Do you know if you’re using your inventory efficiently?
Or how many days you’re holding inventory?
Managing your restaurant’s inventory sometimes get pushed to the backburner.
Invoices stack up. Servers call in. Managers show up late. And payroll has to get done.
You have a million things to think about every day and inventory management isn’t always a top priority.
But understanding your inventory is vital to the success of your restaurant.
You should have a thorough understanding of your inventory turnover rate, how many days its held on average, and how that compares to others in your market.
What is Restaurant Inventory Turnover Rate?
A restaurant’s inventory turnover rate (also called ITR) is how many times your restaurant sold its total average inventory during a period of time.
Your ITR is used to help assess how well your restaurant is operating in comparison to other concepts and the industry as a whole.
An ITR also provides you with valuable insight into how your business is doing with inventory, sales, and cost.
How Do You Calculate Inventory Turnover?
There are two accepted ways to calculate your restaurant’s inventory turnover rate.
Inventory Turnover (ttm) COS:
The first, more preferred method, is to calculate your turnover rate based on Cost of Goods Sold (may also be referred to Cost of Sales or Cost of Revenue on your restaurant’s income statement).
- Inventory Turnover = COGS / Average Inventory
- Average Inventory = (Beginning Inventory + Ending Inventory)/2
Inventory Turnover (ttm) Sales:
The alternative formula for calculating turnover uses the total annual sales of your restaurant and divides it by your average inventory.
- Total annual sales / Average inventory
Why is the COGS (COS) Formula preferred?
Most restaurateurs prefer the COGS turnover formula because it does not include markups. Total annual sales include the company’s markup and this can often make it look like your restaurant is turning inventory faster than you really are.
No matter which ratio you decide to use, it’s important that when comparing your rate to others, you specify whether it’s COS or Total Sales.
How Do You Calculate Average Days in Inventory?
Now you have your inventory turn rate, this can be used to compare your restaurant to other similar concepts in your market.
But you can also use your inventory turnover rate to calculate the average days on hand for your inventory.
Why is average days on hand important?
Knowing your average days on hand for inventory allows you to understand the turnover rate for your restaurant in terms of length of time. How long does it take you to turn over inventory? Is there a risk of restaurant food waste or food getting stockpiled?
Calculate your inventory days as follows:
- Inventory days = 365 / Inventory Turnover Ratio
What is a Good Inventory Turnover Rate?
Now that you know how to calculate inventory turnover, you’re probably wondering what is the average turnover ratio for restaurants?
According to CSIMarket, the average turnover rate for restaurants in Q2 of 2018 was:
- 17.82 (calculated using COGS)
- 40.32 (calculated using total sales)
Although the average ITR for restaurants was 17.82, rates will vary based on the concept/s you own. A quick serve restaurant like McDonald’s will have a very different ITR than say, a single unit barbecue joint.
So what’s an optimal ITR?
To lower food waste and avoid spoilage, you’ll want to make sure your turnover rate is high. A high ITR usually indicates that sales are healthy and you’re using your inventory efficiently.
A low ITR can either indicate that you’re holding too much inventory or that sales are low.
A low turnover rate doesn’t always mean that a restaurant is having issues. It’s important to look at the full picture.
How are your finances? Are they strong?
How much inventory is tied up in current assets?
Are you holding inventory for less than 12-15 days? (less risk of spoilage or stockpiling)
Quick Service Restaurant/Franchise Example:
So we’ve talked a lot about how to calculate an inventory turnover rate, average days on hand, and what an average turnover rate is.
What about real-world examples…
Thanks to The Balance, we have examples of both McDonald’s and Wendy’s turnover rate from 1999 to 2000.
During this time period,
- McDonald’s had an ITR of 96.16, meaning they were able to turn over their inventory every 3.79 days (on average).
- Wendy’s on the other hand, had an ITR of 40.07 and cleared their inventory every 9.1 days.
By calculating ITR of both restaurants, you’re able to quickly see the difference in efficiency. This efficiency is what ultimately affects the bottom line of a restaurant. By clearing inventory quicker, McDonald’s used the additional cash on hand to open new stores and increase marketing support. In contrast, Wendy’s had more money tied up in current assets and was unable to increase support to the same level as McDonald’s.
Typically, you want as little money as possible tied up in inventory that’s not moving. It’s fine to have inventory recorded on your balance sheets, but you’ll want to make sure you’re not under/over-ordering or risking food waste.
Full-Service Restaurant Group Example:
Now let’s take a look at Darden, whose concepts include Olive Garden, Yard House, Seasons 52, and more.
Darden’s ITR in 2018 was as follows:
- Q III – 32.44 or 11.25 average days on hand
- Q IV – 35.85 or 10.18 average days on hand
Improving Your Restaurant’s Inventory Turnover Rate
When Your ITR is Too High
We mentioned earlier that having a high ITR is good. A high ITR (like in the McDonald’s example) will allow you to turn inventory faster and have less money tied up in current assets. But, in some cases, your ITR may be too high.
When your ITR is too high, it’s likely that you’re running out of important items or having to 86 a dish because you’ve under-ordered on supplies.
Our suggestion is to use technology to keep track of your inventory, whether that lives in an Excel Sheet, your POS, or a restaurant inventory management and Food Cost solution like Orderly.
Keeping track of inventory levels will keep you from having to 86 a dish in the middle of a dinner rush.
When Your ITR is Too Low
If your ITR is too low, you probably have an inventory problem.
As a result, you probably not making enough sales for the amount of inventory that you’re carrying. Over-ordering supplies will increase your chances of food waste or supplies getting stockpiled.
Our suggestion is to pay attention to inventory levels. Are you ordering against a par? Are you using technology to your advantage? Do you know, on average, how much you should be ordering each week? Watch your inventory levels and make sure you know exactly how much to order and when.
Concepts that are able to clear inventory quicker typically have restaurant inventory management systems in place to keep track of what has been ordered, that way, there is never too much or too little of an ingredient on hand.
Restaurants with too much inventory on hand risk not being as productive as they could be, consequently risking food waste or stockpiling.
An easy way to combat inventory issues and understand exactly how your restaurant stacks up against others in your space is to calculate your inventory turnover rate.
We’ve made it super easy to calculate your current inventory turnover rate with a free calculator and guide.
Download the free inventory turnover guide and calculator here.