How to Calculate Inventory Turnover Ratio at Your Restaurant
Learn to calculate inventory turnover ratio, and the best ways to manage your inventory purchasing plan to ensure a profitable business.
Inventory management is driven by data, and for many restaurants, data lives in the cloud. The restaurant industry is making the transition from tracking inventory with pen and paper to tracking it online.
Considering restaurants operate on thin profit margins, gaining an edge as it relates to revenue from efficient inventory management is absolutely worthwhile. All types of businesses in the hospitality industry — from food trucks to breweries, to Michelin-star restaurants — can benefit from tracking their inventory numbers closely.
Learn how to calculate inventory turnover ratio as well as inventory management best practices for restaurants.
What is Inventory Turnover Ratio?
Inventory turnover ratio indicates the number of times the store sold out its inventory in a given time period. A low inventory turnover ratio indicates either low sales or too much inventory in stock, while a high inventory turnover ratio indicates either strong sales or a poor inventory purchasing plan, as evidenced by churn.
Efficient inventory management leads to less food waste and more productive allocation of existing inventory. Food has a sensitive and relatively short shelf life, so turnover is important to calculate. Your restaurant’s inventory stock is crucial to maintaining food quality and food safety.
How to Calculate Inventory Turnover Ratio
Keep in mind, there are a few different ways to calculate inventory turnover ratio involving different inputs. In this post, we’ll highlight how to calculate inventory ratio using the costs of goods sold and average inventory.
Another way to calculate this metric is to use total restaurant sales rather than the cost of goods sold, however, COGS includes markup costs and may be a more accurate number to use.
Start by determining a time frame you want to analyze (annual, monthly, etc.). Next, find these three important numbers — the cost of goods sold, beginning inventory (in dollars), and ending inventory (in dollars) — to calculate the average inventory.
1. Calculate Average Inventory for the Time Period
(Beginning Inventory + Ending Inventory) ÷ 2 = Average Inventory
2. Calculate Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold÷ Average Inventory
Inventory Turnover Ratio at Toast Brewpub
Let’s walk through an example of a brewery’s inventory turnover ratio calculation.
Take for example the hypothetical Toast Brewpub: Toast Brewpub – a popular spot for college students located in a college town – is a microbrewery, brewing close to 15,000 barrels of beer a year. The managers of Toast Brewpub must track inventory closely as the beer brewing process is very scientific and precise.
Remember: the first step in calculating the inventory turnover ratio is to choose a time period. In this example, we will analyze Toast Brewpub's inventory for the time period of one year. To find the cost of goods sold for the year, we will gather all costs related to the brewing process. These costs include hops, grains, water, and more.
Let’s say that the brewery’s COGS for the year is $600,000; the next step is to find average inventory. After adding ending inventory and starting inventory and dividing by two, we're left with $100,200. Thus, $100,200 is the brewpub's average inventory.
This brings us to our calculation: COGS ÷ Average Inventory.
$600,000 ÷ $100,200 = 5.9.
Here we see the brewery has an inventory turnover ratio of 5.9. A high inventory turnover ratio means you’re leaving beer on the table (metaphorically, of course). Toast Brewpub, in this case, is maintaining a good inventory turnover ratio, as the restaurant industry average is ~5.
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How to Achieve Your Optimal Inventory Turnover Ratio
Whether or not your inventory turnover ratio is above average or below average for the industry, it is always worth exploring different ways to achieve an optimal inventory turnover ratio. Here are three concrete ways to achieve an optimal turnover:
1. Forecast sales and inventory.
Use forecasting tools to predict your expected sales and/or dig into reports from previous months or years to determine how much to order on a monthly basis. Toast’s powerful analytics platform can help with this analysis.
2. Ensure inventory best practices.
Most restaurants operate on a first-in, first-out inventory method, or FIFO. In this case, the goods purchased first are the goods sold first. Organize your inventory storage, including the walk-in, with most recent purchases most easily accessible, so no inventory expires.
3. Negotiate raw materials costs with available vendors.
Many vendors are open to negotiating when it comes to buying inventory. With food prices rising, try to lock in long-term prices for food items that you're likely to use regularly. Purchase in bulk, and consider talking to a variety of food and drink vendors and comparing prices between them.
What Is Your Inventory Turnover Ratio?
It’s crucial in the restaurant industry to maintain a stellar inventory turnover ratio so your purchases don’t go to waste.
Practice and teach your team good inventory best practices –like FIFO – and calculate inventory turnover ratio if you notice an unorganized walk-in or inventory area.