In the foodservice industry, it seems that Food Cost is the leading measure of success of an operation. We spend a great deal of time working to control cost by making sure our menus are properly priced, re-costing recipes, and shopping for the best quality products and
prices between vendors.
No doubt, achieving our target food cost is an important part of the success of the operation, but it’s just one measurement of many that we should evaluate regularly to get the full story of how well the operation is performing.
We focus a great deal of time on increasing sales and improving bottom-line profits, but what steps are taken to ensure cash is readily available when we need it? Putting profit to the bottom line is what we all work to do, but if it’s tied up in inventory, we need to wait until that product has been sold before we are liquid again.
Your inventory is an investment and money sitting on a shelf
The importance of maintaining a strong cash flow is it allows us to pay bills, our associates, purchase other products or equipment that’s needed to keep the operation open. This is difficult to do if our cash is tied up on the shelf.
Our goal is to always have an adequate amount of product on-hand to prevent shortages, but having too much inventory on-hand can create as many challenges as not maintaining proper levels of product.
Two simple ratios that need to become part of every operation’s weekly and monthly performance monitoring are Days in Inventory and Inventory Turnover.
These ratios are important indicators of how well we’re doing controlling our inventory levels. They measure how many times the operation’s average inventory levels are turned over during a specified period.
Both Formulas are easy to understand and calculate but require information from conducting your weekly or monthly inventories such as Beginning Inventory, Ending Inventory, Purchases, and Cost of Goods or usage for the period.
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 purchases.
The measurement of Inventory Turns is an efficiency ratio that represents how effectively an operation is controlling and using its inventory.
Inventory turnover 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 quarterly, or yearly with an industry target of 4 – 8 turns per month.
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.
By completing these ratios regularly, you'll better understand the flow of inventory through your operation. It is an effective tool to help control cash-flow, reduce cost, and improve profitability.