The most effective way to reduce and control your cost of goods sold (COGS) is to monitor your prime costs every week, take inventory every week, and track actual versus theoretical cost of goods sold. Tracking prime costs weekly enables you to identify waste, theft, spoilage, and other cost of goods sold (COGS) mismanagement before it’s too late. Taking a weekly Inventory will enable you to monitor your inventory turnover and average days of inventory on hand, thereby limiting waste, spoilage, overuse, and theft and reducing the amount of cash tied up in inventory. Managing and monitoring inventory properly can significantly reduce your food and beverage costs, reduce restaurant COGS, and prevent tying up your cash in excess inventory.
In this article, we’ll show you how to implement an inventory system and the ideal inventory amounts to keep on hand so you can generate 2-3x more profit than the average restaurant.
Why Weekly Inventory Matters to Reduce Restaurant COGS
Reduce Food Costs and Increase Profits
Taking inventory frequently allows you to measure your inventory turnover, ensuring you’re carrying the ideal amount of inventory on hand. Ideally, you want to have just enough inventory on hand to prevent running out of product while also avoiding excessive stock, which can be vulnerable to waste, spoilage, or theft. COGS and labor are the primary cost drivers in a restaurant. Therefore, even a tiny mismanagement can decrease profit by 2-5%, which can define the success of a restaurant. Having excess inventory on hand usually leads to higher actual vs theoretical COGS variances. The overuse of inventory is caused by the psychological effects of using more product when more is available, and the product going bad (spoilage). When there is an overabundance of inventory, it’s more likely for an employee to steal because the chances of getting caught are lower, especially when they know that inventory counts are not happening frequently and are not well-tracked.
Inventory is Cash
As a restaurateur, you likely have a cash drawer and a petty cash close-out and reconciliation process. You’re also likely to check your cash balance regularly between your various bank accounts. Your most liquid asset after cash is inventory, meaning inventory is merely cash sitting on your shelves. Therefore, it should be treated as such. Taking inventory is just as crucial as reconciling bank accounts, cash drawers, and cash deposits. Having cash sitting on the shelves is money that can be used for marketing, earning interest, and other investments. It’s also cash that’s more prone to theft due to its accessibility and lack of internal controls.
How to Track Restaurant Prime Costs Weekly for Better Profit Margins
Prime costs (cost of goods sold and labor costs), the main driver behind profitability in a restaurant or bar, should be monitored proactively (weekly or biweekly at the latest).
On average, RestaurantOwner.com sees profit increase from 2-10% when a restaurant monitors prime costs weekly. For a $3 million/year restaurant, that’s anywhere from $60,000 to $300,000/year and can easily define the success of a restaurant.
Taking inventory is required to obtain accurate prime costs, as the cost of goods sold (COGS) measures the amount of inventory used in a period, not purchased. The formula for COGS is as follows:
COGS = Purchases + Beginning Inventory – Ending Inventory
Taking a weekly or biweekly inventory is the best practice for proactively reducing restaurant COGS, rather than reacting to period-end reports. The end of Sunday or Monday morning, before opening, is typically the best time to take inventory when stock is the lowest and aligns with most pay schedules. Taking a monthly or period-end inventory is the bare minimum because it provides insight into COGS and labor too late to identify inconsistencies and problems. If taking inventory weekly is too burdensome, you can start with your top 10-15 most costly and frequently used inventory items. If the results are effective, you can proceed with the rest.
Here is an example of how taking inventory can impact your COGS:
As you can see in the example above, the restaurant’s COGS spiked by 8% in week 2. However, without taking inventory, we wouldn’t be able to identify the COGS problem in week 2. It would appear that our COGS is consistently 25%. By identifying the COGS problem in week 2, we can investigate and understand what happened that week that resulted in such a spike and avoid it in the future. Maybe there was theft? Perhaps the new chef was still in training and wasn’t portioning the food correctly. Maybe there was waste due to employee training? Regardless of the cause, an 8% deviation can make or break a restaurant business. Therefore, COGS should be monitored regularly, taking into account inventory levels. Regular COGS monitoring by taking inventory can help you identify the following:
- Waste
- Spoilage (due to keeping items on hand for too long)
- Theft
- Over portioning
- Unrecorded sales
- Rising ingredient prices
- Over-ordering
Actual versus Theoretical Reporting
How do the most successful restaurants manage food and beverage COGS at scale? They use actual versus theoretical (AvT) reporting to determine their ideal Cost of Goods Sold (COGS) compared to their actual COGS. Your ideal COGS, or theoretical COGS, represents the cost expected for a given sales mix over a specified period, assuming the current cost of ingredients, proper portioning, and regular waste and yield. It is calculated by multiplying each menu item sold in the POS by its cost, using the most recent ingredient prices from the recipe card. As the cost for ingredients changes or the sales mix changes, so will the ideal cost.
Now that you know your ideal (or theoretical) cost, you can compare it to your actual cost and identify variances. Actual costs are typically what most people consider because they’re the final and actual COGS reported on the P&L or prime cost analysis. By identifying variances between your theoretical and actual COGS, you can identify and fix problems. The goal is to understand the reason for the variance and try to mitigate it.
Please read How to Use Financial Data to Achieve Ideal COGS in 3 Steps to learn more about AvT reporting.
AvT reporting will only work if you take inventory regularly. Therefore, you can’t manage and monitor your cost of goods sold without taking inventory.
But My Inventory Doesn’t Change
A common rebuttal we hear is, “Well, our food inventory doesn’t change, so we can always assume it is $X.” Unless you plan on spending 7 days a week at the restaurant and not growing past a couple of locations, you can’t assume that inventory is not being wasted, stolen, or managed effectively without taking inventory properly and instilling the proper controls and training. You’re potentially losing 2-9% of sales on the table due to mismanaged Inventory.
A Culture of Accountability
Implementing a tight and effective inventory process will create a culture of accountability, care, and excellence. A-players want to be successful. By setting clear expectations and KPIs for inventory, you will attract A-players who get joy from achieving results such as improving inventory turnover, reducing COGS, and increasing profit. Failing to implement a tight inventory control process may imply a culture of carelessness and flexibility, which can lead to attracting the wrong people and resulting in waste and loss of motivation.
The Ideal Inventory Amounts
The ideal inventory on hand should ensure that you’re not keeping too much cash on the shelves while also avoiding product shortages. Excess inventory can also lead to over-portioning and over-usage due to psychological spending and usage habits (when you have more, you spend more).
According to RestaurantOwner.com and our experience working with hundreds of restaurants, you should aim to turn over your inventory in a month as follows:
- Food: 4-6x
- Liquor: .25 – 2x
- Wine: 1-2x
- Beer: 2-3x
The ratio used to measure inventory turnover is the # Days Inventory Ratio. The # Days Inventory Ratio tells you how many days’ worth of inventory you have based on how much inventory you are selling. The ratio is calculated as follows:
# Days Inventory = Inventory at the end of Period / Average Daily COGS
If you know the Days Inventory ratio, you can also calculate your inventory turnover by dividing the number of days in the period by the Days Inventory. See below for an example of calculating the inventory days and turnover for a weekly period versus a 4-week period.
The number of days of inventory you want to keep on hand is as follows:
- Food: 6-7 days for FSR; 4-5 days for QSR
- Liquor: 15+ days
- Wine: 15+ days
- Beer: 7-10 days
Implementing the Best Restaurant Inventory Management Systems
Taking inventory weekly for all COGS categories may seem daunting. However, there are numerous tools to streamline inventory and prime cost management, enabling independent operators to operate and generate revenue like national chains and franchises despite having fewer resources. For example, a tool like Marginedge automatically adds all your inventory items to your count sheets when your invoices are scanned, so that you don’t have to create count sheets manually. Marginedge also allows you to set pars, price alerts, and other features that make managing and taking inventory super easy. However, the software will need to be set up, monitored, and calibrated with accounting to work successfully. Therefore, it’s essential to work with a restaurant accountant who can implement and manage the inventory management tool, ensuring that all invoices are captured and reconciled so that the count sheets and inventory are accurate. Otherwise, it’s “garbage in, garbage out.”
With the technology available today, you should be able to access a controller-level restaurant accountant who can maintain your restaurant’s inventory management system and reconcile it with your books to ensure a smooth workflow between all your systems.
Please feel free to contact us to learn more.
