management | 4 mins read

What is a Good Inventory Ratio?

what is a good inventory ratio
Michelle Jaco

By Michelle Jaco

Have you ever overspent on supplies, forced to throw out large amounts of stock because the food went bad, felt perturbed because you weren't 100 percent sure of when to keep or toss your inventory?

Inventory management is often placed low on the priority list because of the hundreds of other responsibilities that come with running a restaurant.

The funny thing about that is that inventory management has a direct impact on your restaurant's success, so it should come as a major priority to owners and management.

Yes, there are of course other key contributing factors involved, but maintaining an appropriate level of inventory certainly cannot be neglected.

You should also have a complete understanding of your restaurant inventory turnover rate. We will discuss that and more in this article.

What is the Restaurant Inventory Turnover Rate?

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An inventory turnover rate (also known as ITR) shows how many times your average inventory was sold in a certain time period.

This helps you assess the performance of your restaurant as compared to your competition. It also provides valuable information about your restaurant's sales and costs.

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How to Calculate ITR

There are 2 ways to calculate ITR which are described as follows

Cost of Goods Sold (COGS)
This formula is the preferred one and it calculates on the basis of the cost of goods sold or cost of sales or cost of revenue (depending on the income statement of your restaurant).

ITR (COGS) = COGS/ Average Inventory

Average inventory = (Ending inventory + beginning inventory) / 2

Total Sales
This alternative formula uses total annual sales as follows

ITR (Total Sales) = Total Sales / Average Inventory

It doesn't matter which formula you use but ensure that you specify the formula while making comparisons with other restaurant's ITRs.

How to Find the Average Days of Inventory Turnover

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When you have the ITR, you can calculate the days you take to turn over inventory. This helps you understand your ITR with respect to time.

The formula is as follows

Inventory Days = 365/ ITR

What is a Good Inventory Turnover Ratio?

In order to understand the ITR better, let's examine a real-world example. According to The Balance, Mcdonald's ITR for the period of 1999 to 2000 was 96.16 (meaning they cleared their inventory every 3.79 days on average).

Whereas, Wendy's had an ITR of 40.07 during over the same time span, and their inventory was being cleared every 9.1 days on average.

ITR can give you insight into the restaurant's efficiency. Mcdonald's high ITR allowed them to clear their inventory at a quicker rate.

When a restaurant has a good inventory turnover ratio, this allows for a number of possibilities of great monetary value. This can include, expanding the brand and opening more restaurants. This will ultimately have a positive effect on the bottom line.

A high ITR is usually considered a good thing because it means that your food is not being wasted or spoiled. It also means your sales are good and your inventory is being used efficiently.

A low ratio generally means that the sales are not healthy or you are holding too much inventory.

However, a low ITR doesn't necessarily mean you are having issues. You need to look at the big picture to understand if your low ITR is a bad thing or a good thing.

The following questions might help you to understand the full picture

  • Are your finances strong or weak?
  • How much of the restaurant inventory is occupied by current assets?
  • Are your inventory days less than 12? (If so, then the risk of stockpiling and spoilage is reduced)

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How to Improve Your ITR?

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When the Ratio is Too High
As we have mentioned earlier, high ITR is generally considered good. But, in some cases, it is not a good thing to have too high ITR.

For instance, too high ITR suggests that it is likely that your important food items are running low or you are likely to refuse service because you have under-ordered on essential supplies.

It is our recommendation that you should make use of technology to monitor your stock levels at all times. You can use excel, POS, or a software solution that can help you in this regard.

If you monitor your stocks at all times, you won't get sucked into a position where you have to refuse a certain dish because the ingredients have run out.

When the Ratio is Too Low
If your ITR is low, you are probably facing a big inventory problem.

As a result of low ITR, your sales would probably be very low as compared to your stock levels. It generally arises when you are over-ordering some food items that increase the chances of stockpiling and food waste.

You should pay keen attention to your inventory. Make sure that you are ordering against a par. Also, use technology to monitor your inventory. Use forecasting to make sure that you know what to order when to order, and how much to order.

Restaurants with optimum inventory ratios usually use effective inventory management systems to monitor stock levels, orders, and sales.

Restaurants that have too much stock run the risk of low productivity resulting in food waste, spoilage, and stockpiling, therefore calculating your inventory turnover ratio is a good measure to take into account. This ratio helps you combat the inventory problems and also to understand your competitors, which will pay off in the long run.

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