As a food business, gross profit margin and cash flow are the two most important parts of your business (outside of food quality) that are paramount to staying above the survival line and generating the profits you require.
When generating your gross profit it is an ideal time to know if you are over stocked or not. In other words, am I holding more inventory than I need to? The more inventory that you have then the more likely that;
- You suffer from poor cash flow – as its tied up in stock
- You will suffer from excessive food wastage and spoilage – the more you have the slower it turns over
- You are prone to internal theft – as its not likely to be noticed if it goes missing
- You have a poor gross profit margin – as your management practices are not up to scratch
Relax, all of this is easily changeable! First thing you want to know is, am I overstocked? The way you do this is, we will take the figures from the gross profit article
Simply calculated, if there are 7 days in the stocktaking period, then divide the Cost of Goods Sold (COGS) by the number of days in that period – €21,878/7 = €3,125
This €3,125 means that over the past 7 days, your sales cost you an average of €3,125 per day to achieve those sales.
Your closing stock on hand figure is €6,490. Divide this figure by the €3,125 – 2.1 days stock on hand.
Of course this is just an example, but a general rule here is; If you’re a food business, that can get food deliveries 5 days per week, then you should have a stock level of between 4-6 days stock on hand. This is the optimal stock level on hand. Any higher than this, then you are overstocked. Any less than this then you are running things a bit tighter than perhaps you should be, but hey! you know your own business. Each time you undertake an inventory count and generate your gross profit margin, calculate this figure. It is an excellent metric for your chef/kitchen manager to know how they are performing.
