Mastering Restaurant Inventory Costing Methods
Running a restaurant is no small feat. From managing staff to delivering top-notch meals, the hustle never stops. But let’s be honest, keeping tabs on inventory costs? That’s a headache all on its own. And yet, nailing this part of your business is essential to staying profitable. So, how can small business restaurant owners master inventory costing? Let’s dig in.
What Is Inventory Costing, and Why Does It Matter?
Inventory costing might sound technical, but it boils down to this: it’s how you assign a value to the ingredients and supplies that keep your kitchen running. Why does this matter? Well, whether you’re calculating your cost of goods sold (COGS), pricing your dishes, or filing taxes, your inventory costs are the backbone of it all.
Imagine you’re running a casual bistro. You serve pasta dishes with fresh ingredients that fly off the shelves. If you’re not accounting for how much you’re spending on tomatoes, cheese, and pasta, how can you know whether your signature lasagna is actually making you money?
The Three Key Inventory Costing Methods for Restaurants
Every restaurant is unique, but most rely on one of these three inventory costing methods:
FIFO (First In, First Out)
FIFO assumes the first items you purchase are the first ones you use. It’s a common choice for restaurants, especially those working with perishables like produce, dairy, and meat. Using FIFO ensures you’re cooking with the freshest ingredients while minimizing spoilage. For instance, if you buy lettuce at $3 per head one week and $4 the next, your salads will first “consume” the $3 lettuce.
When does FIFO work best?
If you’re focused on quality and regularly rotating your inventory (as most restaurants are), FIFO keeps things fresh and simple.
LIFO (Last In, First Out)
LIFO flips FIFO on its head: it assumes the last items you buy are the first you use. While it’s rare in restaurants, LIFO can be useful in specific situations, such as when ingredient costs are rising quickly. The downside? It can lead to older ingredients sitting in storage for longer—a recipe for waste in a restaurant setting.
Weighted Average
This method smooths out fluctuations by averaging the cost of all your inventory. For example, if you bought 10 pounds of flour at $1 per pound and another 10 pounds at $1.50, the weighted average price would be $1.25 per pound.
Who should use it?
Weighted average works well if you’re less worried about individual ingredient costs and more focused on overall profitability.
Which Method Is Right for Your Restaurant?
Choosing the right inventory costing method depends on a few factors:
Menu Complexity: If your menu relies on high-cost ingredients like truffles or seafood, you might lean toward FIFO to ensure freshness and better control over costs.
Ingredient Shelf Life: Restaurants with fast turnover, like fast-casual burger joints, often thrive with FIFO.
Cash Flow and Taxes: If your primary goal is managing cash flow or reducing taxes, weighted average or LIFO could make sense, but consult a tax professional first.
Pro tip: Whichever method you choose, consistency is key. Switching methods without a solid reason can confuse your records—and your accountant.
Let Technology Do the Heavy Lifting
Let’s face it: manually tracking inventory costs isn’t just tedious; it’s error-prone. That’s where technology comes in. Modern point-of-sale (POS) systems and inventory management tools can track stock levels, integrate with your costing method, and even alert you when supplies are running low.
For example, tools like Toast or MarketMan are popular in the restaurant world. These platforms allow you to track inventory in real-time, automate reordering, and even forecast ingredient needs based on historical trends.
Overcoming Common Inventory Challenges
Running out of key ingredients during a busy dinner rush or throwing away spoiled food is every restaurant owner’s nightmare. Here’s how to tackle common inventory issues:
Managing Perishables: Keep a close eye on expiration dates, especially for high-turnover items like dairy and produce. Using FIFO can help here, but so can regular staff training on stock rotation.
Waste Reduction: Over-ordering leads to spoilage, while under-ordering can leave you scrambling. Forecast your inventory needs based on historical sales data.
Tax Implications: Certain inventory costing methods, like LIFO, can impact your taxable income. Be sure to consult a CPA who understands the nuances of restaurant accounting.
Why It All Comes Down to Strategy
At the end of the day (oops, let’s say ultimately), inventory costing isn’t just about spreadsheets or software. It’s about building a sustainable business. The method you choose directly impacts your profitability, cash flow, and even your ability to adapt to market changes.
So, take a moment to reflect: Are your current practices helping your restaurant thrive? If not, it might be time to rethink your approach.
The Takeaway
Mastering restaurant-specific inventory costing methods might feel like a chore, but it’s a game-changer for your business. Whether you go with FIFO, LIFO, or weighted average, understanding and applying the right method ensures you’re not just serving great food—you’re running a financially sound kitchen.
And here’s the thing: you don’t have to do it alone. Tools, technology, and professionals can simplify the process so you can focus on what you do best—delivering amazing dining experiences.
