For those not math inclined, the words may seem intimidating: restaurant inventory turnover ratio. But it’s important to stay on top of your inventory and manage your expenses to make sure your restaurant is profitable and thriving. You don’t need to be trained in accounting to understand the math behind this important value. If you are responsible for the day-to-day operations of a restaurant, read on to understand more about your restaurant’s inventory turnover ratio.
What is Inventory Turnover Ratio?— In simple terms, the inventory turnover ratio is the amount of times that a restaurant replaces its inventory during a set time period. This could be on a monthly or annual basis. And there are many things that can be discovered by measuring how fast a restaurant runs through its stock. Areas influenced by inventory turnover include everything from packaging and shipping to purchasing and ordering.
How is the Ratio Calculated?— There are a few different formulas you might use to calculate your turnover ratio. It’s important to find one that works best for your restaurant. We like this formula below as a baseline. It removes the confusion caused by markups, which can artificially inflate your turnover rate.
Calculate the Average Inventory for the Time Period
(Beginning Inventory + Ending Inventory) ÷ 2 = Average Inventory
Calculate Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory
Here’s an Example Calculation—Let’s say we own a neighborhood café and coffee roaster. This roaster makes thousands of bags of coffee a year. Roasting coffee is an intensive industry and the managers of the coffee company need to make sure their roasting process is meticulous.
When calculating inventory turnover ratio, the first step is to choose a time period. For this example, we will look at the coffee roaster’s inventory for one year. To figure out the cost of goods sold annually, we would determine the costs associated with the coffee roasting, such as the cost of beans and coffee bags.
If the roastery’s COGS is $550,000 for the year, the next thing to calculate is the average inventory. After adding the ending and starting inventories and dividing by two, we get $100,500 average inventory.
We then calculate the next step which is COGS divided by the average inventory.
The roastery is doing well above the restaurant industry average, which has a turnover rate of 5.
What Does My Ratio Mean?— There is no perfect ratio that you should aim for exactly. Calculating your turnover gives you visibility into one more aspect of your inventory management and can help show you when to dive deeper and identify issues. Your target ratio will depend on the type of restaurant you operate. The more fresh, perishable ingredients you use, the higher your turnover should be. In general, higher turnover rates help prevent food waste. A high ratio can also indicate strong sales. A low turnover rate doesn’t necessarily mean there is anything wrong with your restaurant but it can be a good indication to look further into your operations before making a judgement.
Restaurants have thin profit margins, so finding ways to increase cash flow can help your establishment get ahead. Learn how to calculate your inventory turnover ratio to help you narrow down problem areas and make more strategic decisions. Focus on your inventory to improve your bottom line and improve the long-term success of your business.
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