Too Much or Too Little? How to use an Inventory Turnover Ratio

There are many ratios and numbers that are important when it comes to not only managing your inventory, but your entire operations. The inventory turnover ratio – or ITR – affects more than just your inventory, it also affects your food costing, menu pricing, ordering, purchasing and more.

It’s important to understand that, like all best practices in inventory management, taking time to understand and use your inventory turnover ratio will allow you to have better control over stock levels, usage, waste, costs, and ultimately profits.

How to Calculate your Inventory Turnover Ratio

ITR = Sales / Average Inventory

In order to use this formula, you’ll need to determine the time period to measure the inventory turnover ratio for. For that time period, you’ll need to get the following from your sales and usage records:

  • Total Net Sales OR  Total Cost of Goods Sold
  • Beginning Inventory (value of your stock at the start of the time period)
  • Ending Inventory (value of your stock at the end of the time period)
  • Average Inventory ([Beginning + Ending Inventories] / 2)

After you have these numbers, simply plug them into the formula, and voila! you have your ratio. If we apply this to an example:

In December of 2018, your total net sales (or cost of goods sold if you prefer) totaled $90,000; your beginning inventory was worth $25,000; and your ending inventory was $8,000.

By using this information, and plugging it into the formula, we get:

($90,000/([$25,000 + $8,000]/2)) = 5.45

This means that your restaurant or bar sold its entire inventory approximately 5 1/2 times in the month of December.

Whether you want to measure every month, bi-annually, or annually, or by using a different formula altogether, the most important element is consistency. The formula and time periods must be used to ensure the number used for comparisons is meaningful.

Using your Inventory Turnover Ratio to Boost Business

Inventory turnover in your bar or restaurant has high stakes for both you and your customers. Not only does your inventory turning over show that you’re making sales, but also shows that fresh ingredients are being used and sold within a given time to avoid spoilage and waste and ensuring every dish on your menu is good quality and safe to consume.

A healthy inventory ratio for a bar or restaurant is typically between 4 and 8 – selling your entire inventory between 4 and 8 times each month; whether your ratio is a high or low number can also tell you some things about your business.

A low inventory turnover ratio suggests you might be overstocking or over-purchasing food and beverage items, or that business and sales have slowed. If you see a pattern of low turnover on a regular basis, this can be your signal to take a closer look at what’s not selling on your menu, where you can cut back on orders of a particular item, ways to cut costs, and when you might want to offer promotions that bring in more customers and boost sales.

While a high inventory turnover ratio is usually a sign of robust sales and a healthy business, if it’s too high, it can also mean you aren’t keeping enough stock on your shelves. It’s risky for a restaurant business to regularly fall below the optimal inventory levels required to drive sales.

Once you have made calculating your inventory turnover ratio a regular part of business practices in your restaurant, bar or across your multi-unit chain, you’ll find you have a reliable way to track usage and sales while flagging any potential problems before they eat into your profits.

Tools to Control your Inventory Turnover

Our software, Optimum Control, has all the tools you need to calculate your restaurant inventory turnover and more. Our all-in-one restaurant inventory management software is easy, intuitive and accurate, helping you save valuable time, reduce paperwork, and protect your profits.

With Optimum Control, you can track, record and analyze all aspects of your sales, usage and costs per item without piles of paper and complicated spreadsheets. Count and value your inventory with ease, make new orders with a touch of a button, and choose from over 70 different report types to shed insight on your profitability and inventory management.

Run a successful restaurant business from wherever you are. The streamlined digital processes, POS integration, and web-based connectivity of our Enterprise software solution makes effective inventory management a fast, simple part of your daily workflow.

Connect with our expert team of sales and support staff to find your best inventory software solution.

Take control of your inventory today with Optimum Control.

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