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Inventory management in food service: increase your cash flow and reduce your losses

Discover how good inventory management in food service can prevent waste, ensure that demand can be met, and avoid tying up cash.

Cladie Olivier03/12/2020

Good inventory management in food service helps to avoid waste, ensure that demand can be met, and avoid tying up cash. Find out how to optimize your inventory in this article!

Accounting and economic management of catering stocks

The inventory is used for the balance sheet (legal obligation)

In their accounting definition, stocks include all goods, purchased or created by the company and intended to be sold or to be consumed in the production activity. The calculation of these stocks is made compulsory once a year during the balance sheet which incorporates this value into the asset.

In accounting, stocks are entered to the left of the balance sheet. Their market value is part of the company's possessions. In the day-to-day management of an establishment, the money invested in the acquisition of stored goods is “dormant” money. That is to say that the value of these stocks is conditioned by the longer or shorter duration before the goods are sold. We then say that their level of liquidity is low (in comparison with the availability of cash for example).

In addition, the stocks of goods entail additional costs: electrical supply of refrigeration equipment, storage conditioning which adds to the high risk of depreciation of the value of the stock for perishable foodstuffs.

Good management of stocks of goods therefore appears necessary for the sound and sustainable management of catering establishments.

Economic indicators and ratios to watch for inventory management

Stock valuation

Inventory management begins with the valuation of stored goods. In accounting, there are several valuation methods applicable to catering:

The LIFO method  : The valuation of stocks is based on the prices of the most recent invoice and / or the market price and / or the daily price.

The FIFO method : first in, first out. This method is used by catering companies because it is based on the hygiene standard of the same name, which consists of optimizing the management of DLC. The principle of the FIFO method is very simple: the products sold are the oldest in stock. It is however difficult to set up by small structures which do not have a tool for historizing the purchase costs of goods. These structures will therefore choose the LIFO method.

Ratios and indicators

BFR

The working capital requirement (WCR) represents the amount that a company must finance in order to cover the need resulting from cash flow lags corresponding to the disbursements and receipts linked to its activity. The WCR in restoration is explained by the fact that the stored goods are not sold immediately and that during this period, the value of the stock is as much cash not available. The other reason which will concern more the activities of caterers is that the trade receivables are often settled with a delay which creates in this lapse of time, again, a lack of cash.

WCR = Average outstanding trade receivables + Average inventory - Average outstanding trade payables

The WCR is an indicator of the financial health of a company. An exploding WCR is a sign of poor health that can very quickly lead to irremediable cash flow difficulties for an establishment. It can be calculated periodically (every week, every month, every quarter, every semester or every year) and above all, it must be compared and its evolution must be analyzed.

Inventory turnover rate

The inventory turnover rate expresses the number of times the total inventory has been sold in a calendar year. The lower the inventory turnover ratio (close to 1), the more the inventory management model should be optimized. Otherwise, a high turnover reflects good management, with limited working capital requirements (WCR).

Stock turnover rate = Turnover (€) ÷ Average stock value

With:

Average stock value (€) = (End of period stock (€) + End of period stock (€)) ÷ 2

Stock flow time

The calculation of inventory run-off time is a variable to watch in all establishments that handle perishable goods. Catering is the first sector concerned. Calculating inventory flow time involves determining how long, on average, a product will remain in stock before it is exhausted or sold. As you will have understood, this variable must be reduced as much as possible to achieve optimal stock management.

Stock flow time (d) = (Average stock value (€) ÷ Turnover (€)) x 365

Inventory management

Tracking levels, inventories, optimizing cash flow: manage your business like a pro!
manage your inventory

Daily inventory monitoring to improve the economic performance of restaurateurs

Order more accurately from the technical sheets

As we have seen, excessively large stocks are not good for the economic health of your activity. They reduce the available cash and entail significant ancillary costs. Ordering goods as efficiently as possible is therefore a major issue for chefs and restaurant managers.

The first tool available to professionals to optimize orders is the recipe data sheet. It allows you to know the exact quantities of each ingredient in a recipe to anticipate needs. Its use requires an evolution of practices: we will move from a restocking system consisting of ordering the quantities required to reach a minimum buffer stock level, to a more predictive system where we will anticipate what we want. produce in terms of "portions" of recipe from which the quantities of goods to be ordered will be derived.

FoodMeUp is a dedicated management application for gastronomy professionals that will help anticipate your production based on your recipe data sheets. The tool will allow:

  • to digitize your ingredient list;
  • to produce "intelligent" technical sheets which will automatically give you profitability indicators on your dishes;
  • anticipate your production by calibrating recipes in the desired quantities;
  • generate supplier purchase orders based on planned production;
  • to manage and enhance your stocks (inventories).

Order form generation on FoodMeUp:

Adjust orders based on stock status

The second lever for improving profitability is inventory management. It is assumed that regular monitoring will give you sufficient knowledge of your merchandise reserves to order as accurately as possible and limit unnecessary expenses. This monitoring is only done if you have the right tools. The FoodMeUp application will allow you to automate part of your inventory management. The tool will manage the restocking for each receipt of your orders and it will automatically destock the quantities of ingredients used in the planned production.

Other good practices for reducing stocks

Get your teams working together in the kitchen and in the dining room

It is important to get the kitchen and dining teams to work together to understand and analyze the expectations and habits of your customers. You have to limit the choice of the card to better control your reserves and adjust the quantities served to avoid waste (which is also a loss for you: what you throw away is not served to another customer). The unsold ratio is a good indicator of which dishes should grab your attention. Reducing this ratio can become a goal for the whole team. In addition, good communication between the teams will make it possible to guide customers on the right products (and limit unsold products) while avoiding the frustration of any orders canceled by lack of stock.

Keep a chart of your main inventory management ratios

Regular monitoring of your ratios concerning the management of your stocks will be your best ally to identify the critical points of your management and quickly take corrective decisions:

  • too low a turnover rate on a wine reference will lead you to make a decision on maintaining it or enhancing it à la carte;
  • A sharply increasing unsold ratio on a dish may lead you to readjust your stock, remove it from your card or even put it differently on your card (price adjustment, visual change, etc.);
  • Too high a working capital requirement (WCR) will certainly force you to review your way of anticipating your production and adjust the quantities stored;
  • Etc ...

Apply the FIFO method in the storage of your goods

The FIFO method should not remain only a method of valuing stocks. The concept of "first in, first out" should also be illustrated in the way you store your goods in your store room and cold room. Indeed, DLC management remains a critical element in optimizing your management and therefore your profitability. Accountability of your teams is necessary for these good practices to last over time.

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