How to Upgrade Your Inventory Turnover Ratio Practices

Michelle Jaco10/31/2019

Calculating Inventory Turnover Ratio

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

Find the total inventory cost of your restaurant for the previous year
Combine your restaurant inventory at the starting and ending point of the year
Find the total revenue generated by your restaurant for this period
Divide total revenue by your total inventory value

Once the above data is determined, your inventory turnover ratio formula should look as follows

Inventory turnover rate = annual sales / annual inventory value

For example, if your restaurant generated $300,000 in revenues last year and had $60,000 worth of inventory goods on hand throughout this period, your inventory turnover rate will be 5.

300,000 (annual sales) / 60,000 (inventory value) = 5 (inventory turnover rate)

Analysis of Inventory Turnover Rate

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.

Maximization for Your Restaurant Inventory Turnover Ratio

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

Offer several promotions and discounts to your customers to increase the sales in your restaurant. There are many advantages to this strategy. You will attract new customers, you will promote your restaurant through word-of-mouth marketing, your business will grow, and your customers will become more loyal to your brand.
The other thing you can do is order less stock for several times in order to balance your inventory. Purchase your inventory for a month rather than for two or more months. This technique is less risky because it involves investing less capital on products that are not much popular with your customers.
If you have built a good rapport with your suppliers, you may be able to negotiate discounts with them on recurring orders.

While having a good inventory turnover rate might prove beneficial for your restaurant, you need to keep in mind that it is only one metric. Running a restaurant is a complex business, and having several metrics like inventory turnover rate that need your due intention will pay off in the long run.