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    How Much Inventory Should a Restaurant Carry?

    `Stephanie Robalino` : Posted on August 26, 2021

    Ask any chef or kitchen manager if they've ever run out of an ingredient before a busy dinner rush is over, and you'll likely get an earful. Almost every restaurant has experienced the misfortune of having to '86' a popular dish. 

    Similarly, most restaurants have probably gotten in a bad habit of ordering too much food and ending up with excess, unused ingredients. Both scenarios can have blank consequences on your bottom line. While diners may not appreciate you running out of their favorite menu item, they certainly don't want to be served week-old sea bass, salad, or fruit salad as an alternative. 

    Restaurants can find ways to strike a balance and order just the right food and beverage inventory. Improved ordering control can help free your hard-earned cash from being tied up in excess inventory or susceptible to spoilage and waste. Plus, it ensures you're always serving up the freshest dishes and drinks to your customers. 

    5 Ways to Recession - Proof Your Restaurant Business
    Optimizing restaurant operations in 2023 and beyond

    In this article, you will learn: 

    • How much food and beverage inventory your restaurant should carry 
    • How to calculate your inventory turnover rate 
    • Food and beverage inventory best practices 

    How Much Inventory Should Your Restaurant Carry?

    You only need to hold enough inventory to cover your sales, plus a little extra in case of an emergency (like spillage occurs or a large party dines at your restaurant). A good inventory to sales ratio is between 4 and 8, which means selling your entire food or beverage inventory between 4 and 8 times per month. This typically means about 5-7 days' worth of inventory for most restaurants if you're receiving 1-2 deliveries per week. 

    Average Inventory Turnover Ratio for Restaurants

    Calculating your inventory turnover ratio will allow you to have enhanced control over your waste, usage, stock levels, costs, and profits and is an essential formula for figuring out how much inventory your restaurant should carry. It indicates the number of times the restaurant sold out its inventory in a specific time period. A low inventory turnover ratio shows too much inventory in stock or low sales, while a high inventory ratio indicates a flawed inventory purchasing plan or strong sales. The restaurant industry average is about 5. 

    While you can use total restaurant sales to calculate this ratio, cost of goods sold (COGS) includes markup costs and may give you a more accurate number. 

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

    Calculate Average Inventory for a Time Period

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

    Calculate Inventory Turnover Ratio

    Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

    Here are some general ordering rules you can use for comparison purposes: 

    • Food: 4-6 times per month (5-7 days worth of product on hand)
    • Liquor: Approximately once per month (varies by concept/sales mix)
    • Bottled beer: 2-3 times per month
    • Draft beer: 1-2 times per month (varies with concept/number of beers on tap
    • Wine: Approximately once per month (varies with wine list size/sales mix)

    Calculating your turnover offers visibility into many aspects of your inventory management and shows you when to dive deeper into any issues that arise. The above are not hard and fast rules—your target ratio depends heavily on the type of restaurant you operate. Research turnover rates in your niche to make educated comparisons. 

    Inventory Counting Best Practices & Resources

    1. Keep "Just-in-Case" Inventory On-Hand

    Picture this: you're running a pizza shop, and a major freeze takes out the power across the city. Because of this, your flour supplier isn't able to deliver before you make your dough for the day, and your cheese supplier cannot deliver the shredded mozzarella necessary for your most popular pies. 

    Thus, your customers looking for a hot slice that day are out of luck, as you're out of those key ingredients. This situation might not happen if you carried "just-in-case" inventory—an extra supply of inventory that your kitchen staff quickly uses. Just make sure you're switching out this just-in-case inventory frequently, so it doesn't expire. 

    2. Practice Recipe Management

    Not practicing recipe management often results in mismatched stock, which is usually chalked up to over-portioning, food wastage, or theft. But there's a better way to know exactly what's causing these discrepancies—an automated recipe management system. 

    MarketMan's Cookbook feature, for example, allows your chefs to create standardized recipes that will give kitchen staff all the information they need to prepare dishes correctly, including preparation times, cook times, and accurate portion sizes and measurements. 

    One of the leading functions of the Cookbook involves accurate menu planning, which allows restaurateurs to get better insights into their costs. They'll also have an easier time tracking inventory and analyzing things like which items yield the most gross profit, which items need adjustments, and which ones should be taken off the menu. The insight on inventory from the menu planning feature will trigger reorders and alert operators when inventory is low on a particular item. It will also alert operators of any 'shrinkage' like waste or theft.

    3. Engage In Stock Forecasting

    Choose a POS Integrated Inventory Management System that gives you an estimate of each item you would need in a week or a month based on the sales report and order history. You can also set reorder levels for each item that sends you automatic alerts and reminders when a particular stock item is about to finish.

    Forecasting your stock allows you to stay ahead of the curve, so you don't under or overstock your inventory. You can predict what inventory you'll need in the future by forecasting your sales daily, which can be done through a restaurant management app like our partner, Tenzo

    The platform uses advanced AI technology to allow you to forecast by the hour or even at an item level. By incorporating external factors such as weather, season, holidays, or local events, AI forecasting like that offered by Tenzo can give you more accurate sales forecasts. Not only does this allow you to staff efficiently, it means that over-ordering or under-ordering inventory is no longer an issue. 

    4. Set a Schedule and Train Your Staff

    Based on your restaurant's needs, you'll want to set a schedule for taking regular inventory. If you're running a bar, you'll likely need to do inventory on alcohol every night. For some other food items, once a week is probably enough. Just be sure to do inventory counts before you place new orders, so you don't waste money on products you already have. 

    Once you create an optimized schedule, assemble your inventory team. Choose one or two people who will always be in charge of conducting inventory counts. They should already be familiar with your stocking procedures and may even be in charge of receiving orders, too. 

    Be consistent by scheduling your inventory for the same day at the same time. Consistency will lead to cleaner data you can rely on when managing your budget and calculating your cost of goods sold (CoGS).

    5. Track and Report Your Inventory 

    Restaurant inventory management includes logging, tracking, and reporting what ingredients and supplies come in and out of your restaurant. It's an integral part of loss prevention and provides visibility and control over your margins. If you don't consistently track your inventory, you could be losing money without even knowing it.

    When tracking, be sure to pay attention to the following:

    • Sitting Inventory: The amount of product currently in your restaurant. Depending on your business, you should specify sitting inventory as either the physical amount of products or how much they're worth in dollars. Either way, be sure to be consistent and only stick to one unit of measure. 
    • Depletion: The amount of product (or dollars worth of product) used in a particular period. You can base depletion on daily, weekly, or monthly sales, and it can often be calculated using the sales reporting data from your POS. 
    • Usage: The amount (or dollars worth) of sitting inventory divided by the average depletion in a specific period. The formula is as follows:

    Sitting Inventory / Average Depletion (during a set time frame) = Usage

    For example, if you have eight gallons of olive oil and plan to use two gallons per week, you have four weeks of usage.

    • Variance: Variance refers to the difference between the usage amount cost and the product cost. Let's say your inventory has dipped to $50 worth of salmon at the end of the day, but your POS states you only sold $45 of salmon. This makes your food cost variance -$5, which means that $5 worth of salmon has not been accounted for. 

    Digitize Your Inventory Process with MarketMan 

    Tedious spreadsheets and manual accounting is a thing of the past with restaurant management software. You can implement a platform like MarketMan to track your inventory to streamline your restaurant's operations and maximize profitability. 

    Ready to take your inventory management to the next level with top-notch inventory management software? MarketMan provides an all-in-one solution for restaurant management tasks, whether you run one restaurant or 100. Sign up for a free demo with MarketMan.

    5 Ways to Recession - Proof Your Restaurant Business
    Optimizing restaurant operations in 2023 and beyond

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