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Calculating Your Inventory Turnover Rate and Why It Matters

calculating your inventory turnover rate and why it matters
Justin Stewart

By Justin Stewart

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Having inventory recorded correctly can make or break a business. If you don't know how much product you need, you could run out and upset customers. On the other hand, if you have plenty ordered but it's going missing, that's another issue to address.

A lot of the times, managing inventory can be pushed to the bottom of your to-do list, and today you'll read why it's important to make it a priority every time you have to do it, and you'll learn about your inventory turnover rate and why it matters so much.

What Is ITR?

If you own a restaurant or are in management, you've probably heard the phrase ITR; however, if you don't know, ITR stands for inventory turnover rate. The ITR is how many times your shop went through your average inventory in a period of time. An ITR helps you see how well your restaurant is selling specific items, and which you could push; this also helps you see what you need to order more of and what isn't selling too well.

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How to Calculate ITR

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Calculating your ITR can be done in two different ways. Whichever way you choose is up to you, both will give you the same result.

1. Inventory Turnover Sales
Determine your inventory turnover sales rate by taking your yearly sales and dividing it by your average inventory.

2. Inventory Turnover COS
Determining your inventory turnover COS is the more popular method and is done by taking the costs of goods sold (also known as your cost of sales or costs of revenue) and dividing the number by your average inventory. People tend to like this method over the first because it won't include markups, which can make it look like you're burning through products faster than you are.

Calculating Daily Inventory

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Calculating your daily inventory may seem tedious, but it's more important than you think, and using one of the methods above can make it a lot less stressful. Taking a daily inventory count will help you see how long it takes you to turn over your inventory and what your restaurant goes through in a day. Monitoring your inventory can also show you which days are busier than others, and can help you forecast things like staffing and how much food to order.

Another thing calculating your inventory daily will do is show you if food is being wasted or going expired. You can calculate your daily inventory by taking 365 (for the number of days in a year) and dividing it by your inventory turnover ratio.

How to Know if You Have a Good Inventory Turnover Rate

You are now fully capable of finding out your restaurant's inventory turnover rate, but how do you know if yours is high, low, or in a good spot? It depends on which method you used to get your number. The average turnover rate for restaurants as of 2018 if you used the total sales method is 40.32. If you went with the COGS method, the average is 17.82. The number you get can be very different than the average depending on what kind of restaurant you have. If you have a ma and pa type diner, you shouldn't be comparing your ITR to that of a chain fast food restaurant. Compare with businesses like yours so your numbers don't seem way off.

So you know your inventory turnover rate, but what do you do to increase or lower it? There are several ways to get a better number, and they're all relatively easy to accomplish. If you have a high turnover rate, start by tracking food waste. Maybe you're ordering too much, or maybe your staff is giving some away to their friends.

A high ITR generally means sales are going well, and you're using your inventory at a good rate. If your ITR is low, it could mean you have extra inventory and sales are low. You should be going through your inventory in less than two weeks.

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Changing Your Inventory Turnover Rate

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You may not know what to do with the number you came out with when finding out what your ITR is and that's okay. Below we talk about what to do if it's too high or too low and what that means for your restaurant.

If Your ITR Is Too High - Having a high ITR is great, but there is such thing as it being too high. When it is too high, you'll probably notice that you're running out of things or find yourself saying you're out of a meal you offer. However, thanks to advancements in technology, you can easily use an app to keep track of your inventory. Once you get in the habit of monitoring inventory, you'll be able to see how much you'll need and when; you'll also be able to see when you're running out of stuff and why.

If Your ITR Is Too Low - If you find your ITR is low, you likely have an issue with inventory which can happen if sales are low or by ordering too much. A low ITR can increase costs and food waste; this is another reason you should be observing your inventory and taking notes every day. Managing inventory turnover rates can save you money and help teach you when you should order and how much.

Hopefully, now you're able to see why calculating your inventory turnover rate is so important. It might seem tedious to take daily inventory, but it will make everyone's job much easier, save you money and keep the customer's happy. There are several things you can do to control your inventory, and make sure you order the proper amount so that you're not running out, nor are you stockpiling.

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