Running a successful restaurant business is all about spending your cash wisely. You invest a large amount of your budget in inventory. When that inventory is wasted, stolen or spoiled before it’s sold, it must be written off as an expense in the books. Integrating inventory management with accounting facilitates better inventory control. Inventory represents money sitting on your shelf that could be in your bank account.
When you think of your restaurant finances, you don’t always equate it with inventory management. Your restaurant inventory management is a nearly forgotten component of your finances, however, the amount of product you have on hand represents a large part of your budget. Because food and beverage costs make up one of the two largest parts of your restaurant budget, your inventory method has large implications in your accounting.
If it’s not on your shelf, it can’t be stolen, spoiled or wasted. Consequently, purchasing correctly is the cornerstone of any efficiently managed restaurant. The key to minimizing food waste that can eat into your profits is effective restaurant inventory management. While manual inventory management may be “good enough,” it’s a slow, error-prone process.
Automated inventory management integrated with your restaurant-specific accounting software can play a major role in minimizing your cost of goods sold (CoGS). Restaurant inventory management software can help you track your inventory to spot and minimize food waste, and it can also help you keep tabs on vendor pricing changes.
What is restaurant inventory management?
Restaurants manage their inventory of raw materials that they convert into a final menu item that is sold to customers. Restaurants have a large, fast-changing inventory with a limited shelf life, which affects your bottom line. Inventory management allows your restaurant to account for and manage the value of these raw materials on your balance sheet to minimize your CoGS.
Restaurant inventory management is the process of monitoring your restaurant’s food and beverage ingredients in real time. Tracking your inventory enables you to see what is coming into your restaurant, what is leaving your kitchen as sales, and what is left over on your shelf and refrigerator. Understanding these metrics allows you to make more informed inventory orders. The better and more streamlined your inventory control, the less food waste in your kitchen and the more money added to your bottom line.
Unlike other industries that count inventory quarterly or annually, restaurants must take inventory counts frequently – ideally daily or minimally weekly. These inventory counts allow you to calculate the beginning and ending inventory values for specific periods and, in turn, your CoGS.
Calculating your average daily inventory cost
Understanding how to calculate your restaurant’s average daily inventory cost is one way to make accurate purchasing decisions. To calculate that number, use the following formula:
Total Inventory Cost in a Specific Period ÷ Number of Days in that Period = Average Daily Inventory Cost
Example: If your total inventory cost for 30 days is $75,000, your average daily inventory cost is $2,500.
Restaurant inventory management tips and best practices
- Set up your POS to track restaurant inventory
- Use an inventory management system that integrates with your POS system for recipe costing and menu engineering
- Leverage smart forecasting tools to purchase food, beverage, and supply orders at the right level
- Analyze reports based on inventory and accounting data
- Conduct daily and weekly reports of food inventory
- Track usage and yield on each food item
- Collect sales mix polling from your integrated POS and combine it with recipe costing to price menu items properly
- Track variances between actual vs. theoretical food costs
- Ensure transparency and accuracy in vendor contract price
- Record waste, including time and date, amount or weight, cause of waste and employee
- Train all staff on the importance of restaurant inventory
Why you should integrate accounting with inventory management
Inventory has a prominent place in your restaurant accounting. Every time your restaurant acquires, counts, transfers or wastes inventory, it must be entered as a journal entry in your accounting general ledger. Next-generation restaurant accounting technology automates the journal entry process. For example, a completed stock count becomes the inventory journal entry in your general ledger. If your accounting software and inventory software aren’t integrated, these journal entries are done manually, creating the likelihood of errors.
Using Restaurant-Specific Categories in Your Chart of Accounts
A chart of accounts as part of a restaurant-specific accounting system integrated with your inventory management software enables you to record and track food and beverage purchases in detailed accounts (e.g., seafood, chicken, beer, wine, etc.) with automated invoice coding and entry, and direct feeds of POS data. Legacy accounting systems, on the other hand, usually lump your inventory into a general “food and beverage” account. The more detailed your CoGS data is the easier it will be to identify trends and identify opportunities for improvement.
How Your Restaurant Inventory Relates to Net Profit
Your restaurant inventory purchases make up your CoGS, which is the cost of creating your menu items. Determine your CoGS using the following formula:
CoGS = Beginning Inventory + Purchased Inventory – Ending Inventory
You need your CoGS number to determine your net profit, which is determined with the following formula:
Net Profit = Gross Profit (Total Sales – CoGS) – Labor Cost + Total Operating Cost
Why a POS system is not adequate for inventory management
While some operators try to use only a POS system for inventory management, there are significant differences between a dedicated inventory management system and a POS system.
A POS system provides automated inventory tracking based on customer orders, however, it does not account for other sources of inventory loss, such as spoilage, spillage, inefficient or incorrect food or drink preparation process, customer complaint resolutions, and theft. A POS system is unable to account for these scenarios unless the information is entered manually.
Conversely, an inventory management system monitors everything that affects inventory for all your food and beverage products. This includes sales and transactions through an integrated POS system, but it also accounts for other potential areas of loss, including vendor delivery errors, spoilage, or improper preparation. An inventory management system accounts for both sales and all sources of inventory loss, which ensures accurate inventory tracking.
Your inventory touches nearly every area of your business financials. Tracking your inventory with a restaurant inventory management system integrated with your restaurant-specific accounting system can improve order accuracy and streamline your budget.
If you would like to easily track your inventory and see how effective inventory management positively affects your bottom line, consider a restaurant-specific inventory management solution integrated with restaurant accounting software and restaurant operations software in a cloud-based platform.