An easy way to get an instant “read” on whether you’re carrying an appropriate amount of inventory is to calculate your “number of days of inventory on hand.” It tells you how many days your existing inventory will last (assuming you’re carrying exactly the right mix of products) based on how much food you’re using in an average day (your average daily food cost). Calculating “number of days of inventory” on hand is a two-step process:

• Calculate Average Daily Food Cost
• Calculate Days Sales in Inventory

Example: You need the following information to calculate your number of days sales in inventory. You can usually get it right off your financial statements:

• Number of days in the period (example: 30 days)
• Ending food inventory (on the balance sheet) (example: $10,000)
• Food cost (on the P&L) (example: $30,000)

Step 1: Calculate Average Daily Food Cost: $30,000/30 days = $1,000

Step 2: Calculate Days Sales in Inventory: $10,000/$1,000 = 10 days’ worth of food on hand

This tells you that at the end of the last month you had about 10 days’ worth of food on hand. For most restaurants, that’s too much food.

In full-menu restaurants, most operators optimize at around 6 to 7 days of food inventory on hand. In other words, they turn their entire inventory every week or so. There may be extenuating factors that might drive inventory requirements higher such as infrequent deliveries, a high number of products on hand (making everything from scratch) or having to stockpile one or more products due to availability concerns. But generally, six to seven days is a pretty good rule of thumb.

For operators with a limited menu, generally, quick-service restaurants, three to five days of food on hand is usually considered adequate but not excessive.

In the above example, having 10 days’ worth of inventory would probably indicate that there’s too much food on the shelves. If operationally feasible, lowering inventory levels to six or seven days of sales would cause food cost to drop immediately, everything else being equal.

Source: RestaurantOwner.com