What Inventory Turnover Ratio Is & How Restaurants Can Get It Right

Michelle Jaco10/2/2019

Introduction

Efficiently managing your inventory is critical to the success of your restaurant. Too little stock and you run the risk of leaving your customers dissatisfied. With too much stock, your products and materials may go bad, forced to be thrown out, and then you're not able to turn a profit. Either way, it's a drag on your bottom line as your business suffers from your lack of foresight.

It is crucial to find a balance that's right for your business and create a financially sound plan that ensures its success in the long term. Keeping track of your inventory is an integral part of that equation and it's a good idea to get an inventory turnover calculator to do it right.

It's Critical to Understand How to Manage Your Inventory

About 43% of small business owners track inventory manually or just don't do it at all.

Inventory management is driven by quality, reliable and accurate data; this stands true for restaurants, as well. In some aspects, the industry has been late to the digital revolution (mom and pop shops), but it has finally begun making the transition from tracking inventory on a sheet of paper to tracking it digitally.

Since restaurants function on thin profit margins, anything that can give you an edge in revenue generation is worth your while. As such, keeping track of your Inventory Turnover Ratio (ITR) can benefit you greatly, whether you are a 5-star restaurant or a food truck.

This ratio will help you find the sweet spot between having so much inventory that it goes bad or so little that you run out of ingredients for your dishes mid-way. Once you have this magic number through a proper inventory turnover calculator you can ensure a smooth flow of inventory through the supply chain and keep a healthy profit margin.

What is Inventory Turnover?

Simply put, an inventory turnover calculator determines the number of times that your restaurant sold its average inventory over a certain period. The resulting number assesses if your business is operating at an optimal level compared to others in the industry.

Additionally, it helps hospitality businesses answer some essential questions, such as

Am I keeping too much inventory?
Am I making enough sales?
Are my business costs too high?
Am I turning out orders quickly enough?

While the right turnover rate typically depends on the size of your business and the activities you undertake, there is a general rule that governs it all; a low ratio is evidence of less sales or too much inventory in the stock room, while a higher ratio indicates outstanding sales or an ineffective inventory purchase plan.

In general, restaurants should aim for a high turnover because food has a relatively short shelf life. The faster it's turned, the fewer chances of it going to waste.

How It's Calculated

Here are two different ways you can determine your restaurant's inventory turnover ratio

Inventory Turnover COGS
Calculate the rate of your turnover based on the Cost of Goods Sold (this is also commonly referred to as the Cost of Sales or Cost of Revenue and is found on the income statement for your restaurant)

Inventory Turnover = COGS / Average Inventory
Average Inventory = (Initial Inventory + Ending Inventory)/2

This method is often preferred for a simple reason, i.e. it doesn't factor in the markups. In comparison, total yearly sales include the markup, which can artificially inflate the numbers, making it look like the business is turning over inventory faster than it actually is.

Inventory Turnover Sales
The other formula for turnover divides the total annual sales by your average inventory.

Inventory Turnover = Total annual sales / Average inventory

The formula for calculating average inventory remains the same as before.

No matter which ratio you use, make sure you mention whether it's COS or Total Sales, especially when comparing your results with others.

Inventory Turnover for High-Growth Restaurants

As per a report by CSI Market, the average rate of turnover for restaurants in the second quarter of 2019 was

19.62 (calculated using the COGS method)
43.66 (calculated using total sales)

Although the average ITR for restaurants stands at 19.62, the ratio usually varies based on how your business operates. As mentioned earlier, there isn't a right number that's perfect for all restaurants.

Let's take McDonald's for example; as a quick-serve eatery, they have thousands of branches in the country. As such, their turnover rate or ratio will be very different compared to a local, single-unit burger joint.

Here's how McDonald's and Wendy's fared in terms of inventory turnover in 2000 (calculated through the COGS formula)

McDonald's ITR was 96.16; they cleared their inventory every 3.79 days
Wendy's, in contrast, had an ITR of 40.07 and turned over their inventory every 9.1 days.

A high ITR means the inventory's moving faster, i.e. it takes McDonald's less than four days to clear out the stock and this can have a tremendous effect on the restaurant's bottom line. With increased profits and availability of capital, they can open new stores, invest in more prominent marketing campaigns and even buy back shares from investors.

On the other hand, Wendy's has a lot tied up in inventory and current assets so they don't have the financial leverage to help them grow like their competitors.

Typically, you want very little money stuck in inventory that's not willing to move. An inventory turnover calculator can help you make sure that your restaurant doesn't under/over order ingredients or risk food waste. This also eases cash flow troubles and allows you to plan for a better future for your business.

Achieve Your Ideal Inventory Turnover Ratio

Whether your hotel's inventory turnover is below or above the industry average, there's always room for improvement. Here are some of our favorite industry-tested ways of achieving an inventory turnover ratio that's just right for your business.

Forecast Inventory Based on Sales Figures
Strike a balance between stock levels and cash flow using forecasting solutions that take the guesswork right out of inventory and sales management.

In short, figure out what you should have in stock by forecasting future sales, i.e., sales for the next month. This should take into account the velocity of past purchases as well as the seasonality of your menu items.

For this, dig into reports from previous months and determine how much inventory you'll need to order in the future.

Implement Inventory Best Practices
You can use digital tools to analyze your inventory and order lead times this can help you ensure that your turnover rates are optimized.

Organize storage and discourage walk-ins; also implement the FIFO method to ensure that older stock is pulled out and used first.

Negotiate the Costs of Raw Materials
The rising food costs will undoubtedly have an impact on the way you price your menu items.

To address these issues, buy in bulk when you can, but also consider exploring various other vendors and wholesalers in the market. There is no harm in asking for a discount on the estimated price; this way, you can negotiate your position as a buyer and keep inventory costs at a minimum.

Do Better with Time Management

We understand that restaurant managers rarely get time to breathe on a typical day, which is why it's important to do the best you can with the time you have.

Automate tasks and audit the workflow to make sure that food ingredients spend less time in the storage. The faster they are converted to revenue, the better turnover ratio you will have.

Optimize Your Supply Chain
Figure out if there is a weak spot somewhere in your supply chain; does it take several weeks for an order to show up? Extended lead times can mean that your vendor is slow on the output and you need to take a second look at their services.

Your supply chain should be able to respond to demand changes in real-time. When you revise your inventory needs based on sales forecasts, the supplier should be flexible enough to alter the stock units based on your requirements.

Know that there are many ways to enhance your turnover ratio in addition to the ones mentioned above. For instance, you can reduce the prices of your menu items to entice more customers and move excess inventory faster to free up cash.

Also, limit bulk orders where you can and count your inventory balance on a daily and weekly basis so you know exactly what's in stock, what's moving and what's not.

When a restaurant attains its ideal inventory turnover ratio, it not only helps boost profitability, but also strengthens the shareholder's confidence in the business's ability to grow.

And by now we've learned that only with proper inventory management can a restaurant achieve these goals.

The Last Word

Whether your problem is too much inventory at hand or not enough, you must get the ITR right; this helps you make smart purchase decisions and create a better future for your business.

And the most important part of getting this right is having a robust inventory management system to help keep track of what has been ordered or whether you have too much or not enough of an ingredient at hand.

Spreadsheets and paper-based formats may be great for displaying all the data available, but they can't possibly match the functionality and convenience of specialized software.

That's why we've created Zip Inventory, an easy and affordable solution for all your inventory management needs.

As digital inventory management becomes essential for those in the hospitality industry, it is crucial to make sure that every dollar you put to work for your business is bringing in the right returns.

Zip Inventory makes it easier than ever for restaurants to get access to essential figures on food costs, inventory levels, cost of goods sold (a necessary number in inventory turnover ratio calculation) and many others. The built-in inventory turnover calculator will help you make sense of it all.

You don't need to spend time looking for products because this simple yet powerful app makes inventory count as quickly as possible. It comes with a voice search ability so all you have to do is speak the name of a product or ingredient and it will display the available numbers right away.

Even better, all the figures about your business are saved and kept up-to-date in the app, so you never have to worry manual calculations again. And since it's a mobile app, this information is always available at hand, no matter where in the world you go.

Want to keep your inventory from sitting around the stock room? Explore Zip Inventory's inventory turnover calculator today.

Get a FREE two-week trial period to take control of your inventory processes or visit us today to learn more about the app and ensure that your restaurant gets the inventory turnover ratio right!