Restaurant space is full of words that one might not be familiar with, and the restaurant glossary is here to simplify it all for you. It will help you keep up with updated restaurant industry lingo.
Inventory Turnover Ratio
What is the inventory turnover ratio?
The inventory turnover ratio is referred to as the measurement of times the inventory has been sold and replaced over a specific period of time.
Inventory Turnover Ratio = Cost of Goods Sold / Avg. Inventory During The Period
It is always considered that a high inventory turnover ratio indicates efficient operations as it tells that the restaurant is in a good state to sell the goods quickly and there is always a great demand for their products. A low inventory turnover rate may indicate that the sales are not too great and the restaurant is facing a decline in the demand for the goods.
How to calculate the inventory turnover ratio?
Here’s the formula to calculate your inventory turnover ratio,
- Cost of goods sold totaling $150,000
- Beginning inventory of $75,000
- Ending inventory of $12,000, reflecting the effect of seasonal sales
The inventory turnover rate for this period is calculated by:
- $150,000 / (($75,000 + $12,000) / 2)
- Inventory turnover ratio = 3.45
This indicates that the company has sold its entire average inventory more than three times during the given period.
What is a good inventory turnover ratio?
A good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months. This ratio strikes a good balance between having enough inventory on hand and not having to reorder too frequently.