Posted by Jeff Schacher
on Tuesday, April 19th, 2011
Our Inventory Management system can kick out a ton of business defining numbers, but if you don’t have a basic understanding of what they mean – well, they are little use to you I imagine. That said, this post will take a look at three equations that allow you to drill down deeper; Average Inventory, Inventory Turns and Change in Inventory.
Average Inventory is calculated by adding the beginning inventory to the ending inventory and dividing that number by two.
[(Beginning Inventory + Ending Inventory) ÷ 2]
This equation will show the average dollar value in inventory you carry any day during a given period. The number this produces is vital to measuring how efficient you managers are with product and your bank account. The equation for inventory turns will shed some light on why.
Inventory Turns are calculated by dividing use by average inventory.
[Use ÷ Average Inventory]
This will show you how many times the dry storage and walk-in shelves were stripped clear of product and then re-stocked. The benefit: this number measures how efficient a store is with its cash and inventory. For example, in most cases the kitchen of a full service restaurant wants to achieve four to eight inventory turns a month. If the inventory is turned four times in a month, in theory that means they will sell all of their product on the shelves and re-stock them four times and they will be placing a food order only once a week. In the real world this does not happen exactly that way. Think about spices. How long has that large bucket of salt been sitting in your dry storage? What about perishables? Don’t you take delivery of milk and cottage cheese twice a week, so they don’t spoil? So you can see, that some items turn more often than other items. So when we refer to an inventory turn, we are really referring to the number of times the dollar value on the shelves turn.
What are some of the benefits to turning your inventory so often?
1) You will reduce your risk of theft because you can immediately see when items are missing. Everything has its place.
2) You will operate a cleaner restaurant.
3) With less inventory on the shelves you will have more cash in the bank to pay bills. Why? Ask yourself what exactly is inventory? It represents cash that cannot be used to pay your bills with.
Change in Inventory is calculated by subtracting the Ending Inventory by the Beginning Inventory.
[Ending Inventory – Beginning Inventory]
This calculation shows how efficiently you store has been ordering product. This number is important, just as inventory turns are, because it clearly represents how much cash you have either freed up or tied up on your shelves. For instance, if my food inventory was $4,000 at the beginning of the month and my ending inventory was $5,000, I just took $1,000 out of my bank account and placed it on the shelves where it can be stolen, wasted and not used to pay bills. Note that an increase in inventory may have no negative impact on you overall Cost of Goods Sold calculation, because Use is the key number to determining the Cost of Goods Sold percentage. An increase in inventory, however, can be devastating to an operation that is tight on cash.
If you have been searching for a back-office solution that will help you extract these numbers from your POS system allowing you to drill down deeper, look no further – call us today for a demo (888) 316-8861, or drop us a line at email@example.com.
Note: Special thanks to David Scott Peters for sharing these inventory-related calculations with us.