Inventory turnover ratio formula is a ratio that tells you the frequency of inventory replacement during a certain time period.
It is a vital measure of how your restaurant is doing with respect to its performance, costs, and sales. In addition to that, this ratio can also be used to benchmark and compare your restaurant with other competitors.
In order to calculate your restaurant inventory turnover rate for a year, follow these steps
Inventory turnover rate can provide valuable insight into how your restaurant is managing costs and how your employees are performing at work.
When you identify the inventory turnover rate, you can move on to the next step, i.e. understanding what this rate means for your business and what should be the ideal inventory rate for your restaurant.
Once you understand how this ratio works, you can devise an action plan for improvement.
Ideal Inventory Turnover Ratio
For the restaurant industry, the ideal turnover rate is anywhere between 4 to 6 measured annually.
Low and High Turnover Rate
If your inventory turnover rate is less than 1, it means that you have too many goods on your hands than you need at any particular moment, whereas if your inventory turnover ratio is high, it means that sales in your restaurant are good and your restaurant is generating good revenue year-round.
A high inventory turnover rate indicates that you go through your inventory quickly and reorder fresh stock often.
While the high turnover ratio is generally considered a success, too high of a rate indicates that there is a problem. This means your inventory is constantly replenishing, if you don't keep up with the demand, your restaurant may experience a shortage in stock.
This will happen if it takes longer than a couple of weeks to restock a certain very popular item, which means you will lose business during the restocking of that popular item.
So, you need to be extra vigilant in keeping the turnover rate at its sweet spot.
If your inventory turnover rate is too low or too high, there are steps that you can take to better maintain the rate.
High Turnover Rate
As compared to the low turnover rate, a high inventory turnover rate is easier to control.
In order to control a high rate, you can order stock more often or make fewer sales. You need a proper inventory forecasting tool to find when you should order more stock to meet the customer demand of a certain food item.
Another way is to use an inventory management tool, which can help you examine your inventory reports in detail so that you can keep a back stock of your in-demand items.
Low Turnover Rate
If your restaurant inventory turnover rate is too low, you need to deploy a few strategies to decrease the amount of stock on hand. You can do that by ordering less stock and/or selling more items.
The following are some tips to increase your inventory turnover rate efficiently