You’re busy cooking at your restaurant, the air filled with delicious smells. But a question arises: “Am I using my ingredients wisely?”
Think of your ingredients like the spices that give your dishes their magic. Too much, and they’ll spoil and waste your money. Too little, and you can’t keep up with hungry customers.
This is where the average inventory turnover ratio comes in handy. It is a magic number that tells you if you’re holding excess inventory. Knowing how to calculate inventory turnover ratio will help you save tons of money by preventing waste and ensuring your hotel is efficient. By calculating inventory turnover, you can identify whether you’re stocking too much inventory or too little. Understanding and calculating inventory turnover is crucial for maintaining the right balance and optimizing operations.
What is the average inventory turnover ratio for restaurants?
Formula: Inventory Turnover Ratio = COGS/ average inventory
Here, COGS is the Cost of Goods Sold; it describes how often a restaurant turns over all the ingredients it stocks within a given period, usually a month.
A high ratio indicates that inventory is turned over more quickly, or, in other words, it is used more efficiently and sold quicker while the holding cost remains less. A low ratio means problems like overstocking, slow-moving inventory, and high storage costs coupled with spoilage may occur.
Understanding High and Low Inventory Turnover Ratios
Now that we understand what the inventory turnover ratio means, let’s understand the implications of both a high and a low inventory turnover ratio. Since restaurants use perishable items, the ideal ratio is 4 to 8. This number tells whether the organization has effectively utilized its money on stock and inventory.
Let’s discuss what a high and low turnover ratio means:
High Inventory Turnover Ratio (above 8):
A high ratio indicates rapid selling and replenishing of inventory, suggesting good sales performance. However, it may also indicate potential stockouts. For example, a bustling café might sell out of fresh pastries daily, indicating a high turnover but risking customer dissatisfaction if their favorite items are unavailable.
Low Inventory Turnover Ratio (below 4):
A low ratio indicates that inventory is moving very slowly, so you might be overstocking and increasing holding costs. For example, if there are many non-perishable items, the inventory turnover rate would be very low, leading to wasted inventory and higher storage costs.
Benefits of a Healthy Inventory Turnover Ratio
In the case of inventory management, the best turnover ratio has the following benefits for businesses: This ratio shows the extent to which inventory is sold off within a given period. Let’s explore the benefits in detail:
Cost Efficiency: Reduced costs in storage since the inventory is stored for a short time in storage facilities.
Improved Cash Flow: Selling off inventory within an intended period increases the business’s financial flexibility.
Waste Reduction: Optimal stock control reduces food wastage and spoilage.
Market Responsiveness: The flexibility to change the stock in the store in the shortest possible time, depending on the market situation.
Operational Optimization: Improved coordination of production schedules with the sales forecast, thus increasing efficiency.
How do we calculate the average inventory turnover ratio?
We can calculate the Inventory Turnover Ratio using two methods. They are:
1. Using the Cost of Goods Sold (COGS)
Most restaurateurs prefer this method since it gives a correct picture regarding the inventory turnover.
Formula:
Inventory Turnover Ratio (COGS) = COGS / Average Inventory
Where:
COGS is the total cost of all the ingredients used during a specific period, usually a month.
Average Inventory: (Beginning Inventory + Ending Inventory) / 2.
Example:
If your COGS for a month is ₹10,000 and your average inventory is ₹5,000, your inventory turnover ratio with this method would be:
Inventory Turnover Ratio (COGS) = ₹10,000 / ₹5,000 = 2
This indicates that all the ingredients in your inventory are sold out twice a month.
2. Using Total Sales
It is easier to calculate the inventory turnover ratio using this method, but it may not give an accurate number.
Formula:
Inventory Turnover Ratio (Sales) = Total Sales / Average Inventory
Where:
Total Sales is the total income from selling dishes during a specific period (usually a month).
Average Inventory: (Beginning Inventory + Ending Inventory) / 2.
Example:
If your total sales for a month are ₹20,000 and your average inventory is ₹5,000, your inventory turnover ratio using this method would be:
Inventory Turnover Ratio (Sales) = ₹20,000 / ₹5,000 = 4
This ratio tells you that you have sold your inventory four times, but this figure includes the profit made on each item, so it may overstate your actual ITR.
Which Method to Choose?
Most people like the COGS method because it’s an exact figure. However, both of these can be very useful to a restaurant person. It depends upon what you want and need.
Remember:
Use the same method when comparing your inventory turnover ratio with other restaurants.
It is recommended that the inventory turnover ratio be recorded and then analyzed periodically to understand changes and further improvement possibilities.
Inventory management software is recommended to perform calculations and obtain more specific information about inventory data.
What is a healthy inventory turnover ratio for a restaurant?
Now that you’ve mastered the art of inventory turnover ratio calculation, the next big question is: what is the passing grade? Like there is an ideal way of spicing your food, there is also an ideal inventory turnover for restaurants.
The ideal range for most restaurants is between 4 and 8 times per month. This means you are selling your stock of ingredients, on average, every 4 to 8 weeks, depending on the restaurant type.
Think of it like this:
Too low (below 4): You are overstocking your products. This means that you are likely to end up with unsold inventory that will go to waste or be stored for a long time before they are sold. You have a whole lot of spices, some of which you hardly use in the kitchen pantry.
Too high (above 8): You might be out of stock frequently, so you have a limited menu to offer, and your customers are unhappy. It is like having no food in the kitchen and always running around to get more.
But remember, the ideal range can vary depending on your specific restaurant:
Fast food restaurants usually have a higher AITR because they focus on quick turnover and standardized ingredients.
Fine-dining restaurants might have a lower AITR because they use more expensive, perishable ingredients and have complex menu items.
The key is to find your sweet spot, the ratio that helps you maximize restaurant inventory control and keep your customers happy. By comparing your AITR to the ideal range and industry benchmarks for your restaurant type, you can identify areas for improvement and fine-tune your inventory management strategies.
Steps for High or Low Inventory Turnover Ratio
An optimal inventory turnover ratio involves strategic management to balance sales efficiency and stock levels. Here are actionable steps for both high and low-turnover scenarios:
High Inventory Turnover Ratio:
Increase inventory levels to prevent stockouts.
Optimize supply chain efficiency.
Regularly review inventory levels and adjust orders based on demand.
Low Inventory Turnover Ratio:
Assess slow-moving items and adjust menu offerings.
Implement promotions to boost sales.
Reduce order quantities to prevent overstocking.
Impact of Various Factors on Inventory Turnover Ratio
So far, we have seen what the Inventory Turnover Ratio is, how it is calculated, and its benefits. That still does not give a better picture of how external factors can impact it. Several factors influence how efficiently inventory is managed and sold within a business. Understanding these influences can help optimize inventory turnover ratios:
Menu Type: Diverse menus with perishable items may have higher turnover ratios.
Seasonality: Seasonal ingredients may affect turnover ratios, yet higher rates are relative to peak seasons.
Spoilage Rates: High rates of spoilage bring down turnover ratios and put a spotlight on efficient inventory management.
Ordering Practices: Regular review and adjustment of order quantities can optimize turnover ratios.
Days Sales of Inventory (DSI)
Days Sales of Inventory (DSI) is one of the most important measures that gives information about the number of days it takes for a restaurant to sell its total inventory. It’s applied alongside the inventory turnover ratio to provide the real-world time frame within which the restaurant’s stock sells out.
A low DSI means that restaurant inventory is turned over more quickly; a high DSI means it’s taking longer to sell stock on hand, which may result in higher holding costs and potential spoilage for those foods with a shorter shelf life.
Example Calculation:
Inventory Turnover Ratio: 4
Days in Period: 30
DSI: (30 / 4 = 7.5) days
When to Calculate DSI:
It’s particularly useful when high turnover ratios provide additional insights into inventory management efficiency.
How can inventory Management Software help?
In the current world, the restaurant business is very competitive; therefore, every aspect is crucial. A shocking 43% of small businesses, including restaurants, fail to track their inventory properly, which results in higher expenses and lesser revenues. This is where the food inventory management software comes in handy as a key to success. By accurately calculating the inventory ratio and maintaining a higher inventory turnover ratio, restaurants can streamline their inventory management processes. Utilizing an inventory turnover calculator and monitoring the average inventory value are essential steps for optimizing inventory control and ensuring profitability.
By implementing this technology, restaurants can unlock a world of benefits, including:
Reduced waste and spoilage: Accurate tracking minimizes unwanted food waste while maximizing inventory cost control and protecting the environment.
Optimized ordering and purchasing: Predict demand and order supplies correctly, eliminating overstocks and stockouts.
Improved efficiency and productivity: Automate tasks and streamline processes, freeing up valuable time and resources for what matters most – serving your customers.
Data-driven decision-making: By using inventory turnover metrics, you can get great insights into the perfect optimization of your menu, pricing, and promotions to lead to better inventory control for better profitability.
Reduced operational costs: By minimizing waste, optimizing ordering, and improving efficiency, you can significantly reduce overheads and boost your bottom line.
Conclusion
In the end, if any restaurant is serious about long-term success, it will have to see and match itself with robust inventory management software as a critical strategic necessity. In the restaurant industry, maintaining an adequate inventory turnover ratio is essential. By focusing on inventory tracking and understanding your restaurant’s inventory turnover ratio, you can trim your inventory and optimize your operations. Achieving the right restaurant inventory turnover ratio will help your restaurant succeed amid the competitive culinary landscape.
FREQUENTLY ASKED QUESTIONS
A good inventory turnover ratio for the food industry would be between 4 and 8. This range depicts the restaurant efficiently dealing with its inventory by selling out of stock at a healthy rate and replacing it to avoid wastage and reduce holding costs.
Had it been in a restaurant, the turnover rate is usually looked at in terms of the inventory turnover ratio, a measure of the number of times the inventory turns over and replenishes within a specified period. The second refers to the rate at which workers leave the job and are replaced in the restaurant, better known as the employee turnover rate.
In hospitality, restaurants, and hotels, a good inventory turnover ranges from 3 to 6. This would thus mean the establishment or the management doing its job in keeping stocks in check, bringing in new, fresh supplies, and minimizing overflow.
Basically, an acceptable inventory turnover ratio varies by the type of business and industry standards. For a restaurant, the acceptable range is between 4 and 8, which means that inventory management is perfectly balanced—not too high or low—in terms of having no overstocking or frequent stockouts.
A good inventory turnover ratio for the hospitality industry would lie between 3 and 6. The range indicates that the business is maintaining an appropriate balance between keeping the inventory fresh and not suffering from too high holding cost.
A good inventory turnover ratio varies across industries. For food and hospitality, it should lie between 4 and 8. Anything more than that means proper management of inventory, wherein the stock is being sold and replaced continuously, with no scope for any stock becoming waste or dead.
The ratio of restaurant turnover can be computed by using the formula for inventory turnover ratio as follows:
Inventory Turnover Ratio = Cost of Goods Sold (COGS)/Average Inventory
Example Calculation:
Opening Inventory: ₹ 10,000
Closing Inventory: ₹ 15,000
Average Inventory: ((10,000 + 15,000) / 2 = 12,500)
Cost of Goods Sold (COGS): ₹50,000
Inventory Turnover Ratio = 50,000/12,500 = 4
The average inventory turnover for this industry is mostly observed between the range of 4 to 8. This portrays the efficiently done practice of inventory where the goods are perishable and get sold and replaced continuously to avoid wastage and the quality of the product is maintained.
Food and Beverage: 4 to 8
Hospitality: 3 to 6
Retail: 5 to 10
Manufacturing: 6 to 12
Pharmaceuticals: 2 to 4
Obviously, these ranges vary in some cases due to the business model adapted within that industry or individual business strategy.
McDonald’s, as a global fast-food chain, typically has a high inventory turnover ratio due to its high sales volume and efficient supply chain management. While specific numbers can fluctuate, McDonald’s inventory turnover ratio is generally around 100 to 150 times per year. This indicates a very rapid turnover, with inventory being sold and replaced frequently to maintain freshness and meet high customer demand.
