Food inventory turnover is the number of times a retailer has to replace inventory for their products. It's important for retailers to have an adequate food inventory turnover to ensure customer satisfaction at all times. For example, if a retailer is able to produce and sell 50 products each week, they'll need at least 100 new products each month to keep up with supply and demand. This is especially important in their holiday seasons where they may serve close to 1 million customers. If they fail, they'll then have trouble meeting the demands of their customers.
What is Restaurant Inventory Turnover Ratio?
Food inventory turnover refers to the number of times a retailer sold out its stocks in a specific time period. When a retailer has a low inventory turnover period, it shows either there is too much inventory in the store or sales are low. On the other hand, a high inventory turnover ratio means that either the inventory purchasing plan is poor or has strong sales. Restaurant owners can optimize the inventory turnover ratio by reducing food waste or strengthening the allocation of existing inventory. Small business owners must keep track of their inventory to make sure that their business is profitable. To achieve your long-term goals in the restaurant industry, you need to calculate your food costs, menu pricing, ordering, purchasing, etc. Restaurant owners require effective control over usage, waste, costs, stock levels, and revenues. You can install restaurant inventory management software like Zipinventory that includes a food cost calculator to quickly determine your food costs. Food inventory turnover is an essential metric for restaurants as they deal with the short shelf life of food and maintain food quality and food safety.
Why is the Inventory turnover ratio Important?
Is there food waste in your restaurant business? Or are you worried about your sales and profitability? Restaurant inventory turnover allows you to calculate the overall health of your business. It is essential to measure your inventory turnover ratio as restaurants deal with food that has a short shelf life. Food inventory turnover rate assists restaurants in controlling their Food Cost, stocks, and profits. Restaurants with multichannel sales can optimize inventory volumes to meet customer demand with the help of inventory turnover ratio. Here are some benefits of calculating restaurant inventory turnover ratio-
Note-: Food inventory turnover rate assists restaurants in controlling their food cost, stocks, and profits.
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Better profitability
The restaurant business is based on effective food inventory management. When you generate less food waste and optimally utilize your resources, your profitability also increases. The inventory turnover ratio is a vital performance indicator as higher inventory turnover can boost profit. Restaurant businesses that have high inventory turnover have lower holding costs.
Make informed decisions
Restaurant business owners can make informed decisions for their business, as the food inventory turnover ratio allows them to know what food items they need to order. It also allows you to know which menu items are underperforming. When restaurants calculate the inventory turnover ratio, you can decide your business model by implementing the right inventory turnover strategies.
Do You Know-: The inventory turnover ratio is a vital performance indicator as higher inventory turnover can boost profit.
How to Calculate Food Inventory Turnover Rate?
You can calculate the Food Inventory turnover ratio by two methods. The methods depend on whether you utilize your annual sales or the total cost of goods sold.
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Method 1- Inventory Turnover Rate Using Cost of Goods Sold-
One of the most used ways to calculate the inventory turnover ratio is by using COGS. The cost of goods sold is also called the cost of revenue or cost of sales on your restaurant's financial statement. Firstly, calculate your COGS and average inventory for the specific time period by using the following formula- COGS = Beginning inventory + Inventory purchase ending inventory Average Inventory = (Beginning Inventory + Ending Inventory)/2 Now you can start calculating your inventory turnover ratio by using the formula- Inventory Turnover Rate = cost of goods sold / Average Inventory
Method 2- Inventory Turnover Ratio using sales-
Another way of calculating your inventory turnover ratio is with the annual total sales of your restaurant and then dividing it by your average inventory. Inventory Turnover Rate = Total Annual Sales / Average Inventory Why is do Restaurants prefer the COGS Method? Restaurants prefer to use the cost of goods sold method as it provides better accuracy and does not require markups that the sales formula does. In the sales method, dividing sales by average inventory increases your inventory turnover ratio and gives you an idea that you are processing inventory faster than the actual rate. The sales method could result in you purchasing more inventory and wasting resources more than you require. You can use any ratio according to your business requirement; however, remember to mention it while comparing your rates with others.
How Can You Improve Restaurant Inventory Turnover Ratio?
Restaurant businesses calculate how much inventory was sold during a time period with the inventory turnover ratio. You can foresee your business performance and estimate customer demand for your products by measuring the inventory turnover ratio. Restaurant owners are also required to calculate the average time it takes to sell your inventory. You need to ensure that our inventory counts are accurate to measure inventory turnover precisely. After analyzing the inventory turnover ratio, make sure that you have considered the necessary details. If your inventory ratio is low, you can improve it by keeping in mind the following ways-
Improve Forecasting
Restaurant owners require to improve their forecasting techniques to precisely estimate customer demand and order their inventory accordingly. You can manage your inventory levels with better furcating, thus increasing your inventory turnover ratio.
Increase Sales
Increasing sales can result in a higher inventory turnover ratio. Restaurants can plan better strategies to boost customer demand for their products and use social media platforms to encourage sales. Small business owners can organize promotional events, offer discounts, and advertise their products on multiple channels.
Decrease the Price
Restaurants can cut down the prices of their food items in case marketing strategies fail to boost sales to attract customers and, thus, increase sales. With food items with lower prices, you can reduce the prices to clear your stocks faster.
Apply ABC Analysis
Restaurant owners can apply ABC analysis and invest in products that provide the highest profits. You can reduce the production of products that create losses and reduce your profits. When you effectively eliminate the products that do not generate profits, your low inventory turnover will increase, resulting in a higher bottom line.
Improve Order Management
Restaurant owners can implement strategies to obtain advance orders. By obtaining advance orders you can eliminate unrequired stocks and increase your inventory turnover ratio.
Reduce Safety Stock and Eliminate Old Inventory
Typically, the restaurant maintains extra stocks to meet unforeseen situations that result in extra inventory. When you focus on improving forecasting techniques, you do not require to invest in safety stocks. Restaurant owners can reduce old inventory and eliminate your losses. Instead, you can invest your resources in products with maximum profits.
Decrease Purchases
Restaurants can create strategies to manage their purchases optimally. You can buy small quantities of products at once and replenish them when the stocks are low.
People also ask
What is a good inventory turnover ratio for food?
A turnover ratio is an indication of how efficiently a company is using its resources. It is calculated by dividing the cost of goods sold by the average inventory on hand. A good inventory turnover ratio should be between 3 and 10, with lower numbers being better. This means that a company should be able to sell its products or services three to ten times before it needs to buy more things to replace what it sells. There are several factors that influence this number, including location and industry.
What is a good inventory turnover?
Inventory turnover is a measure of how much money you make on each dollar of inventory that you sell. The higher your inventory turnover, the more sales you're going to make and the more money you'll make. In general, a good inventory turnover should fall between 20% and 30%. This means that every sale will generate enough income for your company to make back 20-30% of what it spent producing the items.
How do you calculate inventory turnover in food?
The inventory turnover of a food business is the number of times the total dollar amount of products sold in a given time period is divided by the total dollar value of its inventory. It is a useful metric for determining how quickly or slowly inventory levels are changing. Inventory turnover helps to identify how much of your business's stock you need to hold on hand at any given time, as well as what percentage of your business's sales comes from products bought in-store versus online.
— Restaurant Management & Growth Blog — food inventory turnover
