Using Inventory Management to Maximize Profits

What would you say is the biggest cause of bankruptcy in most businesses today? It’s not lack of sales, overpaid executives, or overstaffed operations; it’s mismanaged assets. Ensuring a strong inventory management system can be the difference between a successful restaurant, one that barely makes a profit or one that must call it quits.

Since restaurant margins are usually pretty slim, cost control is always a major concern. After labor, food costs are typically the largest expense for restaurants. When you focus on increasing profit by maximizing every dollar spent, there are other benefits as well. Below are best practices in a profitable restaurant inventory management.

Step 1: Point-of-Sale System Considerations

Inventory management within your point-of-sale (POS) can take out a lot of guesswork by tracking items on hand and use of specific items. Even if you run a small restaurant, you will have at least a few dozen items in your inventory, and larger operations could easily have several hundred.

Another aspect of a strong, flexible POS is the ability to input menu ingredient specifications and serving sizes, and then the ability to analyze against actual sales. This can help identify ingredients being used too generously or even potential theft. Depending on apps integrated into your POS, you may even be able to track which employees are associated with the inventory loss to start an investigation.

Step 2: Initial Inventory

Though it differs slightly from business to business, inventory generally means store of goods: finished products, raw ingredients or materials, and retail items. Whether you are a new owner, general manager, or kitchen manager, the first place to start is to get hands-on. Verify your inventory personally so you know where your restaurant stands.

Perform this initial count yourself, even if you plan to delegate responsibility for inventory control. Write down each item, unit measurement, and quantity, such as:

The main purpose of conducting inventory counts is to measure the amount of food, beverage, supplies, and other products (hereafter referred to as ‘items’) that your restaurant uses over time. This usage can then be converted to a cost, which is then compared to total sales for a given period. Over time, you can determine exactly how much profit your business makes from the products used properly. 

Step 3: Inventory Management Policy

Many restaurants conduct inventory on a daily or weekly basis. The best timing for you will depend on the number of products moving through your restaurant and if you utilize a POS system to manage inventory. Regardless of how often you conduct inventory, it is important to establish company policies for inventory management that incorporate:

• Inventory performed on a regular basis.
• Constantly updating the inventory list, including those seasonal or special promotional items.
• Devise a method for calculating the cost of items.
• Assigning one person to be responsible for inventory tracking and a second person to assist.
• Regular schedules for delivery and ordering (procurement), with one person responsible for procurement activities including cost estimates, ordering, receiving, and changes to regular deliveries.
• Occasional or at least annual inventory completed by the owner for internal auditing.

Unless you are a very small restaurant the inventory and procurement should be assigned to different people, which acts as an internal control. With these positions, look for trustworthy individuals who are analytical in nature. Not only do two sets of eyes make it less likely that anything will be missed during the inventory count, but it’s also an anti-loss measure. One can count, and the other can record the inventory information. It is also a good practice to train all employees on the importance of inventory management and the policies of your restaurant.

Step 4: Mind Your Menu

After taking stock of inventory, the best way to control inventory costs is to mind your menu. In the restaurant, there are likely a few items that are your top sellers or especially important to your customers. These are also called key items, or “center of the plate” items. These should be inventoried every day before doors open for sales to help keep staff accountable for spilled, mis-cooked, or potentially stolen food items.

Work to incorporate ingredients, dishes, and items so they are used in multiple ways, otherwise known as cross-utilization to minimize waste. A stand-alone ingredient may work for very large restaurants; however, it is a gamble if the dish sporadically stops selling. If one of your restaurant’s goals is sustainability or green practices, be sure to up the cross-utilization game.

Step 5: Understand Inventory Loss Potential

There are several reasons your restaurant may experience a loss in inventory, some of which are inevitable. It is critical to record any loss because of waste from items spilled, undercooked, burned, stolen, improperly stored, or other reasons. Any missing inventory needs to be accounted for in order to accurately analyze usage and costs. Additionally, managers need to learn why food is being wasted and how the problem can be fixed.

Likewise, poor food-handling is one of the biggest contributors to inventory depletion. Properly label food with clearly marked expiration dates. When food is properly labeled and correctly dated, employees know what to use and when. A secondary aspect of loss potential is to have specific processes in place for close to expiry dated items to be used for specials or for a creative off-menu specialty dish. These special dishes work well when staff are trained in announcing the special to seating guests.

Closing Thoughts

Efficient, regular, profitable restaurant inventory management is critical to the success of your business. Using the five steps that incorporate a strong, flexible POS, initial inventory, inventory management policy, minding your menu, and understanding inventory loss your business will run more smoothly, staff will hold each other accountable, and profitability will be maximized. There is no time to waste, start your road to controlling inventory today.