By David Scott Peters
Inventory = Money
Early in my career I remember being walked into a walk-in cooler and asked, “What do you see on the shelves?”
I started listing what I could see on the shelves, but I was stopped short and told the answer was, “Money!”
This was a very important lesson and one I encourage anyone who owns, manages or works in a restaurant to learn. Inventory is money!
And the worst part is, inventory is money sitting on your shelves that you can’t even pay your bills with. Think of it this way… you need $2,500 for your power bill and it’s not in your bank account. But you do have $2,500 in steaks, seafood and poultry sitting on your shelves in the cooler. The sad reality is you can’t just walk into your power company’s billing office and dolly in cases of product and say, “let’s call it even.”
Not only do you not have the cash in the bank, if you have too much inventory on your shelves, you’re more likely to fall victim to employee theft because you have so much stuff sitting there you’d never know it was missing. Or it can just plain spoil.
So what is an independent restaurant owner to do? How are you supposed to know how much is too much? The answer is, you have to calculate, know and manage your turns.
What is a turn?
Picture that your shelves are completely stocked with food. You open your doors for business and by the end of the day they are completely empty. A delivery comes in the next morning to fill them completely up again. This is a turn, the process of completely emptying your stocked shelves and restocking them.
Now you might be saying to yourself, “That works in theory, but I know I have items on my shelves that have been there for months, such as spices. And I know I have items that I replace almost daily, such as dairy and fresh vegetables. How do I know when I have turned my inventory when my shelves are never empty?”
The answer is easy. Now that you understand what a turn is, change the definition so that an inventory turn is the dollar value in product turns. Simply put, if you have $5,000 of food on your shelves, when you have used $5,000 in product (translation: it’s actually left your shelves), that is considered a turn, no matter how many days it takes.
How do you calculate an inventory turn?
Inventory turns are calculated by dividing the dollar value of the product use (you should be calculating this monthly to know what your food cost is) by your average inventory (which is simply taking your beginning inventory plus your ending inventory and dividing it by two). The final calculation for inventory turns looks like this: [use ÷ average inventory]. The benefit is this number measures how efficient a restaurant is with its cash and inventory.
For example, in most cases the kitchen of a full-service restaurant wants to achieve four to eight inventory turns a month. If the inventory is turned 4 times in a month, in theory that means you will sell all of your product on the shelves and re-stock them 4 times and you will be placing a food order only once a week.
When eight turns are achieved and you’re ordering twice a week, you only have enough food on your shelves for three to four days of business. This makes your operation extremely efficient. The key to successful inventory turns is the more turns you can achieve the better use of your money.
What are some other benefits to turning your inventory more often?
- You will reduce your risk of theft because you can immediately see when items are missing. Everything has its place.
- You will operate a cleaner restaurant, which translates into better health department scores.
- With less inventory on the shelves, you will have more cash in the bank to pay bills, like that $2,500 power bill.
- And last but not least, calculating inventory turns can be a key to ordering properly to hit your budget.
So the next time you walk into your cooler, ask yourself, “What do I see?” If the answer is just the right amount of money, your bank account will thank you.
David Scott Peters is a restaurant expert, coach, trainer and speaker, specializing in systems for independent restaurant owners. He is the nationally acclaimed restaurant coach whose unique “SMART Systems” approach to boosting profits has earned him the title of, “The man who can walk into any restaurant in America and find $10,000 in undiscovered cash before he hits the back door – Guaranteed!” Visit www.TheRestaurantExpert.com for more. Learn more tips, tricks and secrets in David’s free five-part e-course, “How to Explode Your Restaurant Profits NOW!” Simply sign up to receive the e-course at TheRestaurantExpert.com.
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