This post was last updated on Jul 29, 2020.
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When you hear the word "inventory," it shouldn't make you stop dead in your tracks or feel like your day is over.
But for many restaurant owners, that's exactly what happens.
Instead of running from your restaurant inventory management duties, embrace them!
Inventory management is key to knowing the daily functioning of your restaurant and ensuring that you’re maximizing profits. Every expert says that if you aren’t taking regular inventory, food is going missing through theft or waste.
College kids working at the bar? A beer going missing here and there really adds up. Still have inventory laying around from over a year ago? That old pasta could be diminishing your bottom line.
To be in the know about inventory's impact on your restaurant, here is a list of 15 must-know inventory management terms.
1) Costs of Goods Sold (COGS)
COGS is the cost to create the food and beverages you’ll sell to guests. It represents your restaurant’s inventory during a specified time period. In order to calculate COGS, you need to record inventory levels at the beginning and end of a given period of time, and take into account any additional inventory purchases.
Cost of Goods Sold (COGS) = Beginning Inventory + Purchased Inventory - Final Inventory
Example: You have $5,000 worth of inventory at the beginning of the month, you purchase another $2,000 during the month, and end the month with $4,000 worth of inventory left over. Your cost of goods sold for that month is $3,000, because if you follow the equation, $5,000 (beginning inventory) + $2,000 (purchased inventory) - $4,000 (final inventory) = $3,000.
2. Catch Weight
Another term for approximate weight that is usually applicable to unprocessed food such as meats. Since they vary in size and weight, meats are often sold by catch weight, meaning the exact weight may be slightly more or less each time. This has implications for inventory management and must be handled properly.
Example: You pay for 10 pounds of steak each week. Week one you are delivered 9.7 pounds and week two you are delivered 10.2.
3. Sitting Inventory
The amount of product (or dollars worth of product) in-house. Depending on your business, you should refer to sitting inventory as either dollars worth or amount of product, keeping a consistent unit of measurement.
Example: You have 10 pounds of salt as sitting inventory in-house
4. Food Cost Percentage
The percentage of your sale price that makes up the cost of your ingredients. Although it depends on the certain aspects of your dishes, your guests’ expectations, and your restaurant’s service type, typically a restaurant’s food cost percentage should be between 28%-35%.
Example: If it costs $3.50 to prepare your steak sub and you sell it for $10, your food cost percentage would be 35%.
5. Inventory Turnover Ratio
A measurement that shows the rate that inventory is used over a specified period of time, usually a year.
This ratio indicates a restaurant’s inventory management efficiency as it looks at if you’re successful at selling the product you bring in. If you buy too much inventory, you incur costs and put yourself at a greater risk of waste and spillage. You’ll want to aim for a high turnover rate.
Example: The COGS for the year was $100,000. The average inventory was $127,500 with a starting of $120,000 and an ending of $135,000. Divide $100,000 by $127,500 to get the inventory turnover ratio of 0.78. This means that the restaurant sold about 80% of its inventory.
6. Less Case Unit
Used primarily as another way to count inventory when the actual Full Case unit is not used to count the ingredient. A Less Case Unit can also be referred to as a "broken case unit" or a "split unit."
Example: You have a case of wine that you purchased and the items inside the case are bottles of wine. The Less Case Unit will be "Bottles."
7. Par Level
The amount of an item you’ll need in order to produce typical orders for a given time period. It’s normal to have a margin of safety (some extra), but if you have too much, you put yourself at risk for wasting food, spillage, and tying up funds unnecessarily.
Example: If your stock is delivered daily, you may need 20 dozen eggs to fulfill the average amount of orders. You won’t want to go too far over or under the par level when placing inventory orders.
Menu items that have various ingredients mapped to them in the quantities needed to make the menu item. Food cost will be calculated by adding up the cost of ingredients in a recipe.
Example: The recipe for chili includes ingredients such as tomato sauce, salsa, onions, tomatoes, shredded cheese, and ground beef.
9. Estimated Usage
The amount (or dollars worth) of sitting inventory divided by the average usage in a set period.
Estimated Usage = Sitting Inventory ÷ Average Usage
Example: If you have 4 jars of pickles (sitting inventory) and your average usage is 1 jar a week, you have 4 weeks of estimated usage.
10. Theoretical Usage vs. Actual Usage
The amount that your POS and servers claim to have used vs. what is used in reality. It’s useful to track theoretical vs. actual usage because you can keep a close watch on what inventory is going unaccounted for and adjust accordingly.
Example: You start the day off with a dozen eggs. There were 4 dishes ordered that required 2 eggs each, so your theoretical usage is 8 eggs. At the end of the day, though, there are 3 eggs left, which leaves your actual usage at 9. Your theoretical usage (8) minus your actual usage (9) leaves 1 egg unaccounted for. Understanding the root-cause of such discrepancies will help you improve operations. Did it get dropped, stolen, or used as extra in a dish?
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11. Unit of Measurement
A chosen indicator measuring how much inventory is in your restaurant. One of the most important aspects of managing inventory is using a consistent unit of measurement. Imagine one manager is counting cases of pasta sauce and another is counting cans. You’d have an inventory nightmare! Choose one unit of measurement and stick to it.
Example: Sugar can be counted by the pound, ounce, or bag.
The amount of product (or dollars worth of product) used in a set period of time. Usage can be based on daily, weekly, or monthly sales and is often calculated using the sales reporting data from your POS.
Example: According to Toast’s inventory, 8 boxes of pasta were used this week.
The difference between your product cost and the usage amount cost. Variance can also be a percentage to help you make easier comparisons. The average restaurant has a 2-5% variance.
Theoretical Usage - Actual Usage = Variance
Example: Your POS (theoretical usage) says you only sold $95 worth of cheese, but your actual inventory usage is $100 worth of cheese at the end of the day. This makes your variance -$5, meaning $5 worth of cheese is unaccounted for. In this scenario, $5 (the variance amount)/$100 (the usage amount cost) = 5% variance.
One of the biggest ways to lose money from your inventory. Pre-consumer kitchen waste which could be improperly prepared food, spoiled food, or making too much constitutes approximately 4-10% of purchased food. This means it’s wasted before it is even served to customers. Waste can really cut into profits.
Example: You are telling cooks to prepare 20 ounces of bacon each morning, but they’re only using 16 ounces and they are throwing out the other 4 ounces by the end of the day.
The percentage of product that is actually being accounted for in sales vs. the theoretical amount that the POS says should have been used.
Example: You have actual usage of $100 of chicken for a period. Your POS says your theoretical usage was $90 (the amount you would have used in a perfect world). The variance is $10. Your yield is 90% (theoretical/actual).
What would you add to this glossary of inventory management terms? Leave your response in a comment!
Now that you're more familiar with key concepts, take a deeper look with the Beginner’s Guide to Inventory Management!