Inventory Turnover Formula: Calculating Inventory Turnover

Nicole Georgiev
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    Is your food inventory being used efficiently? Do you ever wonder the number of days it takes you to sell through your inventory? Are you familiar with the food inventory turnover formula? Do you understand what the inventory definition is or the inventory days formula? How do you manage backorders? When you manage a restaurant, the inventory can sometimes get put on the back burner.

    However, understanding your inventory, the restaurant inventory control process, and the items you have in stock at any time is crucial for the success of your restaurant. That’s where using the food turnover formula comes in. 

    As a restaurant manager or owner, it’s necessary to be familiar with their inventory turn and the inventory turnover definition. This includes how many days your inventory is held on average and how it compares to others in your industry. 

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    Inventory Turnover: What Is the Inventory Turnover Formula?

    The inventory turnover formula is a way to calculate the number of times an establishment has sold its entire inventory in a specific time period. Low turnover ratios can indicate too much inventory or low sales. High turnover ratios indicate poor inventory management process, purchasing strategies, or strong sales. 

    Restaurant inventory software helps with this process. It provides automatic updates on what products a company sells and what's left in inventory. Many foods have sensitive and short shelf lives, so it’s crucial to determine turnover. This is how you ensure food quality and safety.

    High Inventory Turnover Rate

    If you have a higher inventory turnover rate, it’s possible that you’re purchasing the right amount of stock as you need it and that you have less money allocated in your current assets. However, too high of a turnover rate isn’t a good thing. Familiarize yourself with the fill rate definition to better understand why this is.

    A turnover rate that is too high indicates that you’re running out of essential food products or ingredients. This causes you to 86 items (see 86 meaning) from your menu due to poor inventory control. Such ineffective purchasing results in low inventory levels and a loss in sales.

    Low Inventory Turnover Rate

    A lower inventory turnover rate that is too low indicates that there’s an issue with your stock levels. It’s likely that lower turnover is causing you to not meet sales quotas for the amount of stock that you have. 

    This can be prevented by auditing your stock and identifying excess items. By making a note of these items, you’ll be aware of what items you don’t need to purchase on your next order. This also limits your food waste and reduces inventory shrinkage.

    Inventory Turnover Definition

    The inventory turnover definition is a number that refers to the number of times a company sells and replaces inventory products during a given period of time. To determine turnover, you have to divide the cost of inventory by the average inventory value for the same time period. High inventory turnover ratios tend to mean strong sales whereas insufficient inventory ratios indicate weak sales.

    Calculating turnover is possible using an inventory turnover calculator and the inventory turnover equation, which is covered in this article. It's crucial for any business to keep track of in order to understand its financial footsteps. It provides insight in terms of profit and business stability as a whole.

    If you want to understand how the inventory turnover formula is used in a business, check out our Inventory Management eBook. Learn all there is to know about inventory management processes and methods.

    Inventory Turnover Formula

    If you’re a restaurant owner or manager, chances are that you’re asking yourself “how do I calculate inventory turnover?” The formula to calculate inventory turnover ratio is necessary. The turnover ratio formula is the cost of items sold divided by the average inventory. Average inventory is calculated by adding up the beginning and ending inventory and dividing it by two. 

    You can also determine turnover by dividing the total sales by inventory. However, this can produce inflated results that aren’t as accurate since sales are oftentimes recorded at market value. 

    There are many restaurants that use the COGS or cost of goods sold instead of total sales. This is because the COGS can reflect the overall cost of producing goods, and it excludes the retail markup. 

    Below are steps for calculating the restaurant inventory turnover ratio: 

    1. Calculate the average inventory for the time period

    (Starting Inventory + Ending Inventory) / 2 = Average Inventory

    2. Calculate the inventory turnover ratio 

    Cost of Goods Sold (COGS) / Average Inventory = Inventory Turnover Ratio

    Example: Inventory Turnover at Gelato Amaro

    To put things into perspective, let’s go through an example of calculating the turnover ratio for Gelato Amaro, a hypothetical Italian Gelato shop. The food inventory turnover formula is necessary to complete the calculations.

    Gelato Amaro is one of the top locations in the city for people of all ages to go for real Italian gelato. They churn about 30,000 pints of gelato each year. Since the gelato-making process is extremely precise, tracking inventory closely is crucial. Here’s the process:

    1. The first step in calculating the inventory turnover ratio is to specify a time period. For this example, we’re analyzing Gelato Amaro’s inventory for one year. In order to find the cost of goods sold in one year, all expenses for the gelato-making process must be totaled. This includes dairy items such as conventional and organic milk, dairy eggs, cream, sugar, and flavorings. 
    2. Let’s presume that Gelato Amaro’s cost of goods sold for one year equals $100,000. Now it’s time to determine the average inventory using the average inventory formula. To do this, we add the starting inventory with the ending inventory and divide it by two. Gelato Amaro’s average inventory is $20,200. 
    3. Now it’s time to divide the cost of goods sold ($100,000) by the average inventory ($20,000). We’re left with 4.9, which is our turnover ratio. Given that the restaurant industry average turnover ratio is 5, Gelato Amaro is maintaining an adequate inventory turnover ratio. 

    How to Calculate the Restaurant Inventory Turnover Rate

    The restaurant turnover rate is calculated by dividing the cost of items sold by the average inventory over a specific period. 

    Average inventory is a metric that is used because businesses tend to have fluctuating sales based on the time of year. This can be due to peak seasons, holidays, and more. Average inventory is used to determine the turnover in order to account for variations in sales. It’s calculated by adding beginning inventory to ending inventory and dividing it by two.

    Why Is Food Turnover Rate Important?

    The food turnover rate is important because it’s used to optimize inventory volumes based on consumer demand. This can help with profitability as well as operational efficiency, including restaurant operations. The turnover ratio is used to indicate all of this. Be sure to look into how to increase restaurant sales.

    Having an ideal turnover rate for your restaurant or food business is important. The current inventory ratio should be compared to past performance and your competition’s performance. A high ratio is preferred over a low ratio, but it’s not always ideal. This can reflect strong sales, but it can also mean low inventory levels. 

    Inventory turnover reflects a company’s liquidity. If a business can’t turn inventory quickly, then it might have cash flow problems. Companies with high turnover rates can typically generate cash quickly. 

    It’s crucial for companies to show that they have the sales to match their inventories and that they utilize a strong management process. This is because banks and creditors tend to use inventory as loan collateral. 

    Restaurants don’t usually want to waste their resources and money on unnecessary food storage costs. They also don’t want to underestimate consumer demand. Instead of guessing when it comes to ordering volumes, restaurants optimize their food inventories using turnover rates. Restaurant tech such as restaurant management technology is also useful.

    Here are the top seven  benefits of restaurant food turnover rates: 

    1. Increase Profitability

    Using turnover ratios will help restaurants increase their profitability. This is crucial for KPIs or performance indicators since increasing turnover can drive profit. Many businesses with high turnover reduce holding costs. 

    The cost of goods sold formula is how companies can determine their net profits. When total waste decreases due to proper inventory management techniques, the cost of goods sold decreases resulting in increased profits. 

    1. Make Better Decisions 

    When you understand turnover, you can make smarter and better business decisions. This is because you're aware of exactly what food items you need to order or reorder

     You’ll also have an understanding of which food items are underperforming. This can help you decide on how to change that; for instance, by offering those products at discounted prices. By utilizing turnover strategies, you can also anticipate order demand with increased accuracy and be ahead of schedule. This is known as demand planning.

    1. Less Food Loss

    On average, about 10% of food that is purchased by restaurants is wasted. In many cases, this happens because restaurants purchase too much food at one time. The food then spoils before it’s served to the customer. 

    While having safety stock on hand is important, too many of the wrong items can be a problem. This is manageable using demand planning and inventory forecasting tools. Using these tools, the inventory control manager has the ability to track what products are more likely to sell out and require quicker replenishment. 

    1. Lower Cost of Goods

    Using the food inventory turnover formula, restaurant owners can lower their cost of goods. On average, food costs equal out to be about 28-30% of total costs for the restaurant. This average can increase when food is spoiled or lost. Recipe costing will also come in handy here.

    1. Better Vendor Management

    Vendor managed inventory allows restaurants to keep track of their food and purchases. This means that they have the ability to manage the inventory purchases and payments they’re making to their vendors.

    1. Automatic Inventory Supply

    Automated processes make the inventory control process simple. Automatic inventory supply is useful in that it provides insightful information regarding the restaurant supply levels. Software systems create automatic processes that replenish food supplies when necessary to the appropriate levels or par stock. This process also decreases food waste. 

    1. More Satisfied Customers

    One of the ways of developing repeat customers is by keeping them happy through excellent customer service. In order to do this, restaurants must keep ingredients on hand for all menu items. If a restaurant has different types of menus, this can get tricky as it’s likely that each item will require different ingredients. 

    How to Get the Ideal Inventory Turnover Ratio

    It's crucial to explore different ways to get the turnover ratio no matter if it's above or below average. Here are five steps to achieving the ideal turnover for your restaurant food items: 

    1. Start Forecasting Your Inventory and Sales

    Utilize forecasting tools to predict your expected sales. You can also look into previous monthly or yearly reports to determine how much you’ve ordered in the past. A simple and timed inventory audit can also help.

    1. Use Inventory Best Practices

    Many restaurants tend to operate in a first-in, first-out method when it comes to inventory. This means that the items that were purchased first will be sold first. When inventory is sold as it comes in, you can organize your inventory in an easily accessible manner to ensure that no inventory expires. 

    1. Negotiate the Cost of Raw Materials With Vendors

    Vendors are oftentimes open to negotiating costs when you buy inventory, especially when it’s wholesale. Purchase what you can in bulk and compare your inventory prices between different food and drink vendors to ensure you’re getting the best price.

    1. Use a Food and Beverage Inventory Management Platform

    BlueCart is a food inventory management platform whereas BinWise is a beverage inventory control platform. They make it easy to keep track of what products you need to replenish, and they also simplify the actual ordering process. Similar platforms also allow you to create a restaurant QR code. Revolution also makes it simple to grow your business through their technology and talent.

    1. Work With a 3PL Company

    Managing inventory in real-time is difficult but with 3PL companies, the process is simplified. Restaurants that combine the use of inventory control platforms with nationwide fulfillment have a greater outlook on their operations. 

    It’s possible for you to automate reorder points so that you know when to replenish your inventories at the fulfillment centers. This will ensure that you have time to send food products and restock inventory on time. As a result, you can prevent taking items off of the menu due to a lack of inventory. The reorder point can be calculated using the reorder point formula

    Using Your Inventory Turnover Formula to Boost Business

    A restaurant's turnover is important to the business owner and the customers. It shows that you’re making sales while also using and selling fresh ingredients, like fresh produce, within a specific timeframe to avoid waste. This ensures that every item and dish on your menu is made with quality and food safety in mind. 

    Having a low or high turnover ratio says a lot about your business as a whole. Low turnover ratios suggest that you’re over-purchasing or overstocking your food and beverage items. It can also suggest that your business is slowing down in terms of sales.

    Low turnover patterns should act as a sign to look into what isn’t performing well on your menu. Determine if there is anywhere you can cut back on in terms of ordering and cut costs as a whole. This is also the point where you could consider offering promotions to attract more customers and boost sales.

    High turnover ratios typically indicate robust sales and a solid business. However, if the ratio is too high, it can mean that you don’t have enough stock on hand. Falling below the optimal level of inventory is risky for any business owner. 

    Using the inventory turnover formula to determine your restaurant's food turnover ratio should become a regular part of your business practices. This is how you’ll track product usage and sales while also indicating potential problems before they negatively affect your profits. 

    Utilizing Time Management

    It’s common for a restaurant manager to not have time to catch a breath of air on a typical work day. That’s why it’s crucial to make the most of the time that you have by utilizing proper time management techniques. 

    Automating tasks and auditing the workflow will ensure that food products and ingredients are stored for less time. The quicker you convert those products and ingredients into revenue, the better the turnover ratio you’ll have. 

    Optimizing Your Supply Chain

    The supply chain is a big aspect of the food industry. It’s possible for it to be broken up into numerous fragments to ensure food safety. However, this makes supply chain management even more important. Take some time to familiarize yourself with the answer to, “What is supply chain management?” if you haven’t already. 

    When evaluating your supply chain, look out for any weak spots. Identify how long it takes for an order to get delivered. Long lead times can mean that your vendors are slow with their output process. As a result, you’ll have to look at the Vendor Managed Inventory (VMI) to resolve outstanding issues.

    Within a solid supply chain, you should have the ability to respond to new demand changes in real-time. This also applies when revising inventory needs based on demand planning or sales forecasting. It’s also important for suppliers to be flexible with altering stock units in order to meet your requirements. 

    Price Adjustments

    Boosting business at your restaurant and enhancing your turnover rate is also possible through price adjustments. This includes reducing the prices of items on your menu. By doing this, it’s likely that you’ll entice more customers into your establishment and start moving excess inventory faster.

    Limiting bulk orders when replenishing items can also help. Bulk orders include wholesale products such as wholesale meat, bulk fish, wholesale produce, wholesale alcohol, and wholesale dairy. Once you limit your bulk orders, you can count your inventory on a daily or weekly basis. This will give you an idea of what items are in stock, what is selling, and what is not. 

    With an ideal food turnover ratio, a restaurant will boost its profitability and strengthen the confidence between the owner and the shareholders. As a result, it increases the business’s ability to grow and thrive. 

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    How Do Restaurants Take Inventory?

    Each restaurant takes inventory differently. These days, many restaurants simplify their inventory process with the use of restaurant inventory software. However, some still take the traditional approach and take inventory manually. 

    Manual Inventory Taking

    There is an increased chance for error when taking inventory manually. However, many restaurants still prefer to do it this way. The process typically starts off by creating a table or inventory spreadsheet with columns for the item name, unit of measurement, the current count, unit price, and total cost. 

    Once your table is created, you can list all of the items you have in stock individually. Grouping similar items together are preferred to keep track of everything. With your items listed, you then record the amount of each item using its ideal unit of measurement. 

    The price of each item is also recorded. Using the most recent purchase price is preferred so that you have up-to-date information to use to determine the cost of goods sold. After each item is recorded, you determine the cost by multiplying the inventory count by unit and by the last price of the item. That number is inserted into the total cost column. 

    It’s common for restaurants to use par inventory sheets. This is how they set minimum inventory levels for each item they want to have on hand. It can also indicate when items need to be replenished. 

    Inventory Management Software

    These days, technology eliminates most of the manual work that we have to do. This is especially true for the restaurant industry when it comes time to take inventory. With inventory control software, there’s less risk of input errors. 

    Most systems will also automatically pull data through cloud-based systems for real-time inventory updates. This way, you’ll know exactly what inventory you have on hand. As a result, your cost of goods sold numbers will be more accurate. 

    The use of inventory control software makes the process of taking inventory faster and more reliable. You’ll have the opportunity to create a digital catalog with your products and invoices. With this option, you’ll be able to easily update inventory as often as necessary.

    Inventory management is a process that is driven by data. Many restaurants keep track of their inventory in the cloud and are switching from pen and paper tracking to online inventory tracking. Businesses in the hospitality industry--including restaurants, food trucks (one of the 2022 food trends), coffee shops, and more--can benefit from tracking their goods with the inventory turnover formula. 

    The hospitality industry business benefits from tracking their inventory in numerous ways. It’s also beneficial for those that are just getting into opening a business. This includes those that are opening a restaurant, opening a food truck, opening a coffee shop, opening a bakery, or opening a grocery store.

    How Do You Manage Food Inventory?

    Restaurants manage food inventory by regularly tracking product quantities either through manual processes or the use of inventory control software. With the manual process, it’s best if the same staff members perform the checks in order to improve efficiency and remain consistent. The use of inventory control software automates the process and ensures accurate reports and data. 

    Most restaurants deal with fresh ingredients. Due to this, restaurants should keep less inventory on hand than other businesses. However, there are some food products that last longer than others. These include packaged goods such as sugar, flour, and rice. These items don’t need to be turned over quite as often as fresh or perishable items do in order to maintain their freshness, quality, and safety. 

    Effective food inventory management tactics also include:

    Setting Up a POS and ERP System

    A point of sale (POS) system, such as a bar POS system, helps with restaurant order planning, forecasting, inventory tracking, and accounting. An enterprise resource planning (ERP) system helps integrate day-to-day business operations. To further understand the ERP meaning, explore some ERP system examples and the benefits of ERP.   

    These systems automate the inventory-taking process so that it’s more up-to-date and accurate. To verify the information collected through your digital platforms, it’s encouraged to still do a manual inventory count from time to time. 

    Have the Same Staff Take Inventory

    In order to ensure the accuracy of your inventory and an efficient inventory-taking process, it’s ideal to always use the same staff members to complete the job. This is how you can home in on certain trends or inconsistencies. It’s also a way for you to minimize the risk of theft. 

    Use a Consistent Schedule

    Taking inventory on a regular basis will give you insight into how quickly you’re running out of certain foods and ingredients. This is called cycle counting or cycle stock. Developing a plan for inventory control is ideal to ensure it’s up-to-date.

    Inventory should be counted either before you open your establishment or after you close. Ideally, the process should be done at the same time and day of the week, every time.  However, different types of stock can be counted on different schedules. This means that produce items can be tracked daily whereas non-perishable items can be tracked weekly. 

    Utilize a Food Waste Sheet

    When tracking inventory, a separate sheet should be used to track food waste. This includes food that has spoiled or is no longer of high quality. By monitoring food waste, you’ll have the opportunity to find ways to avoid the same future loss. This is a way for you to improve your inventory control tactics and save money.

    Following the FEFO Method

    FEFO stands for first expiring, first out. It’s a method used when managing inventory and more specifically, perishable goods. The oldest food and supplies should go first before any others. It’s best to position those items in the front of storage areas or in a place where they’re easy to access.

    Use Inventory to Influence Future Buying Decisions

    By constantly taking inventory, restaurants will be able to identify trends as to how they’re using their food and ingredients. This data is useful when it comes to making future buying decisions. You can determine what items should be replenished more often and which aren’t a priority. 

    Do you want to see how the inventory turnover formula is used in a business? Check out our Inventory Control Guide eBook to learn all there is to know about the inventory control process.

    Wrapping It Up

    Restaurant concepts that are quick to clear inventory generally utilize restaurant inventory control systems. They’re used to keep track of what items have been ordered so that there is never too much or too little of that product on hand. They also utilize the food inventory turnover formula for their calculations.

    Food establishments with too much inventory run the risk of not being as productive. They also have an increased risk of stockpiling and having their food products spoil. 

    An ideal way to avoid inventory issues and understand the state of your restaurant is to compute the turnover rate using the food inventory turnover formula. This article has made the process simple to do. 

    Whether your restaurant has too much inventory or not enough, getting your turnover ratio to an ideal level is essential. This will allow you to make smart buying decisions and create a future for your business to thrive in. 

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    Frequently Asked Questions About Food Inventory Turnover Formula

    Understanding turnover may be tricky, but it's essential for restaurants to keep track of what's going in and out of their establishments. Read through the following commonly asked questions about inventory and the inventory turnover formula.

    What Is Restaurant Inventory Turnover Ratio?

    The restaurant inventory turnover ratio is used to represent how many times a restaurant has sold out its inventory during a given time period. The amount of inventory a restaurant has can determine how efficient the inventory control processes are. Once you sell the inventory in your restaurant, you generate a turnover ratio. 

    Why Is Restaurant Turnover Rate Important?

    Restaurant turnover rates are important for optimizing inventory volumes based on consumer demands. This is ideal for increasing profitability and ensuring optimal operational efficiency. Using a company's inventory turnover formula can help you keep track of your goods. Understanding what turnover means is crucial for any business.

    How Can Restaurants Manage Their Food Inventories?

    BlueCart and BinWise are food and beverage inventory platforms that can be used to ensure proper inventory replenishment. Restaurants can keep track of their items and complete the ordering all in one place. 

    What Is a Good Food Inventory Turnover Ratio?

    A good food inventory turnover ratio is generally between 4 and 8. This means that a restaurant is selling its entire food inventory 4-8 times each month. 

    How Do You Calculate Food Cost Percentage?

    To calculate the food cost percentage, you must add the value of inventory at the start and all purchases, then subtract the value of your ending inventory and divide the result into the total food sales. This inventory turnover calculation will provide you with insight on the total food cost of your establishment.

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