As in the business of food and beverages, every penny matters. Tracking your spending with inventory is more than just a ‘nice to do’ – it’s an essential task that will not only improve the smooth running of your business but will also return profit that would otherwise have been lost.
The aim of any area of inventory management should be to improve the Cost of Goods Sold (CoGS) and maximize profits on each sale. There may also be other very important fringe benefits to inventory management, such as removing the environmental impact of your waste.
We believe that tech is the best way to manage food inventory but before we head there, let’s jump into the various metrics and answer – what are the right inventory calculations and metrics to use to calculate inventory?
How to calculate inventory: Find out your core stats
By creating an inventory spreadsheet, or using smart technology to do so, you can gather a real idea of food costs and your total inventory, as well as areas of waste in both cost and quantity. By having a percentage of total food cost, you can see in stark monetary terms the cost of waste and food in your business.
Calculating inventory: How much sitting inventory do you have?
Sitting inventory is what you have, at your premises, ready to sell. This could be a value (Avocadoes – £180) or a physical amount – (Avocadoes – 200 units.) Calculating this requires very accurate stock counts. There are many ways to go about them and they will take time, but with lots of benefits in the end.
Ensure that you don’t mix and match between physical or monetary values or things can get messy later on!
Calculating daily consumption rate
To find your daily consumption rate, you can also look at this as a level of depletion. This is the amount of inventory used over a specific period of time (either expressed in a monetary value or a physical amount).
What is your usage?
Usage is the amount of sitting inventory, divided by average depletion over a period of time.
For example, if you have 70 pounds of sausage and you plan on using 10 pounds per day, you have seven days of usage.
What is your variance?
Variance is the difference between your product’s cost and the usage amount’s cost.
Let’s say you used £500 worth of smoothie mix over the course of a week, but your POS system is reporting that you only sold £450 worth. Your variance would be -£50, meaning that £50 is unaccounted for.
Calculating your total food cost
- What time frame are you looking at? (choose one week)
- What is the starting sitting inventory value for that week?
- The cost of your purchases in that period
- The ending inventory value
- Turnover for the time period
By using this method you can count up all your stock and multiply the items by its money value. Add everything up to know your starting inventory value.
Add the value of new purchases from this week to the value of the starting inventory and then subtract the value of the ending inventory. This is a stock count at the end of the period you are investigating.
The actual food cost formula is:
Starting inventory value + Total value of new purchases – Ending inventory value = Actual food cost.
As a percentage, you should be coming out at around 28 – 32% which is an industry benchmark.
Other ratios to consider
Inventory Turnover Ratio (ITR) – this metric measures how rapidly your inventory sells — how many times you’ve sold and replaced your entire food stock in a given timeframe (a year, a month, or a week), and;
Days Sales in Inventory (DSI) – this one tells you how many days (on average) your food inventory sits on the shelves. Basically, it’s a number that tells you how many day’s worth you’re left with at the end of a given timeframe.
How to calculate inventory: Find out why wastage happens
The next step is to work out how much food you’re wasting unnecessarily. cooking errors, preparation waste and spillages all create food waste. Start with an audit to determine where waste hot spots are. These are the areas to look at.
Are you over-ordering?
Are you over ordering in a way that doesn’t connect to customer demand of interest? Understanding your recipes and planned meals is key to avoid over orders.
Do you have spoilage?
Ideally you will have first-in, first-out (FIFO) storage method to reduce the amount of spoiled food you keep on hand, but if this areas has become less scrutinised or isn’t working, you will have spoilage.
Do you suffer from overproduction?
Overproduction usually indicates a misalignment between front and back of house and serving through peak periods and times of lower footfall alike. Planning meals around extra ingredients can help minimise wastage.
Identify common mistakes
This could be where a team member doesn’t note all dietary requirements, or when a dish is prepared incorrectly. These things happen, we are all human after all, but active management could be identified as an area if many of your wastages come from a common theme.
Effective portion control means you can stretch your food budget further and customers will still be satisfied. In a recent study, 40% of customers left food because the portions were simply too large. If this is a common area, you could start standardizing your measurements for each meal. The reductions in waste could astound you!
Inventory management for your business
The Orderly Inventory Management App is proven to reduce waste and increase profit and efficiency, all from your mobile phone, with a straightforward POS integration to schedule polling receipt of sales and waste data. Stock counts become a breeze that you can schedule in any way you see fit.
On top of that, you can get accurate recipe data that you can overwrite, access all the items to be sent for credit request and automate your PO receipting. There’s nothing else like it.
Whether you are a small business or a global enterprise, getting hold of food inventory management will not only leave you more time to focus on the better parts of the job but will reap benefits in your overall profits.
Interested to see how it can work for you? Please speak to us here.