Taking a Physical Count of Restaurant Inventory that Actually Counts

This article was contributed by Marisa Parker, CPA, Senior Client Advisor at The Fork CPAs

It’s Monday; 7:00 AM. The dreaded restaurant inventory count is here again. Your BOH scoffs and sighs. Not enough coffee in the world to wake them up. How confident are you that you’ll have accurately updated an actionable restaurant inventory count at the day’s end? 

All restaurants have their unique processes for how to do restaurant inventory counts. What they often don’t have is the time to do them right. 

This lack of time required to take inventory makes it easy to put “the count” on the back burner — especially true if the impact and value of inventory management aren’t transparent and well defined. This is why operators need a proven process for how to do restaurant inventory counts consistently and efficiently. 

Read on to learn why taking physical inventory counts is so important for your restaurant's inventory management. See some processes and system to help make your physical restaurant inventory counts actually count.

Consistent inventory counts can unlock actionable reports that directly impact bottom lines

Taking inventory counts regularly and systematically, such as with a restaurant inventory management system, can help operators and their back-of-house staff:

1. Maintain enough stock for happy customers and happy employees

2. Identify areas of waste/theft

3. Avoid having cash flow tied up in slow-moving inventory

4. Order the right amount at the right price at the right time

5. Determine the true cost of sales and profitability of menu items

Let’s begin with a simple acronym — STOP — to walk you through the areas that taking inventory can help improve: 

• Stock

• Theft/Waste

• Ordering

• Profitability

Stock

Staying on top of the inventory count is intrinsic to maintaining appropriate stock levels, known as par levels. These baseline stock quantities are essential for maintaining smooth operations and delivering great customer experiences. 

The manager at (fictional) Not Enough Restaurant tried to take inventory. He didn’t have enough time though, so he cut corners. He only counted the hamburger ingredients since it’s the most popular menu item. While hamburgers made up most sales, he missed other high-cost items — including certain fish and cheeses that aren’t regularly used and were about to expire.

Without taking a full inventory, he couldn’t adjust his menu offerings to incorporate food costs already purchased to create new specials. 

You can avoid this gap by prioritizing your inventory counting. Start with the high-cost inventory items that are costly if they go wasted and the ingredients that make up high turnover items from popular dishes. Once the high-turnover and high-cost items are counted, you can move on to the rest of your inventory.

You’re ideally counting all your inventory with every count but things come up — life/restaurants happen, and you’re pulled away. This prioritized strategy can help minimize the time that is absolutely necessary to take inventory weekly, while also minimizing the risk of running out of stock or over-ordering on key ingredients. 

It should be a goal to do a full inventory count at least once per month to know what is actually in stock, how much there is compared to how much was actually used, and to help predict how much of each ingredient to order again.

Theft/Waste

The manager at (fictional) Wasteful Restaurant has five standard, 750ml bottles of tequila at the beginning of the week. During the week, 40 margaritas were sold, each requiring 1.5oz or 45ml — which is 1/16th of a bottle. 

Based on sales, there should be about two bottles left at the end of the week — but the manager found there was none left.

The manager discovered that the bartender was incorrectly adding 2/16th of the bottle to each margarita. This is a simple example of how taking inventory can help identify portioning issues. 

Many restaurants probably deal with staff that are over-pouring and/or over-portioning their menu items, or do not have consistent portioning. This makes it difficult to track and forecast the menu item’s profitability, and it can upset customers when their favorite order is inconsistent. 

If you have an inventory management system, products are automatically added to your inventory in the system when you upload invoices for products purchased such as tequila. Using this example, the invoice for the tequila would be uploaded and added to the inventory. A “margarita” menu item could then be set up in the system by combining the different inventory items used in this recipe, including the 1/16th of the bottle used in the margarita. 

Using the data from your POS system, when the sale of the 40 margaritas occurred, inventory in xtraCHEF would automatically be updated to reflect the theoretical removal of half the bottles — leaving a theoretical ending inventory of 2.5 bottles. You can then compare the “theoretical inventory” with your “actual inventory.” If your actual inventory is lower than it should be, you want to investigate it to determine if it’s portion control issues, theft, waste, spillage, or comps.

Ordering

The manager at (again, fictional) Tied Up Restaurant placed a huge order of inventory on the expectation of increased sales.

He didn’t factor in that payroll was also coming up or the other bills and loans coming due for the restaurant. Since money was tied up in inventory, he couldn’t meet his other obligations and ended up with unhappy vendors and employees. And since sales were not as high as predicted, many ingredients expired or sat unused longer than expected. Money wasted. 

Taking inventory regularly can help managers accurately determine the products and quantities they need to order. It starts by setting par levels and calculating the gap between par and on-hand inventory. This exercise can inform your baseline ordering — allowing you to adjust as needed for specials, new menu items, events, etc.

Profitability

The manager at (still fictional) Order Ahead Restaurant ordered $200,000 worth of wine in December. That same month, the restaurant sold $100,000 worth of wine for a price of $340,000. 

Without taking inventory, the cost of goods sold would appear to be $200,000 in December based solely on the cash that went out to purchase wine that month, which is 58% of sales. If an inventory is taken, it will be clear that the cost of goods sold is only $100,000 (half of the wine purchased) which is only 29% of sales, since the additional $100,000 spent on wine is treated as an inventory asset and not expensed until used. 

This accurately reflects the cost of the sales and shows the true profitability. This is very important for items like alcoholic beverages, which can be purchased well in advance of anticipated sales, and not used for months or sometimes even years later.

Operators can also hone in on inventory profitability by setting up alerts that notify kitchen managers when ingredient prices have changed. This allows you to adjust orders, update recipes and menu items, and even reset menu prices — all to protect and promote profitability.

How to do restaurant inventory counts that actually add value to reporting

There’s no one correct way to conduct a restaurant inventory count, though there are plenty of wrong ways — none more dire than not taking regular counts at all.

Inventory count processes vary between restaurants due to factors including:

• Inventory quantities

• Physical spaces

• Staffing

Regardless of these components, there are core inventory count steps that all restaurants should practice.

Schedule counts

Setting a repeating day of the week or month is a great way to standardize inventory counts. Schedule counts a night prior to the restaurant closing or on the day it’s closed. This allows you to exhaust as much inventory as possible before updating your count and placing that next order.

Assign the right counters

It’s also important to choose dependable staff members to conduct counts. In theory, all staff members can dependably conduct an inventory count. In reality, many operators probably have work to do on educating and promoting the value of inventory counts. 

Achieving this buy-in is easier said than done, though a worthy endeavor that can align your operation in data-backed decision making and an understanding of flows from raw inventory to profits.

Organize your counts

Be sure to construct count sheets and/or digital count systems in line with your back of house space. For example, if a counter is running through the flours and baked good shelves, their next counts section should ideally be the next closest inventory to those shelves. 

An organized count list can introduce efficiencies and eliminate unnecessary back and forth.

Incentive-bribe your staff

If buy-in stalls or you’re introducing inventory counts for the first time, a little incentive or light bribery could help. 

Hourly staff members could get time and a half if they stay late for an inventory count or come in on a day off. Or you could simply bribe them in the form of free food and drinks — either from your place or ordered in from a peer or second location.

Integrate invoice processing

Restaurant invoices are the single source of truth when it comes to inventory order intake, ingredient/product price tracking, recipe costing, and more. 

Invoices are essentially receipts for supplier orders — documentation providing an itemized list of ingredients and products, quantities, and prices. It’s all these details that make invoices so valuable to restaurant inventory and cost management.

Operators should have a process in place for receiving supplier orders. Someone needs to review what’s delivered compared to what was ordered and billed on the invoice. The staff member assigned to review the order should feel empowered to call out any discrepancies in what’s being billed and what’s been delivered. 

The inventory can then be distributed and put away and the invoice either processed immediately or stored for processing later. With invoice processing automation tools, such as xtraCHEF, invoices can be processed with a snap of a photo, scan of a page, or upload of an email. The system maps items on the invoice to individual ingredients, suppliers, and product categories all set up and customized by operators.

Implement processes for a strong inventory foundation — then level it up with specialized software and service

Next time you start to dread counting inventory, stop and think about improving “STOP” (Stock, Theft/Waste, Ordering, and Profitability.)

The cost of your time spent taking inventory can be recovered in the money saved from maintaining proper stock, preventing theft/waste, freeing up cash flow, and being able to analyze the true profitability of menu items. Setting aside the time to focus on these areas can help increase your bottom line and the success of your restaurant.

And consider leveling up your inventory counts and analysis by using a restaurant-specific inventory tool. These systems can help you gain consistently actionable insights into your ordering, costs, and profitability.

Restaurant inventory management software, such as xtraCHEF by Toast, can help restaurant operators: 

• Determine the right amount of inventory to maintain par

• Reorder inventory at the right price based on price alerts

• Analyze variances in theoretical and actual inventory

• Accurately report out on cost of goods sold (COGS) 

Learn more about xtraCHEF by Toast today. And reach out to us at The Fork CPAs if you need assistance with your reporting and analysis.

Marisa Parker, CPA, is a Senior Client Advisor at The Fork CPAs. The Fork CPAs provides restaurant owners with frictionless, streamlined, and modern restaurant bookkeeping and tax services. They believe that with the appropriate technology and accountant, restaurants of all sizes can access the same financial data as national restaurant chains.