Whether you’re the owner of a restaurant or the day-to-day manager, you likely got into this career for the love of creating delicious dishes and delighting customers.
Yet there’s much more to a successful restaurant than just serving tasty food.
Back-end and operational processes are crucial to the success of your business, yet the thought of even performing restaurant inventory management processes makes most owners and managers stop dead in their tracks.
Restaurant inventory management is a crucial component of maximizing profits - and restaurant owners and managers must embrace that.
To truly understand how your food inventory is impacting your business, and to implement your very own restaurant inventory management strategy, we have created a glossary of the most important restaurant inventory terms that you need to know.
Key restaurant inventory terms you need to know
Cost of goods sold (COGS)
For restaurants, the cost of goods sold (COGS) is the total cost of all the ingredients used to make menu items. This includes everything you serve to customers, from your main dishes to recipes as simple as garnishes and condiments. The typical restaurant spends around one-third of its gross revenue on the cost of goods sold.
This metric is calculated by:
Cost of good sold = beginning inventory + purchased inventory - final inventory.
Dead stock refers to restaurant inventory that doesn’t sell and doesn’t have a high likelihood of selling in the future. These items typically sit on your restaurant’s shelves and take the space that could be occupied by more profitable items.
Want to learn how to improve cash flow by reducing dead stock? Read our blog ‘Your Guide to Reduce Dead Stock and Improve Cash Flow’.
Depletion refers to the amount of inventory (either expressed in dollar value or product amount) that you have used over a specific period of time. Depletion is generally counted using your POS system’s sales reporting data on a daily, weekly or monthly basis.
First in, first out (FIFO)
A first in, first out (FIFO) inventory model is a way of ensuring that your restaurant uses the inventory products that arrive to your business first. An example of this is to place new products behind your existing products. This helps to reduce spoilage and waste.
Food cost percentage
Food cost percentage is the percentage of your sale price that makes up the cost of your ingredients. The average restaurant spends between 20 and 40 percent of its revenue on food, although to run a profitable restaurant it’s typically advised that restaurant owners and managers keep food costs between 28 and 35 percent of revenue.
Restaurant inventory simply refers to the goods and raw materials your business has available right now.
Inventory management system
A restaurant inventory management system acts as a mechanism to manage, automate and strategize all of your restaurant’s inventory processes. A restaurant inventory management solution will provide your restaurant with the data you need to make better ordering decisions, reduce food waste, design more profitable menus and a huge number of other benefits.
Menu engineering is the process of looking at your restaurant inventory data to maximize profitability on your menu. Menu engineering includes designing your menu to encourage customers to buy what you want them to buy, creating high-profit menu items, and eliminating menu items that are costly to prepare and unpopular.
Period automatic replacement (PAR) level is a metric used to improve ordering decisions. PAR level helps you to figure out the optimal level of product that should be on-hand in your restaurant at all times. This enables you to make better restaurant inventory ordering decisions, ensuring you neither run out of a product or overstock it either.
You can learn more about PAR level on our blog ‘What is PAR Level and why is it Important in Restaurant Inventory Management?’
Point-of-sale (POS) system
A point-of-sale (POS) system is a software platform that allows your business to accept payments from customers and keep track of sales.
A purchase order is a document that is created to confirm the details of the items that are to be purchased from a vendor or supplier. This includes information such as the type of goods, quantity and the price.
Sitting inventory refers to the amount of inventory (calculated in either dollar value or product amount) that is sitting in your restaurant.
Food spoilage is when perishable food within your restaurant becomes unacceptable for human consumption, and must be thrown out. Approximately four to 10 percent of food purchased by restaurants is wasted before the event reaches the customer.
Unit of measurement
Unit of measurement is how you choose to measure your inventory. Any successful food inventory strategy relies on your business using a consistent unit of measurement - all employees who conduct inventory counts should stick to the same unit of measurement for each inventory item.
Usage is the amount of product (either in product terms or dollars worth) used in a set period of time. It is calculated by taking your sitting inventory and dividing it by average depletion over a period of time.
Variance is the difference between how much you spend on a product, compared to the usage amount cost. For example, if you used $200 of beer but your POS system is reporting that you only sold $150, then your variance would be -$50. That means $50 of beer is unaccounted for. Variance gives your restaurant insight into wastage, and where you can make small changes that dramatically impact profitability.
Speaking of waste, waste in your restaurant inventory is one of the most common ways that restaurant’s lose money. Waste can be anything from over pouring, improperly prepared food, spoilage or employee theft.
In your restaurant, yield refers to the percentage of product that is actually being accounted for in sales compared to the amount that your POS says should have been used. If your variance is 10 percent, then your yield is 90 percent as that’s how much product was actually used.Have any further questions about restaurant inventory management, or want to learn how sculpture’s technology and team of expert consultants can help your restaurant boost profits? Contact us today for more information.