What’s Inventory Turnover Ratio and How Can You Perfect It?

Businessman analyzing inventory turnover on tablet with graph chart.
Ayseli İzmen
Ayseli İzmen
May 31, 2022

First of all, let’s get this right: the success of your cafe/restaurant depends on YOU…

It depends on how well you manage your resources, accounts, customers, kitchen, inventory, deliveries, etc. A restaurant is a line of business with quite a few components attached to it.

For those of you who want to figure out the math behind your kitchen and stay on top of your restaurant inventory, it’s actually quite simple if you grasp the logic behind it. We are here to provide you with that logic and formula for it in the following paragraphs, but let’s first get some of the necessary definitions out of the way.

Since our topic is the Inventory Turnover Ratio (ITR), it is good to know what it means, so let’s dive in…

What is a turnover ratio?

Simply put, it is a measure of how many times a business’/restaurant’s inventory is sold and replaced in a given time period. The ratio is calculated by dividing the cost of goods sold by the average inventory.

As a general rule, the higher the ratio, the better. A high turnover ratio indicates that your business is selling its goods quickly and efficiently, which will lead to higher profits for the business in most cases. Be aware that exceptions exist (if your location is wildly remote and frequent food delivery is irrational).

Reaching the perfect inventory turnover ratio can be difficult and it depends on a number of factors. One factor that affects the turnover ratio is how long a restaurant holds onto its inventory before selling it. If a food business has a high turnover rate, then they are more likely to have a higher profit margin because they don't have to pay for storage, electricity, etc. At least this is the idea but we all know that reality is different in a commercial kitchen full of chest freezers and humanity’s built-in hoarding habits.

Anyhow, the idea is to find that sweet spot so that you never have to be embarrassed because a menu item is out of stock. At the same time, if that menu item is overstocked, it means that you are vulnerable to time, and stock management.

Thus, getting it right by finding the correct balance for your business volume is important, and developing a functioning inventory plan that assures long-term success is critical. Keeping track of your inventory is an important component of the equation. In fact, not doing so can turn into a disaster.

How to calculate the turnover ratio

A staggering number of small business owners don’t actually take their inventory seriously. Knowing that manual inventory management turns slack in no time simply because it’s an extremely boring act. Remember that you can choose to do things the easy way.

The beauty of mathematics is as important to your business as the golden ratio in your menu items.

To calculate your Inventory Turnover Ratio and reveal the bitter or glitter truth, there’s a super-simple formula…

Sales / Average Inventory = ITR

To apply this calculation, you must first specify the time period for which you want to calculate your inventory turnover ratio (hint; one week, one month, three months, one year… usually one month though…).

What we aim for is an average number here, neither too high nor too low are considered good.

What this means is that if you get a number too high, i.e. your ITR is too high, this may indicate that you run out of stock at a crazy rapid pace which may mean that you are constantly out of this and that which isn’t all that fun. Constant supply orders and deliveries can in fact interrupt the business unless you have a team dedicated just to that.

On the other hand, if your number is too low, it indicates that your stock is sitting on shelves too long, perhaps on the edge of going bad, causing damage, waste, and guilt.

Reach the perfect turnover ratio with an end-to-end restaurant management solution

Knowing that a small business is a lot of work, especially if your business is a small restaurant, cafe, bakery, food truck, etc. our humble advice would be to “automate what you can”.

If you want to reach the perfect turnover ratio, have the perfect smart menu, receive automated customer feedback, and more without doing all the work, get help from an end-to-end restaurant management solution system.

As small business owners, we owe it to ourselves to do less of the burdensome, time-consuming stuff and have more time for innovation and celebration of our success.

FineDine is a restaurant management solution that helps food-related businesses to manage their operations. It has some magic, innovative features on offer along with:

    Managing inventory and orders

    Tracking employee hours and scheduling shifts

    Managing customer data and feedback

    Generating reports on sales, profits, and other metrics

FineDine is an end-to-end restaurant management system that keeps everything in one place, including digital menus, QR menus, online orders, table orders, digital payments, and checkouts in addition to its above-mentioned talents.

With this easy-to-use system, you can calculate your Inventory Turnover Ratio and other important metrics in a breeze. Request a demo to explore how a 360-degree solution can improve your restaurant management.