Too much or too little? How to use an Inventory Turnover Ratio

Inventory turnover is a business and accounting term for measuring the number of times your inventory is sold or used up in a certain time period, like a month or year.

In the restaurant industry, calculating your food and beverage inventory turnover ratio – or ITR – is an incredibly useful tool for decision making in food costing, menu pricing, ordering, purchasing and more.

Like all good inventory management practices, taking time to figure out – and use – your inventory turnover ratio means you’ll have better control over your stock levels, usage, waste, costs and profits. And even better, there are tools you can use to make these kinds of good business practices easy, accurate and profitable.

Calculate your Inventory Turnover Ratio

A simple formula for calculating your inventory turnover ratio is:

ITR = Sales / Average Inventory

To use this formula, you’ll need to pick a time period over which you want to measure your inventory turnover. Then, gather a few key pieces of information from your sales and usage records in that same time period:

  • Your total Net Sales OR your 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)

Then, simply plug these numbers into the formula to get your ratio. Let’s use an example.

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

Using the formula, your inventory turnover ratio for the month was $90,000 / [(25,000+ $8,000) / 2], or 5.45. This ratio means that your bar or restaurant sold its entire inventory about 5 and half times in the month of December.

Remember, it’s up to you to decide if you want to measure your inventory turnover each month, bi-annually or every year, or by using a different formula all together. The important part is that your whole company needs to be consistent in the formula and time periods you use so that your ratio is a meaningful number for comparisons.

Using your inventory turnover ratio to boost business

Inventory turnover in a bar or restaurant has high stakes for you and your customers: much of your food and beverage stocks are fresh ingredients that need to be used and sold within a given time to avoid spoilage and waste and ensure every dish on your menu is good quality and safe to consume.

In general, a healthy inventory turnover ratio for a bar or restaurant is between 4 and 8 – selling your entire average inventory between 4 and 8 times each month. And whether your ratio is a high or low number can also tell you a few 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.

And 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.

So 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

Optimum Control software 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 Optimum Control software makes effective inventory management a fast, simple part of your daily workflow.

Browse more features and benefits of our leading software, or 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!