The Importance of Inventory Management

One of the biggest money wasters in the restaurant business is wasted food. In fact, many restaurants lose up to 10% of their food before it even makes it onto diners’ plates because of inventory errors. Is there anything worse as a restaurant manager than having to throw away beautiful heads of romaine lettuce or amazing cuts of meat because you ordered too much? The bright side is that inventory management software is available to make managing a restaurant’s inventory a breeze.

What is inventory management?

what is inventory management quote

Inventory management is the process of ordering, storing, and using a company’s inventory. This includes managing raw materials, components, and finished products and warehousing and processing such items.
Basically, inventory management is a system that organises and tracks all of a company’s goods throughout the time the company owns them. Once a company sells the items, that inventory gets converted into revenue.
Inventory management is known as stock management in some industries, like retail, where apparel or home goods inventory is considered “stock on hand.”

Why inventory management is critical

quote explaining why inventory management is critical

Proper inventory management is vital to ensure that a business has enough stock on hand to meet the demands of customers. Suppose a restaurant or business does not do inventory management effectively. In that case, it can result in the business either wasting money by stocking too much inventory or losing money on potential sales that they can’t fill.

Inventory is considered an asset, and companies must keep track of inventory on their balance sheets. To develop a valuation for the balance sheet that is accurate, a physical inventory count must be done to determine the quantities on hand, or an ongoing inventory system must be in place to create a precise record of every inventory-related transaction.

Five key benefits of inventory management

Inventory management software helps your restaurant or business to run as efficiently as possible. A good inventory software program will perform the following essential functions:

  1. It allows you to plan the menu by letting you know exactly which and how much food is available to you.
  2. Alerts you of surpluses or shortages of any item.
  3. Tracks the kitchen’s food usage to help you identify trends.
  4. Calculates your cost of goods sold (COGS) or how much you spend on inventory. This helps give you an authentic look at profit margins, represents your restaurant’s financial health and helps you track tax deductions.
  5. Determines the cost of food and controls waste by telling you what needs to be used first on any given day.

How inventory management improves cash flow

Good inventory management is more cost-efficient, but it can also improve cash flow in other ways. Inventory is product you’ve probably already paid for with cash (including checks and electronic transfers), and you’re going to sell it for money. But, while that inventory sits in your warehouse, it’s not cash. You can’t pay the bills in tomatoes or soup stock, can you? This is why you must factor inventory into your cash flow management. Inventory directly affects sales (because it dictates how much you can sell) and expenses (it dictates what you have to buy). Both of these elements are large factors in how much cash you have on hand. Simply put, the better your inventory management, the better your restaurant’s cash flow management.

When you have a robust inventory system, you’ll know exactly how much product you have in real-time, and based on sales, you can project when you’ll run out so you can replace it before then.

Five fundamental inventory management techniques

  1. Set par levels: You can make inventory management simpler by establishing par levels for each of your products. Par levels are the minimum amount of product that must always be on-hand. When your inventory falls below these predetermined levels, that means it’s time for you to order more. Setting these par levels will require some research upfront and some decision making, they’ll systemise the ordering process, making it easier for you to make decisions quickly and allowing your staff to make decisions on your behalf. One thing to remember is that conditions change over time, so you need to check on par levels periodically throughout the year to make sure they still make sense. If something changes, adjust your par levels up or down.
  2. First-in, first-out (FIFO): First-in, first-out (FIFO) is a crucial inventory management principle. FIFO means your oldest stock (first in) gets sold first (first out), not your newest stock. When it comes to perishable products, like ingredients, this is especially key.
  3. Manage relationships: Part of successful inventory management (and the restaurant biz as a whole) is adapting quickly. Say you need to return an item that is not selling or selling slowly to make room for a new product, restock a fast seller ASAP, troubleshoot manufacturing issues, or temporarily expand your storage space. It’s essential to have a great relationship with your suppliers. When you do, your suppliers will be more willing to work with you to solve problems. As anyone in the restaurant business knows, you will run into issues that need to be solved STAT.
  4. Regular auditing: Regular reconciliation is essential. In most cases, you’ll be relying on software and reports from your warehouse to know how much product you have in stock. But, you must also ensure the facts match up. You can do this in a few ways:
    • Physical inventory: A physical inventory, or stock take, is the method of counting all of your inventory at one time. This is commonly done at the end of the year because it goes with filing income tax and other accounting needs.
    • Spot checking: If you do a full physical inventory at the end of the year and you often run into problems, or you have a lot of products, you might want to start spot checking throughout the year instead. This means choosing a product, counting it, and comparing the number to what it’s supposed to be.
    • Cycle counting: Instead of doing a full physical inventory, you can also do cycle counting to audit your inventory. Instead of a complete count at the end of the year, cycle counting spreads reconciliation throughout the year. Every day, week, or month a different product is checked on a rotating schedule. There are several methods to determine which items to count when, but generally speaking, higher-value items are counted more frequently.
  5. Reorder point: The reorder point tells you the level at which it’s time to replenish your stock. You can use this formula to calculate the reorder point in your business: Reorder Point = Lead Time Demand + Safety Stock.

Calculating reorder points is essential to manage stock effectively, but it can be incredibly time-consuming when dealing with many products.

Restaurant inventory management features:

  • Menu costing: One of the most crucial aspects of running a restaurant is calculating realistic menu costs. You must find a software system that lets you do this in real-time and at scale. By defining each ingredient’s cost, markup, and final sale price, you will be able to run a more organised and realistically budgeted restaurant.
  • Order management: Another vital aspect of creating a menu and successfully running a restaurant is connecting with your suppliers. You need software that will connect seamlessly to the overall costs of the goods coming into your restaurant. This should also offer the option to be done at scale, to allow you to view food costs weekly, monthly, and even yearly.
  • Integrations: The ability to integrate with other programs is the sign of any great software. Restaurant success is often about the collaboration between several different types of people and programs. Your restaurant inventory software must play into this dynamic. To do so, you must find software that easily integrates with POS systems and other software that you use for your restaurant.
  • Real-time updates: What good is using software for food costing if it doesn’t update in real-time? One of the main advantages of using software to track and calculate costs that could otherwise be done manually is to update it in real-time.
  • POS capabilities: Many restaurant inventory software programs double as a point-of-sale system. Depending on what your company is already using, it may be best to integrate your inventory software with POS software fully or get a POS system that has robust inventory management built-in. Either way allows you to keep all of your information in one place.

How a POS system helps you manage inventory

A robust POS with inventory management software system will help you precisely track what comes in and goes out of your restaurant, down to the last sprig of thyme.

No matter the size of a business, effective inventory management can differentiate between failure and success. Even the most basic inventory management system can ensure that the appropriate amount of products are kept on hand to serve customers without wasting money or product.