Is Your Inventory Costing Method Hurting Your Restaurant?

Inventory costing is a vital part of your business operations. It tells you a lot about the health of your restaurant’s finances. Understanding and regularly tracking inventory cost gives you an idea about your expenses, sales and how their interactions equate to profit growth—or profit loss.

The better you understand every aspect of your inventory, the more effectively you can control costs and revenue to optimize your restaurant’s financial health. There are several different inventory costing methods so you can decide what works best for your individual business.

FIFO

The First In, First Out method is great for inventories that consist of a wide range of products bought at various price points. For example, with restaurant foodstuff, you might buy different meats, produce and other ingredients from multiple vendors.

FIFO assumes that you’re selling the oldest things on hand first, which makes sense from a food service standpoint when your inventory has a tendency to go bad if left unused. FIFO is good for industries where prices fluctuate and product is perishable, because it caters to shorter demand cycles. It’s a bit more difficult to keep track of all these various individual costs but that’s what makes it such a realistic outlook on inventory, if you’re powered by the right technology. The right Point of Sale machines, like the one powered by eatOS, can help you track and run automatic reporting on your inventory so you stay on top of this complicated accounting system with very little hassle.

How do you calculate FIFO on your own? Multiply the cost of the oldest items in your inventory by the amount that’s been sold, and there you have it. As mentioned, it’s an especially good metric for restaurants to use because inventory costs are rising, especially since COVID-19 threw a wrench in the industry last March. The pandemic has complicated the supply chain and thrown everything in flux; thus relying on a system that intrinsically accounts for big inventories at different price points is a pretty safe bet—always, but especially right now.

LIFO

The Last In, First Out method is the opposite of FIFO: Sell the newest products first. It’s useful for systems where older inventory sits on the shelf for a long time. It’s not very common for restaurants to use LIFO for obvious reasons; it’s better for retailers whose product doesn’t expire with a short lifecycle.

LIFO is a complex system that makes record-keeping difficult, but not unmanageable. You might be wondering why anyone would go through the trouble, but some businesses prefer it on the basis of tax benefits alone. LIFO increases COGS which means that taxes are cheaper, but the quick expiry of restaurant products also lowers your profit margin and net income overall, because things simply go to waste. It’s not an ideal accounting method for restaurants for that reason alone, but of course consult with your accountant about what you want and what you can handle if it’s a path you want to explore.

Weighted Average

This accounting method works best for businesses whose product prices don’t change much over time. Basically, you pool all the inventory costs and then simply divide the pool by how many units you have in the back. It works well and is easy to calculate, even when you make purchases within the accounting period.

Of course this system isn’t as accurate because it doesn’t individually account for every piece of inventory, but it works well if the price of product doesn’t change with the seasons. You can easily find the weighted average by dividing the total cost of sitting inventory by the number of units you have in stock.

These aren’t the only inventory costing methods available to you, though they’re the most common. Do your research and decide if any of these, or one of the other less-popular ones available, work best for your business and apply whichever you see fit. There’s no one-size-fits-all solution when it comes to making a successful business.

Whatever you choose, make sure you’re factoring in how inventory cost affects things like taxes, perhaps by talking to your accountant for a second opinion. Managing your inventory is one of the most important aspects of your job as a business owner. A good point of sale system, like the one from eatOS, does the necessary reporting and analytics for you so that you can focus on leveraging your COGS, sales and inventory management in a way that best makes your restaurant thrive.

Talk to your accountant, do your own research and schedule a demo with eatOS so we can show you how a high-powered Point of Sale system will make your restaurant function more efficiently and more profitably than ever before.

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