Because food is what makes up the majority of inventory for a restaurant, how well a restaurant handles inventory is vital to its success. Here are best practices plus a downloadable tracker to minimize food waste and increase profits.
In this article:
- Benefits of restaurant inventory management
- Best practices in restaurant inventory management
- KPIs and formulas to help manage your inventory and restaurant
- How to pick the right restaurant inventory management system
What Is Inventory Management?
At its core, inventory management helps companies know how much stock to order and when to order it. You need enough to meet customer demand, but you don’t want to take up too much space. And restaurants have the added challenge of selling perishable food items that need to be turned over quickly, before they spoil. Restaurant inventory management tracks food coming in from suppliers as it’s used, lost or leftover.
Inventory management can be accomplished with spreadsheets and manual counting. But inventory management software helps ease the process and more accurately count and track your products. Additionally, it can show important financial and performance data and re-order stock when it reaches certain levels.
What Is Considered Inventory in a Food and Beverage Service?
Inventory for the food and beverage industry includes all the physical items needed to provide service to your customers, including food, ingredient and other items like pots and pans and employee uniforms.
Examples of inventory in a food and beverage service business include:
- Dry goods
- Liquor and beverages
- Cooking equipment
- Worker uniforms
Experts recommend tracking inventory in separate categories like food, liquor and non-food items.
Why Restaurants Should Care About Inventory Management
Inventory management helps restaurants keep the right amount of food and ingredients on hand so they have enough stock to serve all customers but also avoid spoilage and loss. Restaurants are more likely to find long-term success if they practice effective inventory management.
Inventory Management Benefits for Restaurants
Proper inventory management helps you decrease food waste and loss, work with vendors, decrease the overall cost of goods, increase profits and keep customers happy.
Some of the benefits include the following.
- Less food loss:
Up to 10% of food purchased by restaurants is wasted before it even reaches the consumer. Restaurants buy too much food at a time, so it ends up spoiling before being served to customers. Food inventory management can minimize that loss.
- Lower cost of goods:
Food costs are generally 28% to 35% of total costs for a restaurant. That goes up when food is lost or spoils.
- Better vendor management:
Restaurants can use inventory management to more closely track their food and purchases, allowing them to better manage purchases and payments to vendors.
- Automatic inventory supply:
Inventory management provides insights into a restaurant’s supply levels. The system also creates automatic processes that replenish food supplies to the appropriate amounts and avoids waste.
- More satisfied customers:
Develop repeat customers and keep them happy by keeping ingredients on hand for all the dishes on your menu.
- Increased profits:
The total cost of goods sold is a major component that determines net profits. Inventory management decreases waste, which lowers the cost of goods sold and ultimately increases profits.
How Do Restaurants Take Inventory?
Depending on the size and type of your restaurant, you may take inventory differently. Here are six common inventory steps that experts recommend.
- Create a table
Create an inventory table with five columns across the top. Name the columns: item, unit of measurement, current count, unit price and total cost.
- List items
List all items in individual rows on the inventory table. You may want to group similar items — all meats, for example.
- Record the amount
Record the amount of an item by a logical unit of measurement. For example, you might list hamburger by the pound or by the number of 10-pound packages. And you might record buns by the quantity of 12-bun packages.
- Record price
Record the unit price for each item in stock. It’s important to use the most recent price you paid for that item. That helps you understand the current cost of goods and how much it costs to replenish.
- Determine cost
Multiply the inventory count by unit and by the last price of the item. Place that number in the total cost column.
- Use par inventory sheets
Owners and managers set the minimum level they want on hand for each item as the “par” level. A par inventory sheet shows how much of an item the restaurant always wants on hand and when to purchase more.
How Do You Manage Food Inventory?
Regularly track inventory manually with the same staff members to help keep it consistent and improve efficiency. And consider restaurant inventory management software to automate processes and ensure more accurate data and reports. Five tips for effective restaurant food inventory management include:
- A point of sale (POS) system will help, but use an ERP or take inventory by hand.
A POS helps immensely with forecasting, order planning, accounting and some inventory tracking. But you’ll still want a person or persons to do a manual count of your inventory to verify and update information included in your digital platforms.
- Use the same staff to do inventory.
If the same employees track inventory each time, they’ll become more efficient and can learn to spot trends or inconsistencies — but be aware of the possibility of theft if only a few employees are responsible.
- Track inventory on a consistent schedule.
Count and monitor your inventory on a regular basis to see how quickly you’re using food and ingredients, which is called cycle counting. Create a plan for your inventory management. It’s best to conduct your inventory process before you open or after you close. Plan to take inventory at the same time of day on the same day every week or month to ensure consistency. However, you can track different types of stock on different schedules. You might track more perishable food every few days and bulk or less frequently used items every week or every other week.
- Use a food waste sheet.
While tracking inventory, you should use a separate sheet in your inventory table to track the amount of food that has spoiled or been wasted in other ways. Monitoring food waste can help you find ways to avoid that loss. Use a food waste log to find areas you can improve and save money.
- Follow the first expiring, first out (FEFO) inventory method.
Restaurants rely on perishable goods, so you want to use the FEFO inventory method. That means you use the oldest food and supplies before any others. Position the oldest items in your storage areas to the front and make it easy to access.
- Use your inventory to guide future buying decisions.
Consistently taking inventory should help you identify trends in how you’re using food and ingredients. Use that data to guide future purchasing decisions so you always have the right stock on-hand.
Free Food Waste Log
Download the free food waste log to track the food wasted or spoiled.
How Much Food Inventory Should a Restaurant Carry?
Restaurants should keep less inventory than many businesses because they usually deal with fresh ingredients. However, some items can last longer than others. For example, canned goods, and food with longer shelf life, such as flour, sugar, rice, etc. doesn’t need to be turned over as often as perishable items that need to stay fresh for safety and quality concerns. Those should turn over in a week or less.
Calculate your monthly turnover by dividing the cost of sales for the month by the average value of inventory on hand. For example, if you spend $24,000 each month, divide that by six to get the low-end of the value of inventory you should have on hand — $4,000. And then divide it by four to get the high end — $6,000. That’s because you should be turning over most of your food inventory four to six times each month. If the cost of your inventory on-hand is outside that range, it could be an indicator of having too much or too little inventory.
What Is Restaurant Inventory Control?
Restaurant inventory control is the process of managing your food and other stock to avoid spoilage and other losses. It helps you plan for when to repurchase inventory. Inventory cost accounting is the process of determining how much product your company should carry to reduce the total inventory costs. It looks at more than just the actual cost of the product and considers storage, administration and market fluctuation.
8 Restaurant Inventory Management Best Practices
Categorizing and organizing stock, setting automated reorder points, establishing safeguards against inventory mistakes and using technology to forecast demand are some key methods to help you manage inventory more effectively.
Here are some best practices.
- Organize inventory:
Put labels on shelving to help staff find items quickly. It also makes restocking goods easier and quicker. Identify the most-used goods and keep them in the same, easily accessible spot.
- Keep stock levels as low as possible:
Use an inventory management system to help keep just enough stock to satisfy customers, but not spoil or take unnecessary space that could be used for more equipment or even more tables for customers.
- Monitor the sell-through rate:
This is a way of tracking how much you sell of a specific item during a given period. For example, if you order 100 steaks in a week and sell 60, you have a sell through rate of 60%. Track your sale through rate for different items and groupings of items, such as meat, bread, beer, etc.
- Track all inventory:
Track every item your restaurant uses, from steaks and potatoes to napkins and staff uniforms. How often you count inventory will vary depending on the type of item. For example, you may track some perishable items weekly, and others, like uniforms, yearly.
- Safeguard against mistakes:
Consider putting two employees in charge of inventory and have them check each other’s work. You should also create an inventory sheet that corresponds to where things are stored onsite for easier counting.
- Employee accountability:
Start by training employees on how you’re tracking all food and beverages that go out and cash that comes in. Help them be a part of the solution and understand all the processes in place for inventory tracking. If you use a POS system, give managers permissions for employee activity and inventory reports.
- Automate reordering:
Inventory management systems can help you set automatic reordering for when stock or supplies reach a certain level.
- Use technology to forecast demand:
Use a POS or inventory management software to forecast demand based on a variety of factors including previous trends, seasonality and other preset conditions.
Restaurant Inventory Terms
Experts use some standard terms to explain elements of inventory, including restaurant inventory. Here are some of the common terms:
- Sitting inventory:
The total amount of a product that your restaurant has on-hand. You can measure sitting inventory in dollar value or another physical or unit measurement. Whichever way you measure, stay consistent.
The dollar value of a product your restaurant uses in a specified period is depletion. You can track depletion daily, weekly, monthly or over longer terms.
A measurement of how long you have before a product is entirely gone if you bought no more. To calculate usage, divide the sitting inventory of a product by the depletion rate for that product. For example, if you have 250 pounds of hamburger and use 50 pounds of it per day, you have five days of usage.
Often tracked as a percentage, variance is the difference between the depletion of a product and how much your records say was sold. For example, at the end of a weekend, your inventory of pizza dough is down by 200 pounds. But your POS system says you sold pizzas that used 190 pounds of dough. The variance is 10 pounds. In this example, the variance would be 10/200 or 5%.
The yield represents the ratio of the amount of product your POS reports as sold compared to the amount actually used. In the previous example, the POS said you sold 190 pounds of pizza dough, but you have 200 pounds less pizza dough so the yield is 190/200, or 95%.
8 Restaurant Inventory Management Tips
Restaurant industry experts advise getting a complete sense of each recipe’s cost, analyzing your menus based on real prices and avoiding waste.
Here are eight restaurant inventory management tips from the pros:
- Recipe costing
Analyze the exact cost of each recipe based on the price and precise amount of each ingredient. You can do this by hand, but restaurant inventory management and POS technology make it much easier.
- Menu engineering
Evaluate the popularity of each menu offering and determine the specific costs of each item. This practice can lead you to increase sales of certain items, change the price point or find less expensive ingredients.
- Use surplus food and ingredients to avoid waste
If your inventory shows a large number of certain foods and ingredients in danger of spoiling, have your chef include them in recipes or offer special appetizers.
- Provide bonuses for reduced waste
Consider offering company-wide bonuses based on the reduction of waste from one period to another.
- Adjust your product mix
Analyze the performance and profitability of each item. Having enough high performing and high profitability menu items will keep your business running and is a key component of leveraging your restaurant’s product mix.
- Do some daily tracking of inventory
Use an inventory consumption spreadsheet to track some items on a daily basis. Understanding how much and what you use frequently can help you detect and better understand food waste.
- Do some basic daily sales tracking
You can’t do a deep dive every day, but you can track some overall sales through a POS and other systems. If an issue does arise, you’ll be more likely to identify and address it quickly.
- Use strategies that reduce employee theft
Up to $6 billion annually is stolen in the restaurant industry by employees. And more than half of restaurant servers have committed theft from their employers at least once, according to a 2019 study. Some of the common ways employees steal from employers is taking food for breaks and meals, voiding cash checks and falsely claiming customers left without paying while pocketing cash. Take steps to identify and prevent employee theft that can cut into already razor-thin margins.
Restaurant Inventory Management KPIs
Several key performance indicators (KPIs) can give you a sense of how well you manage a restaurant’s inventory. Keeping an eye on sales, labor costs and the costs of goods helps you track and measure these and other KPIs to find areas doing well and opportunities for improvement. Many indicators focus on the cost of goods and loss of goods.
Important KPIs include:
Cost of goods sold:
Add purchased stock to the inventory you had at the beginning of a period. Then, subtract the ending inventory. Calculate cost of goods sold with this formula:
COGS = Starting inventory + purchases – ending inventory
If you have $10,000 in total inventory at the start of a period and purchase $8,000 more. If at the end of that period there’s $9,000 in stock left, then the cost of goods sold was $9,000.
Food loss cost:
Determine average food loss by tracking it over a day or a week (use a period representing an average level of business). Place all food waste in a separate bin. After a specified period, weigh that bin and subtract the weight of the container.
Next, calculate an estimated average cost of fresh food by the pound. Multiply the food loss figure by this number. Add the per-pound disposal costs for the restaurant. Then, add how much it costs staff to prepare the disposed of food and multiply by total staff costs. Calculate food loss cost with this formula:
Food loss cost = (food loss in pounds x average cost of fresh food per pound) + (food loss in pounds x average cost of disposal per pound) + (food loss / total food used X average staffing costs)
For example, a restaurant owner tracks food loss for two days and determines the food bin has 50 pounds of waste. He estimates the average cost of all food is $1 per pound. The cost of disposal is $0.20 per pound. During those two days, the restaurant used a total of 1,000 pounds of food. In this scenario, the food waste is 5%. The average food preparation staffing costs for those two days is $3,200. The food loss cost for those two days is $220 [(50 X $1) + (50 X $0.20) + (.05 X $3,200).
Food cost percentage:
This KPI determines the food cost as a percent of total sales. To calculate food cost percentage, use this formula:
Food cost percentage = food cost / total sales
For example, if your food cost is $9,000 and total sales in that period were $25,000, the food cost percentage is 36%.
Liquor loss cost:
Liquor loss cost is a bit harder to quantify. Consider assigning a manager to track liquor loss (spillage, free drinks given to customers to make up for bad service, liquor consumed by staff, etc.). Multiply the amount by the average cost of all alcohol. Calculate liquor loss cost with this formula:
Liquor loss cost = amount of liquor lost in average day x average cost of all liquor
If you want tocalculate liquor costs separately from the overall COGS, the process is similar. Determine the dollar value of inventory at the start of a period. Add the cost of alcohol you buy during the period. Then, subtract the alcohol left at the end of the period. To calculate liquor cost, use this formula:
Liquor cost = starting inventory + purchases – ending inventory
If you have $3,000 in alcohol at the beginning of a period and buy $2,000 more and end with $2,500, then the liquor cost was $2,500 At the end of the period, there’s $2,500 remaining in alcohol. The liquor cost was $2,500.
Liquor cost percentage:
Like food cost percentage, this calculates the total liquor costs as a percent of total liquor sales. To calculate liquor cost percentage, use this formula:
Liquor cost percentage = liquor cost / total liquor sales
For example, if your liquor cost was $2,500 and you sold $10,000 in liquor, the liquor cost percentage is 25%.
Determine inventory turnover by dividing a restaurant’s sales during a period by the average cost of stock during that period. Calculate the average cost of inventory by adding the beginning and ending inventory during a period and dividing by two. Restaurants generally want to turn over much of their stock in seven days or less.
You can also divide the average inventory into COGS, rather than sales. To calculate inventory turnover, use this formula:
Inventory turnover = sales / (beginning inventory + ending inventory / 2)
Inventory turnover = COGS / (beginning inventory + ending inventory / 2)
For example, you have a beginning inventory for a month of $30,000 and end with $20,000 in stock. Total sales (or COGS) for the month was $135,000. The inventory turnover during the month would be 5.4, or a bit less than once a week.
Inventory turnover = $135,000 / ($30,000 + $20,000 / 2) = 5.4
Calculate prime cost by adding total labor costs added to COGS. Calculate prime cost with this formula:
Prime cost = COGS + labor
For example, if the COGS for a period was $9,000 and labor costs were $6,000, then the prime cost was $15,000.
Prime cost as a percentage of sales:
This number represents the prime cost as a percentage of total sales. Calculate prime cost as a percentage of sales with this formula:
Prime cost as a percent of sales = prime cost / sales
For example, if the prime cost is $15,000 and total sales are $25,000, the prime cost as a percentage of sales is 60%.
These and other inventory management metrics can help you monitor and make decisions about your stock.
Benefits of Inventory Management Systems for Restaurants
Inventory management software can be a big help in managing inventory for your restaurant. Among other things, the systems can offer insights into expenses and sales that manual tracking simply cannot provide. Use restaurant management systems to connect back-end financials, POS and inventory in a cohesive cloud platform.
- Real-time visibility into inventory:
Inventory management software can integrate with your POS to track even a single order of a meal and how that impacts your inventory.
- Easy tracking of sales:
Inventory software integrated with a POS system provides in-depth insights into which items are most popular and profitable.
- Tracking promotions:
Restaurant owners can use inventory software to track the success of marketing, loyalty programs and other promotions.
- More effective and efficient tracking:
Staff can use inventory software to efficiently and accurately track stock digitally.
- Automating purchases:
Use software to automate orders when items reach a specified level.
- In-depth reports to help decision-making:
Inventory software provides KPIs and other restaurant data that can drive better informed business decisions and increase profits.
How Restaurant Inventory Affects Net Profit
It’s all about finding that sweet spot. You need enough inventory so your customers can always buy their favorite menu items. But not so much that too much product spoils or expires. Having enough inventory to drive sales while minimizing waste will improve your net profit, or the amount of money left over after all the expenses and taxes.
How to Pick the Right Inventory Management System for Your Restaurant
Think about the size of your restaurant, what other software you’ll need to integrate with and the price when considering purchasing an inventory management system.
- Consider the size and complexity of your operations:
If you run four restaurants that serve 4,000 customers per day, you’ll have far different and more complex needs than a small restaurant that has 100 customers come through its doors. Inventory management software can benefit any eating establishment, but smaller operations may only need basic software.
- Evaluate how your POS and inventory management systems work together:
If you already have a POS system, make sure it will integrate with the new inventory management system. If your POS system can’t track stock, consider getting an updated POS system that includes inventory management.
- Analyze the most common features:
Ask the following questions about general features, noting which are most relevant to your needs:
- Real-time tracking: Can the system make adjustments in inventory with every customer order?
- Automatic purchasing: Can the software create purchase orders for suppliers whenever a specific item starts to run low?
- Financial assessments and reports: Can the platform track how each item sells and which are most profitable?
- User-friendliness: Is the system easy to understand and use for the restaurant staff that may be continually changing?
- Scalability: Can you easily make changes in the system as your restaurant or group of restaurants grow?
- Consider whether you want an in-house or cloud-based system:
A cloud-based option allows for tracking stock using multiple devices and across different restaurant locations.
- Consider cost:
Weigh the cost of a system based on the size of your operation. Don’t buy software that is more complex and more expensive than you need.
Restaurant Inventory Management Case Study
Philz Coffee in San Francisco struggled with disparate systems. Additionally, critical work like tracking and replenishing inventory and monitoring sales, was all done manually. The company implemented an integrated NetSuite platform to help with accounting, inventory and sales and revenue increased by 400%. Philz Coffee has more than a dozen locations in the Bay Area and expanded to the D.C-area and Chicago, along with its wholesale distribution that now reaches 100+ buyers. As it grows and extends business models, NetSuite for restaurants adapts and scales with Philz Coffee.
How NetSuite can Help Restaurants with Inventory Management
Today’s restaurants need a system that takes inventory, tracks sales and provides other useful data about running the business to help cut costs and improve efficiency. Restaurant owners need a solution that will help them effectively manage their business and increase their profits. Whether you’re looking for a completely new inventory management system or something that will integrate into your existing setup, NetSuite can help.
NetSuite’s restaurant and hospitality management software system is a modern and lightweight solution for restaurants, franchisors and hospitality groups to drive revenue and reduce costs. With a solid foundation of back-end financials and inventory in a unified cloud platform, restaurants can elevate their business by adding the functionality required to meet their changing business needs including point-of-sale integration, commissary and franchise management, and more.