What is inventory turnover?
Inventory turnover measures how often a restaurant sells and replaces its inventory within a period. It indicates the efficiency of managing stock, helping reduce waste, optimize purchasing, and improve cash flow - crucial for maintaining profitability in a fast-paced restaurant environment.
How to Calculate Inventory Turnover for Your Restaurant
Profitability, Waste Reduction, and Cash Flow
Running a restaurant means juggling many things, and keeping track of your inventory is one of the most important. Inventory turnover is a way to see how quickly your restaurant uses up and replaces its ingredients and supplies. Knowing this helps you avoid having too much food sitting around, which can spoil and waste money.
Did you know that restaurants can lose up to 10% of their food to waste each year? That's a big hit to profits. By keeping an eye on how often you turn over your inventory, you can order smarter, use ingredients before they go bad, and save money.
The Basic Formula for Inventory Turnover
Inventory turnover is a straightforward calculation, but understanding it clearly can make a big difference in managing your restaurant's stock. The formula is -
Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
Let's break that down
1. Cost of Goods Sold (COGS) - This is the total cost of all the ingredients and supplies you've used during a certain time period, usually a month or a year. It includes everything you buy to prepare your menu items -like vegetables, meat, spices, and dairy.
2. Average Inventory - This is the average value of the stock you have on hand during the same time period. You find it by adding the inventory value at the beginning of the period and the inventory value at the end, then dividing by two.
For example, if your COGS for the month is $10,000 and your average inventory value is $2,000, your inventory turnover would be -
$10,000 / $2,000 = 5
This means you turn over your inventory five times in that month.
Why does this matter? A higher inventory turnover number usually means your ingredients are moving quickly, which is good because fresh food is less likely to spoil. But if your turnover is too high, it might mean you're not keeping enough stock, which can lead to running out of key ingredients. On the other hand, a low turnover number could mean you're holding too much inventory, risking waste and tying up money in unused stock.
Getting this formula right gives you a clear picture of how well you're managing your restaurant's inventory, helping you make better decisions about ordering and storage.
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Gathering the Necessary Data
Before you can calculate your inventory turnover, you need accurate numbers for two key pieces of information- your Cost of Goods Sold (COGS) and your average inventory. Getting these right is essential for a reliable calculation.
1. Cost of Goods Sold (COGS) represents how much you spend on ingredients and supplies used to make your menu items during a specific time, usually monthly or yearly. Most restaurants track COGS through their accounting or point-of-sale (POS) systems, where purchases and sales data are recorded. If you don't have exact figures, you can estimate COGS by adding up all your ingredient invoices and subtracting any unused stock left at the end of the period. Keep in mind that COGS should only include the cost of the items you actually use, not things like equipment or labor.
2. Average Inventory is the value of the ingredients and supplies you have on hand during that same period. To calculate it, you need the inventory value at the start and at the end of the time frame. For example, if you had $3,000 worth of inventory at the start of the month and $1,000 at the end, your average inventory is ($3,000 + $1,000) / 2 = $2,000.
If you don't have formal inventory tracking, consider starting regular stock counts. Many restaurants find that counting inventory weekly or monthly helps keep better control over orders and waste. Using inventory management tools or even simple spreadsheets can make this easier and more accurate.
Having reliable COGS and inventory data gives you the solid foundation you need to calculate inventory turnover accurately and make smarter decisions for your restaurant's success.
Step-by-Step Calculation
Now that you know the formula and what data to gather, let's walk through a simple example using ingredients you might find in your restaurant kitchen.
Imagine your restaurant tracks its inventory and costs over one month. Here's the data you have -
Cost of Goods Sold (COGS) for the month - $12,000
Inventory value at the beginning of the month - $3,000
Inventory value at the end of the month - $1,500
First, calculate your average inventory
$3,000 + $1,500 / 1 = $2,250
Next, apply the inventory turnover formula -
Inventory Turnover = COGS / Average Inventory =
12,000 / 2,250 = 5.33
This means your restaurant turns over or sells through its inventory about 5.33 times during that month.
To put this in perspective, imagine you stock fresh vegetables, meat, and dairy. A turnover rate of 5.33 means you're effectively using and replacing your inventory about every 6 days (30 days / 5.33). This is generally a good pace, especially for perishable items, because it helps minimize food spoilage while keeping enough stock to meet customer demand.
If your turnover were much lower - say 2 times per month - it might mean you're holding too much inventory, risking food going bad and money being tied up unnecessarily. If it's much higher - say 10 times per month - you could be running out of items too often, potentially disappointing customers and interrupting service.
This example shows how a simple calculation can give you important insight into how well you're managing your restaurant's ingredients, helping you strike the right balance.
Interpreting Your Inventory Turnover Ratio
Once you've calculated your inventory turnover, the next step is understanding what that number really means for your restaurant. The ratio tells you how quickly you're using and replacing your stock, but the right turnover rate can vary depending on the type of restaurant, menu, and ingredients you use.
A higher turnover ratio generally means your inventory moves quickly. This is usually good because it means fresh ingredients are used before they spoil, reducing waste. For example, a turnover rate between 6 and 12 per month is common for restaurants handling lots of fresh produce and dairy. However, if your turnover is extremely high, like 15 or more, it might indicate you're not keeping enough stock on hand. This can cause frequent shortages, leading to last-minute orders or menu changes that frustrate staff and customers.
On the other hand, a lower turnover ratio suggests you might be holding on to inventory too long. A ratio under 4 can be a red flag that your restaurant has too much stock, which increases the chance of spoilage and ties up cash that could be used elsewhere. Excess inventory also takes up storage space, making your kitchen less efficient.
It's important to remember that there isn't a one-size-fits-all perfect turnover ratio. Factors like your restaurant's size, menu variety, supplier reliability, and the perishability of ingredients all play a role. For instance, a fine dining restaurant with specialty ingredients might have a different ideal turnover rate compared to a fast-casual spot with simpler, faster-moving items.
Regularly tracking and comparing your over time helps you spot trends, adjust your ordering habits, and improve your overall efficiency and profitability.
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The Impact of Inventory Turnover
Inventory turnover isn't just a number - it directly affects your restaurant's bottom line. When you manage your inventory turnover well, you reduce waste, free up cash, and improve your overall profitability.
One big way turnover impacts profits is through food waste reduction. Restaurants lose around 4-10% of their food to spoilage each year, according to industry estimates. Holding onto inventory too long means ingredients expire or go bad, forcing you to throw away money spent on unused stock. Faster turnover means fresher ingredients get used more quickly, cutting down on waste and saving you money.
Turnover also affects cash flow. Money spent on buying ingredients that sit unused ties up funds that could be used elsewhere - like paying staff, marketing, or upgrading equipment. When you turn over inventory quickly, you get your money back faster through sales, which helps keep cash flowing smoothly.
Additionally, turnover influences ordering efficiency. Knowing how often you use ingredients helps you order the right amounts at the right time. This prevents overstocking, which wastes space and money, and understocking, which can lead to running out of key ingredients during busy service times - a problem that can hurt your reputation and revenue.
Optimizing inventory turnover also impacts your menu planning and pricing. By understanding which ingredients move quickly, you can design menus that focus on popular, high-turnover items, maximizing profits while reducing waste.
Best Practices to Improve Inventory Turnover
Improving your inventory turnover doesn't have to be complicated. There are several practical steps you can take to make sure your restaurant is ordering, storing, and using ingredients efficiently.
1. Plan Your Menu Around High-Turnover Ingredients
Design your menu with items that use ingredients you know move quickly. This helps reduce the risk of waste and ensures your kitchen is stocked with what sells best. Avoid including too many dishes with rare or slow-moving ingredients that might sit in storage for weeks.
2. Regularly Conduct Inventory Counts
Keep track of your inventory by counting it at least weekly or monthly. This helps you spot slow-moving items early, so you can adjust orders or promote those ingredients before they spoil. Use simple tools like spreadsheets or invest in inventory management software to make tracking easier.
3. Order Smaller, More Frequent Deliveries
Instead of stocking up on large quantities, try ordering smaller amounts more often. This keeps your inventory fresh and reduces the chance of overbuying. It also lets you respond better to changes in customer demand, like seasonal menu shifts.
4. Improve Portion Control and Waste Monitoring
Train your kitchen staff to use consistent portion sizes and monitor food waste closely. This reduces overuse of ingredients and helps maintain accurate inventory records, leading to better turnover calculations.
5. Build Good Relationships with Suppliers
Reliable suppliers who can deliver quality ingredients quickly allow you to keep less stock on hand. This flexibility means you can order just what you need when you need it.
By following these steps, you can improve your inventory turnover rate, reduce waste, and keep your restaurant running more smoothly and profitably.
Monitoring and Adjusting
Calculating your inventory turnover once is helpful, but regularly tracking it over time is what truly helps improve your restaurant's operations and profitability. Monitoring this number allows you to spot trends, catch problems early, and make smarter decisions about ordering and menu planning.
Set a schedule to calculate your inventory turnover monthly or quarterly. This frequency gives you enough data to see how changes in your restaurant affect your inventory management. For example, if your turnover drops, it could be a sign you're overstocking or that some ingredients aren't being used as expected. If it spikes, it might mean you're understocking and risking shortages.
Use your turnover data alongside other numbers like sales volume, food waste reports, and supplier delivery times to get a full picture of your inventory health. Tracking these metrics together helps you identify what's working and what needs improvement.
Adjust your goals based on your restaurant's style and size. A fast-casual restaurant will typically have a higher turnover rate than a fine dining establishment because ingredients move faster. Knowing your ideal range helps set realistic targets and guide your ordering habits.
If you notice consistent issues - such as frequent shortages or excess waste - use your turnover insights to try new strategies. This could include tweaking your menu, renegotiating delivery schedules, or improving portion control.
Finally, keep your team involved. Share turnover numbers with your kitchen and purchasing staff to help everyone understand why managing inventory is important. Collaboration can lead to better practices and smoother operations.
If you're ready to take your inventory management to the next level, consider using a digital tool that saves time and improves accuracy. Altametrics offers powerful, easy-to-use restaurant inventory software that helps you automate checklists, track usage in real-time, and control food costs with confidence.
From forecasting and vendor tracking to waste reduction and mobile-friendly tools,Altametrics gives you everything you need to streamline your inventory process - so you can spend less time counting and more time running your restaurant.
Learn more about how you can optimize your restaurant chain's inventory and order fulfillment by clicking "Request a Demo" below.
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Frequently Asked Questions
What counts as Cost of Goods Sold (COGS) in a restaurant?
COGS includes all ingredient and supply costs used to prepare menu items during a given time frame, excluding labor and overhead.
What is a good inventory turnover ratio for a restaurant?
It varies, but generally between 5 to 12 times per month is common. Too high or too low turnover can indicate issues with stock management.
How can I improve my restaurant's inventory turnover?
Plan menus with high-turnover ingredients, conduct regular stock counts, order smaller amounts more frequently, and improve portion control.
What's the difference between inventory turnover and food cost percentage?
Inventory turnover tracks how often inventory is used and replaced, while food cost percentage shows how much of your sales are spent on food. Both are useful but measure different things.
