How to Calculate Inventory Turnover Ratio at Your Restaurant

Food inventory turnover ratio is a valuable restaurant metric. 

The idea behind the ratio is simple enough — a healthy restaurant frequently sells through its inventory and has to replenish it. The more times the inventory turns over during a given period, the healthier the business.

The reason the restaurant industry inventory turnover ratio is so popular is because it’s a quick and easy assessment for accountants, executives, investors, and other parties. All you need is your restaurant cost of goods sold (COGS) and your average food inventory value over the same period of time.

Restaurant operators can dive into the details of their inventory ratio to address problems with specific products and ingredients.

Read on to learn more about inventory turnover and how you can measure it at your restaurant.

What is a restaurant inventory turnover ratio?

A food inventory turnover ratio is a measure of the number of times a restaurant sells out its inventory in a given time period. 

A low inventory turnover ratio indicates either low sales or too much inventory in stock, while a high inventory turnover ratio indicates either strong sales or a poor inventory purchasing plan, as evidenced running out rather than selling out of key ingredients.

Efficient inventory management leads to less food waste, more precise recipe costing, and thus more accurate plate cost calculations. All this helps forecast and control your restaurant’s profitability, helping you work toward you business goals and navigate uncertainty.

How to calculate your inventory turnover ratio

Keep in mind, there are a few different ways to calculate inventory turnover ratio involving different inputs.

The primary way to calculate inventory ratio is by using the costs of goods sold and average inventory formula.

Another way to calculate it is to use total restaurant sales rather than the cost of goods sold, however, COGS includes markup costs and may be a more accurate number to use.

Start by determining a time frame you want to analyze (annual, monthly, etc.). Next, find these three important numbers — the cost of goods sold, beginning inventory (in dollars), and ending inventory (in dollars) — to calculate the average inventory.

1. Calculate average inventory for the time period

(Beginning inventory + Ending inventory) ÷ 2 = Average inventory

2. Calculate inventory turnover ratio

Inventory turnover ratio = Cost of goods sold ÷ Average inventory

What is a good inventory turnover ratio for a restaurant?

Let’s walk through an example of a brewery’s inventory turnover ratio calculation.

Take for example a hypothetical restaurant, Toasty’s.

Remember: the first step in calculating the inventory turnover ratio is to choose a time period. Let’s analyze Toasty’s inventory for the time period of one year. To find the cost of goods sold for the year, we will gather all costs related to preparing all the food and drinks that were served.

Let’s say that Toasty’s COGS for the year is $600,000; the next step is to find average inventory. 

After adding ending inventory and starting inventory and dividing by two, we're left with $100,200. Thus, $100,200 is the brewpub's average inventory.

This brings us to our calculation: COGS ÷ Average inventory.

$600,000 ÷ $100,200 = 5.9

Here we see the Toasty’s has an inventory turnover ratio of 5.9, which is a good inventory turnover ratio for restaurants as the average industry rate is around 5.

Why invoice automation is the foundation for an optimized restaurant inventory turnover ratio

When you think of your inventory turnover ratio, your restaurant invoices probably aren’t on your mind — they should be.

Invaluable restaurant ingredient details are coded into every invoice. This information is critical to maintaining healthy costing measures, tracking trends, and keeping a handle on inventory. Of course, analyzing this information can be easier said than done given most invoices come through on paper or static PDFs. This is where invoice automation shines.

Restaurant invoice automation empowers operators, managers, kitchen and bar staff — anyone that may receive an invoice — to quickly snap a photo, scan it, or upload it. After that, voilà, it’s digitized.

The invoice automation within xtraCHEF by Toast properly coded pertinent information for your general ledger and accounting practices. At the same time, it provides insights and analysis on inventory trends for your ingredients and products.

You can calculate your inventory turnover ratio manually, but it can be a burdensome, time consuming process rife with human error. xtraCHEF by Toast can help automate the calculation by providing a reliable, consistently accurate data source from which to build on. 

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