Chances are somewhere on your shelves, lurking behind so many other boxes, is an old dusty can of soup that gets counted every week and passed on to the next team of back-of-the-house employees, week after week, without a thought. This can of soup can teach you a lot about your inventory. Many times, your struggle with managing inventory levels is more about your mindset than your process. Here are three tips to help you adjust your mindset and better manage your inventory levels, one can of soup at a time.
The value of inventory
The hypothetical can of soup probably cost you $1.50 several months ago when purchased as part of your weekly food order. But each week that goes by, that can of soup costs you more than just $1.50. The true cost of that can of soup is all the other products you haven’t been able to buy each week because $1.50 of your cash is sitting in the can of soup waiting to get sold.
This can be a hard concept to follow at first. Assuming you don’t want to spend any MORE on inventory, you will not have $1.50 to buy new inventory until you sell the can of soup. Here is where our mindset toward inventory is as important as our process. Are you paying attention to the products sitting on your shelves week over week as well as the new products coming in?
Tip 1: Take a walk with your team when they are taking the next weekly or monthly inventory. Chances are, you will find several lurking "cans of soup" that are being counted and recounted. Each week that goes by with these items on our shelves, you lose cash in your pocket. Don’t be afraid to ask your team why these items aren’t being used? This is called inventory turnover. And managing your turnover can be the key to better cash flow in your operations. It might be time to run a promotion on soup to clear out the cans and free up your cash for the next order.
Inventory at risk
One aspect of inventory most business owners avoid thinking about is waste or spoilage. What happens if that can of soup expires before it ever gets used? Or if you sell clothing, what happens if you buy a sweater in a size that never gets sold? Or worse, what if your employees take a piece of jewelry on your shelf when no one is looking?
This is the riskiest part of any business that sells a product. Whether toys or nachos, each time you make an inventory purchase, chances are that at least part of that inventory purchase will never end up as part of your cost of goods sold.
It isn’t a question of if it goes missing before it is sold. Instead it is a question of how much goes missing? How much inventory is lost each week due to spoilage in your restaurant? If you are a retailer, how much new inventory each season goes unsold? Have you ever had a problem with employee theft? The total amount of waste, spoilage and employee theft is a very important dollar amount to track, as this is cash out of your pocket that cannot be recouped.
Tip 2: Don’t be afraid to actively monitor waste or spoilage in your operations. Do you have a policy for monitoring your inventory? As the owner, it is important that you are setting a good example for your team. If they see you grilling ribeye at the end of the night for a friend and not running it through the system as a comp/discount, this will send the signal that they can do the same. The same is true in retail, if you walk in wearing the newest line without ringing it through the system, you are sending a signal to your team that they can do the same.
Inventory management starts with the top of your organization, and your team needs to be trained that each piece of inventory is valuable and needs to be monitored. Actively managing your inventory for any waste, spoilage or theft will keep your cash in your business!
Cash flow and inventory
If you run the promo on your soup can, monitor your inventory for waste and spoilage, and still find your cash flow is a struggle, chances are pricing may be an issue. Have you ever tried to calculate the true cost of your product sold including your waste and spoilage? Is that margin enough to cover your other expenses for running your operation? Are you profitable?
Here is where focusing on your cash flow instead of your profits can help you see if your business is truly making money. What are the total revenues being brought in each week, and what are your total costs?
Tip 3: For the next week, pay attention to your total cash out for cost of goods purchases. How does that compare to your sales? As an example, if in the next week you purchase $10,000 of new product, how does that $10,000 compare to your sales? This is the quickest way to catch any margin and/or buying issues that may be lurking in your operations. If your cost of goods sold is typically 30 percent of sales, the easiest way to confirm that your costs for the week are in line with your margins is to make sure if you purchased $10,000 of product you have $30,000 of sales. There will always be timing differences, and if in retail, this may be an exercise over the next season instead of the next week. But the easiest way to see your true margins is to track your total dollars spent on your products. Whether you monitor over the last week or the last month, if your purchases are $10,000 and sales are $15,000 – this could indicate a larger problem lurking in your ordering and/or pricing that needs to be addressed.
So many times, a business owner’s anxiety around the business is due to mindset. By taking a few minutes to understand the value of your inventory, the risk of your inventory, and your cash flow as it relates to inventory, you will feel more in control of your operations and your own destiny.
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Author: Anne Gannon, founder and principal of The Largo Group.