Days in Inventory - Inventory Turnover
It is very possible to hit your monthly food cost percentage target or run an even lower food cost for the period and still have an excessive amount of product in inventory. Food cost is based on usage and not on your purchases. You can purchase as much as you want every week and as long as you account for all the products, you can still achieve your target food cost.
In running an efficient operation, your goal is to always have an adequate amount of product on-hand to prevent shortages. On the other hand, having too much inventory on-hand is just as harmful as not maintaining proper levels of product.
Improperly planning and not ordering enough product puts the operation at risk by creating shortages which can lead to unhappy customers and loss of sales. It is also frustrating to the staff, not having the products they need when they need them to do their jobs.
While over-ordering may give you the sense of security of knowing that you have plenty of product on-hand, having an endless supply of products leads to increased usage, spoilage, and shrinkage. Most importantly, having too much product on-hand reduces your cash-flow opportunities by tying your money up by sitting on a shelf.
Two very important tools you can use to determine if you are holding too much product in inventory are, Days in Inventory and Inventory Turns. While they may appear to provide the same information, both give you two different very important indicators of how you’re doing controlling your inventory levels. These ratios measure how many times the operation’s inventory has been turned over during a specified period. Typically these ratios are calculated monthly but are often tracked weekly, quarterly as well as yearly.
Both formulas will require information that is calculated from conducting your weekly or monthly inventories such as Beginning Inventory, Ending Inventory, Purchases, and Cost of Goods or usage for the period.
You can easily calculate your Cost of Goods using the formula
(Beginning Inventory + Purchases) – Ending Inventory = Cost of Goods
You will find a copy of both of these formulas on the download tab.
"Your inventory is an investment and money sitting on a shelf"
Days in Inventory
Days in inventory is an efficiency ratio that measures the average number of days an operation takes to turn over its average inventory levels. This ratio is important because it measures the number of days the operations cash-flow is tied up in inventory.
The time standard in the foodservice industry for Days in Inventory is between 7 – 10 days with the lower the number representing a better performance of controlling inventory and purchasing.
By completing the ratio form regularly, you will better understand the flow of inventory through your operation. It is an effective tool to help you control your cash-flow, reduce cost, and improve profitability.
Days In Inventory Terminology
Days in Inventory: The average number of days an operation takes to turn over its average inventory levels.
Inventory Turnover: The number of times an operation sold its total average inventory during a specific period.
Cost of Goods: The cost of food that is directly used to prepare the products that an operation sells during a period. Cost of Goods (COGS) is calculated by using the formula:
(Beginning Inventory + Purchases - Ending Inventory)
Average Weekly Inventory: The value of the average amount of inventory stored on hand on a weekly basis
Total Inventory ÷ Number of Weeks
Average Daily Inventory: The value of the average amount of inventory stored on-hand daily
Total Inventory ÷ Number of Operating Days
Average Daily Usage: The value of inventory that is used on a daily basis.
Total Usage ÷ Number of days
Operating Days: The number of days a business operates for specific period
Beginning Inventory: Value of inventory on hand at the start of the period of measure. Ending inventory of prior period is the starting inventory for the new period.
Ending Inventory: The value of inventory on hand at the end of a specific period
Days in Inventory (DII) Formula:
Industry Standard 7 - 10 Days
A higher number of days may indicate there is too much product on-hand and you need to review your purchasing practices. You may see occasional spikes in this number based on the needs of the operation, but a well-run operation should see a consistent trend in its weekly or monthly results.
While a lower number of Days in Inventory is desirable and may show that an operation is effectively managing its purchases and inventory, too low of a number may indicate other problems, such as issues with maintaining adequate levels of products on-hand to prevent shortages. Issues with product shortages will often lead to dissatisfied guests which lead to loss of revenue. If product shortages are a consistent issue with the operation, this could eventually lead to a more permanent loss of valued customers.
The formula to calculate Days in Inventory
Inventory Turnover Ratio
Like Days in Inventory, the measurement of Inventory Turns is an efficiency ratio that represents how effectively an operation is controlling and using its inventory.
Inventory turnover, or the inventory turnover ratio, is how many times your operation sold its total average inventory during a specific period. This is usually calculated monthly but can also be tracked weekly.
A high inventory turnover number usually means that products are sold faster and not sitting on a shelf, while a low turnover rate indicates weak sales and excess inventories.
The formula to calculate Inventory Turns:
Cost of Goods Sold ÷ Average Inventory = Inventory Turns
The foodservice industry standard for an efficient operation is between 4 - 8 turns per month.
A low inventory turnover ratio may indicate that you are over-purchasing food and holding too much product in-house. Additionally, it could be a situation of a reduction in sales due to a decrease in sales.
If Inventory Turns trend consistently low, it would be a good time to review sales of each menu item and determine if slower-moving products can be eliminated from your menu or just reduce the amount that is kept on-hand.
While a high inventory turnover ratio is typically a sign of healthy sales, Inventory Turns that are too high may suggest that not enough inventory is being maintained. This again leads to shortages and loss of sales.
Calculating your Days in Inventory and your Inventory Turnover ratios as part of your regular routine is a reliable way to track purchases, usage, and improving the operation’s cash flow. The better you understand your operation, the better you can minimize loss and improve profitability.