Fallacy of Food Cost % and Monthly inventory

Discussion in 'Professional Chefs' started by someday, Apr 10, 2016.

  1. someday

    someday

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    Discussion for you guys and gals...

    I've heard, throughout my cooking/chef career, conflicting reports about when and why you should do inventory. Some places I've been at require a weekly inventory, some monthly, and some forego this altogether. 

    The reasoning behind not taking a monthly inventory is the thought that, over time, all the costs average out and the week to week or month to month fluctuations don't accurately reflect the average cost. 

    For example, lets say we spent $2800 on food one week, and made $6000 in food revenue. That means our food cost % (not accounting for inventory changes) would be 46.66%. Pretty high, but it also means (most likely) that we bought a lot of food that week. 

    Now, our inventory is purchased with the intent of selling. In effect, even though we didn't count it, the stuff is still in dry storage and the walk in waiting to be prepped and sold. If we are up on inventory one week, we can reasonably expect to purchase much less the following week. So lets say the following week we only purchase $1000, and we end up selling $7000 in food. This equals 14.3%. If we average the two out, we are left with 30.48%--which is much better. 

    Obviously this is a simplified example, but it makes sense to me. It doesn't account for waste nor for theft, obviously.

    I guess this school of thought assumes the chef has better things to do then to count stuff. I'm also talking smaller outlets, not multi-faceted F&B places, large restaurants, chains, hotels, etc. 

    Beyond counting for potential theft and wastage, is there REALLY much point in doing inventory on a weekly/monthly basis? What do you all think?
     
  2. Guest

    Guest Guest

    I'm somewhat of a noob to this world, having left a different career to start my own food cart, but I can see how inventory in a place with high volume and lots of employees could be important to catch things like over portioning, wastage, and theft. If you buy enough chicken in a week for 100 orders and you are all out but only sold 80 orders, something is amiss and I don't see how you'd catch that w/o doing inventory. For me, being a one-person operation, once a quarter inventory is what I'm doing just to keep my books in order and have a sense of actual food costs and net worth.
     
  3. chefboyog

    chefboyog

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    " if you cant measure it you cant manage it"-i forget who but wise words.

    If you don't measure it, your lazy and probably about to lose your job.
     
  4. justa chef

    justa chef

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    AS a consultant, I believe it's important to keep a thumb on you financials. I'm not in agreement of how your doing your figuring. Using the standard formula of "Beginning Inventory + Purchases – Ending Inventory = COGS" EVERYTHING is accounted for. The BI and EI compounded with your purchases throw your theory out the door regarding a 14.something food cost. You have low purchases most probably because you already have the product on hand to sell. I would always stock up right after I did inventory and try to run down to nothing towards the end of the month....less to inventory. So my purchases were high the first and third weeks of the of the month and obviously lower the last week of the month.

    It is very helpful to break down your food cost into all the types of foods and beverages your purchase. For instance, a 31% food cost may be broken down into the following food categories:
    • Meat: 10%
    • Dairy: 6%
    • Produce: 8%
    • Seafood: 5%
    • Non-Alcoholic Beverage: 2%
    If food cost is high, categorizing like this will help determine where the money is being over-spent. Operators can keep a much better tab on food cost when they know exactly what percentage of the total cost they are spending on each category of food.

    Finally, I'm a fan of monthly inventories. I've only found it necessary to do a weekly inventory to determine food cost if you're bleeding money and can't figure out what's up. If you're the one being held accountable for the numbers in the kitchen, you'll want to do a physical inventory to either get a grip on things or to stay on top of things Monthly. Weekly inventories can help determine if pilfering is going on causing a major increase in food cost, but you're still going to look at the monthly avg to determine the monthly food cost or you'll get a false sense of security loping at a 14% cost, ya know?. Also look at waste, whether it be improper prepping, line cook screw ups in food coming back and having to make dishes twice or waitress screw ups also causing the dish to be made twice, just to name a few instances. 

    Bottom line is inventories are used to determine overall profits and allows you to be in control of your kitchen and that's key. Some folks don't do inventory and just use their invoices and guesstimate the cost. That might be your cup of tea but not mine Not very accurate atol. We are here to maximize our profits, don't be lazy. At the least do a true physical monthly inventory keeping on top of everything in your kitchen, that's your job...cover your own ass! BTW, No, chefs don't have better things to do than "count stuff." A knowledgable chef knows the importance of his administrative roll and Food Cost it one of those things on the top of the list, and that's what ownership looks at, what's on paper! The Chef will make the time to do a physical inventory and drag his sous chef or other salaried employee along with him to assist in the process. Ya it's tedious as all hell but a necessary evil. It's a lot easier to keep the books properly from the get go then letting the shit hit the fan and having to take 4 months to get the books back in line!!
     
    Last edited: Apr 10, 2016
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  5. someday

    someday

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    Here's what I'm asking. Why do you measure it? Does it really have tangible benefits, and if so, what are they? If knowing the inventory helped so much, why not do it daily? 
     
  6. someday

    someday

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    Just as an aside, I'm not necessarily a proponent of this, I'm just opening it up for discussion. 

    Here's my counter argument. You say that you purchased heavy in the first few weeks of a month, then slowly dwindled down towards the end of the month. This is common to front end purchases and be miserly towards the end of the month, in effect, to reduce purchases to achieve a better FC%. I've heard of chefs who would go grocery shopping out of his own pocket for the last couple days a month (if needed) so he'd meet his bonus numbers, which apparently outweighed whatever he spent at the grocery. 

    But, I'd say you are in effect arguing what I'm arguing. Imagine your proposed scenario where you purchase heavy at the beginning then taper off. Imagine now that the place you work does inventory once a week. So you'd have two weeks of "high" FC and two weeks of "low" food cost, which in theory would average out at the end of the month, correct? 

    The inventory is, we assume for purposes of this discussion, going to be sold. Whether it is sold in 1 day, 1 week, 1 month, or over the course of a year depends on what you bought and how much you use, etc. The difference in a week to week basis, or even a month to month basis, shouldn't really matter that much assuming we are going to sell it at some point. Obviously keeping an eye on your numbers on a consistent basis is key, but if you know what you are purchasing and when, why does it matter if I count it weekly or monthly?

    Also, I'm talking about smaller scale opeations, not huge chains and hotels, etc.
    I said above we are putting aside theft for this discussion. This is just an example.

    And how would 14% be taken as a false sense of security? You are comparing it with other numbers and averaging them out. If you purchase a lot one week, you would expect the purchases the next week to go down. So a "bad" week in terms of FC% would be followed by a "good" week in FC%, so it averages. Which is what you are doing anyways, when you look at FC% over time, is averaging the numbers. 

    Again, I said above that I know this example doesn't account for waste and theft. Just a hypothetical. 

    I'm still waiting to see if someone has an answer for why to take inventory. 
     
  7. fablesable

    fablesable

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    @Someday  You bring up a great discussion!

    I would like to ask, just for clarification, what you meant by the last question in your original post "beyond counting for potential theft and wastage, is there REALLY much point in doing inventory on a weekly/monthly basis?" I immediately take this question as the non-understanding of how relevant wastage is to the longevity of a restaurant staying in business. I know you have the experience in this industry so I am not assuming you do not understand, I just wanted to clarify in more detail what you think about this.

    Taking inventory is not just about the food cost percentage which is the profit one makes in their business although it greatly helps to understand and have knowledge of this in order for your business to flourish. We know the  main purpose of conducting inventory counts is to measure the amount of food, supplies and other products your restaurant uses over time. This usage can be converted to a cost, which is then compared to total sales for a given period so that you can get a feel for how much profit your business makes from the product sold. Taking inventory affects your ordering processes as well. It will let you know how much you have as well as how fast it is being used, and therefore how much you need to order each week. If you have too much fresh food in the refrigerator, it will go bad and if you do not have enough, you will run out of food and disappoint your customers. As "inventory" signifies all food, beverages, serving supplies and cleaning supplies you have in your restaurant, every piece of inventory should be counted at least once every week so that you can prepare menu items for your customers and stay in CONTROL of the goods you have on hand. Taking inventory will also help with variance and usage as well as looking at issues with poor food handling and how many comps are given along with wastage and theft. 

    All business whether small or large should be doing inventory to effectively, efficiently and successfully run their business. I do mine once a week and have at every establishment I have ever worked in regardless of what they had in place (weekly, monthly or quarterly) as this allows me to see the bigger picture as to what is really happening with the business. I have trained two other people besides myself in doing the proper inventory counts so that if one is ill or decides to leave there are still two others that have been doing the inventory and everything stays smooth. Also, when you have two people counting the inventory you will find that sometimes there are counting errors or one person entering the numbers in the computer will make a typo but the other person checking it over for backup catches it. 

    This all might seem like overkill however I have found that only the businesses that don't do proper and regular inventory are the ones that go under. To each their own I guess /img/vbsmilies/smilies/wink.gif
     
  8. brandon odell

    brandon odell

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    Purchasing more one week and less another isn't going to make your food cost fluctuate because your food cost is not a measurement of the value of your inventory. It's a measurement of how much food you used. Your food cost doesn't go up when you purchase more food, it only goes up when you sell, waste or lose food to theft, if your purchase prices go up, or if there is a record keeping error like wrong prices in your point of sale system, on your menu or on your inventory.

    The purpose of taking inventory is to find out how much food you went through in a given period. I prefer weekly inventories because only measuring monthly or quarterly doesn't allow you to learn about about a problem soon enough, and may mean tens of thousands in lost revenue or product before you even know there is an issue.

    Knowing your actual cost of goods isn't enough either. You also need to know your ideal cost of goods (what your food should have cost to sell). Only with both these numbers, and a properly organized inventory sheet can you pinpoint a cost problem quickly and get it fixed quickly.

    You don't want to find out on the 5th of May that some manager accidentally mispriced your most popular menu item on the 1st of April, and you've been eating it on cost for more than a month, or that an employee started swiping a pound of shrimp a day four weeks earlier, or that your new prep cook is pulling the tails off beef tenderloins and tossing them in the trash when he should be trimming them out for beef bourgignon, or that the sous chef you've allowed to start costing recipes doesn't know the difference between weight ounces and fluid ounces.

    There are a thousand ways to lose money on food. If you don't count both your actual cost of goods and your ideal cost of goods, you'll spend a lot of time chasing your tail and making excuses to the owner or GM when someone who was better organized, and tracked their costs weekly, knows about the problem first and fixes it before the owner or GM ever knew there was an issue.
     
    Last edited: Apr 11, 2016
  9. justa chef

    justa chef

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    ok...let's put it like this for you. Inventorty is nothing but an administrative tool for people in an operation who want to delve into the BOH financials. It allows you to figure out your COG's and food cost. Some chefs chose to utilize this Tool others don't. If you're making money hand over fist, there is no reason to do an inventory. You are paying your bills, your employees and pocketing a good chunk of change. So why bother. Others have a "Need to know" so they choose to go through the process. Some chefs don't mind using a food processor, other chefs insist on hand cutting everything. I guess it's personal preference. You are asking the need to do it, and that to me is a rhetorical question you need to answer on your own my friend. I have been in the same scenarios as yourself. In some places I've done weekly's, others monthly and others not at all.  If you choose not to, far be it for me to steer you otherwise unless you have a financial problem, in which case I've already spoken my piece and why I do it. No need to dwell on it.....
     
  10. someday

    someday

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    The reason I brought it up is to move the conversation beyond the obvious answer that inventory helps you recognize theft and waste. I didn't want 10 answer of "You do inventory so you know people don't steal from you." I'm well aware of how waste relates to these things. Just trying to move the conversation off that track.
    OK so, can the information of "how much I spent on food" be gleaned from looking at your invoices and totaling food purchases for any given time period? If you are counting inventory, adding up the total, costing items, then multiplying to find the "value" of your inventory, why can this information not just be gleaned from "how much I spent on food." Again, this assumes that when you buy something you will at some point sell it for money. So if I buy a case of 4x1 gallon jugs of rice wine vinegar, which may take me a year to go through, it won't go bad. So instead of incrementally costing out the remaining amount of vinegar left in the jugs, one could effectively take the "hit" on it up front by not counting inventory every week/month. Make sense?
    Correct me if I'm wrong, I thought "food cost" was the amount of money that a place spends on food. I referenced FC% as an expression of percent of sales in my original post. You are basically saying that "food cost" only happens when something is removed from our inventory and sold to the diner? Could you expound on that some? Seems to me if you purchase more food, or especially more food than you can sell reasonably, then your food cost (and FC%) would increase...?
    You lost me a bit on that "should have cost to sell" bit there. Can you explain some more? I guess I don't know what an "ideal cost of goods" is either. Do you just mean what your COGS SHOULD have been vs. what is actually was, as it relates to your %'s? Like, "we needed our COGS to be $5000, but it was actually $6000?"
    The whole purpose of taking inventory as it relates to FC% and COGS is to track the usage of product in our inventory to account for changes and use of things over time, so a case of fish sauce that takes a year to use is accounted for slowly over time...correct? (simplified, I know, but still)

    I guess I'm saying is that, if we assume all of our purchases are going to, at some point, be sold for money (even if the date is far into the future) what is the purpose (beyond theft and waste) of tracking the inventory on a week to week basis, assuming that all purchases will average out over the course of X amount of time. 

    Do I really need to know that I started with a gallon of rice wine vinegar, and now I have 7/8ths of a gallon of rice wine vinegar? Etc...

    I'm also not suggesting that a chef shouldn't be costing menu items, keeping waste sheets, looking at invoices, tracking spending, etc. I'm just strictly talking about counting inventory on a weekly/monthly basis. 
    Again, I'm not CHOOSING anything, I'm just talking in hypothetical questions. 

    Are there scenarios where a chef doesn't do inventory and the business is still healthy and profitable? 
     
  11. brandon odell

    brandon odell

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    >>>>>
    Correct me if I'm wrong, I thought "food cost" was the amount of money that a place spends on food. I referenced FC% as an expression of percent of sales in my original post. You are basically saying that "food cost" only happens when something is removed from our inventory and sold to the diner? Could you expound on that some? Seems to me if you purchase more food, or especially more food than you can sell reasonably, then your food cost (and FC%) would increase...?
     
  12. pete

    pete Moderator Staff Member

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    Let's face it.  The vast majority of restaurants run on razor thin profit margins, usually in the single digits.  Sure there are exceptions, but for the vast majority of places this is the case.  That being said, those profit margins can be eaten up very quickly so we have as many checks and balances in place to protect that profit margin.  One of the biggest checks and balances is inventory.  I will ignore the concept of doing inventory to detect waste and theft as there already seems to be an agreement that inventory is important in this regards, but there are other things that inventory is used for and why it is important to make sure that we are consistently working towards our "ideal' food cost. 

    When costing out a menu, let's say we are wanting to achieve a 33% food cost.  Rarely, does a place just do the same mark up across the board.  You would end up with dishes that are priced way too high and dishes priced way too low.  Instead, you price your steaks at 40% FC to stay in line with competition and price your pasta dishes at 20% because market forces allow you to charge that kind of price.  Looking at your menu all your items average out to 33% FC, but  once you start taking into account the menu mix (how many of each item you actual sell) that FC% can swing.  Sure you can figure out your actual food cost by run menu analysis and multiplying the number sold by the FC, adding those up, etc., etc. but that's a hassle.  Doing inventory can help you see trends.  Once you have ruled out theft, and taken into account waste, you inventory, figured into your FC analysis can show you where your actual food cost is trending.  Food Cost running high?  Then maybe its time to look at the menu mix and find ways to make those lower FC cost items more attractive to your customers to offset all those high FC steaks you are selling.

    One thing that I've taken away from working the corporate world is that you also want to keep inventory as lean as possible.  We usually try to run no more than 1.5 Weeks on Hand.  That means that your inventory should be equal to or less than 1.5 weeks of your weekly COGS.   If your weekly COGS should be $10,000 then you should have no more than $15,000 tied up in inventory. Most businesses want/need as much readily available cash on hand.  You don't have that cash if it is tied up in inventory and the only way to know how much money you have tied up in inventory is to count it on a regular basis.

    Finally, purchases don't tell you the whole story of your FC.  FC only counts what food you actually used as it takes into account both your beginning inventory and ending inventory.  Most people that "order heavy the beginning of the month and order lightly at the end" do so not because it significantly affects their FC.  It affects their ability to easily and quickly count the food they have on hand.  It doesn't matter whether you spent $20,000 or $50,000 in a month on food purchases.  The only thing that matters is the usage, but that can't be figured out without doing an inventory.
     
    Last edited: Apr 11, 2016
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  13. brandon odell

    brandon odell

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    >>>>>
    You lost me a bit on that "should have cost to sell" bit there. Can you explain some more? I guess I don't know what an "ideal cost of goods" is either. Do you just mean what your COGS SHOULD have been vs. what is actually was, as it relates to your %'s? Like, "we needed our COGS to be $5000, but it was actually $6000?"
     
    Last edited: Apr 11, 2016
  14. brandon odell

    brandon odell

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    >>>>>
    Are there scenarios where a chef doesn't do inventory and the business is still healthy and profitable?
     
    Last edited: Apr 11, 2016
  15. phaedrus

    phaedrus

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    The more often you count the finer grained control you have on the financials. At some point though most places will hit a wall regarding the opportunity cost of doing all that counting.  It takes me around 2.5- 3 hours to do the count where I work.  It would be awesome to have it done every week but realistically that would end up taking too much time that always seems to be in short supply.  I think once per month is adequate; more often would be great if you can do it but monthly coincides with most of the other big financials (eg rent, utilities, etc).
     
  16. pete

    pete Moderator Staff Member

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    I agree.  Having done foodservice in a jail setting where, literally, every penny counts, we used to do inventory weekly.  It helped to establish problems quickly and fix them quickly, but sometimes it was too much information.  There were menu cycle weeks where FC was higher than others and until you established a legitimate pattern it would cause a lot of needless work and headaches.  My philosophy was always that it would even out over the weeks and it usually did.  But again, it also helped detect problems; waste, theft, overportioning, etc. so that we could react quickly and adjust to stay within budget.

    While weekly inventory was nice, from an administrative standpoint, in a jail setting, I would have hated having to do it every week in the restaurant business, and I think overall it ends up providing too much information.  FC is going to fluctuate with your business trends so doing weekly inventory you can end up chasing after ghosts.
     
  17. panini

    panini

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    @Pete  , in most states, prisons are usually set up by a board who oversees everything. In our state Every prison or prisoner in the state is offered and eating the same thing in every institution. Monthly menus are usually kept somewhere in each persons cell. It lends to mass contracts with vendors and established a constant for every item across the board for every prison. It's usually done annually. The only problem that may pop up is portion control, which is usually monitored closely by someone. If you run out of food, too bad. Some won't eat. Trust me, if an inmate  is told there is no food for him, he or she will find and eliminate the problem promptly. If an item like pork has been calculated at  $0.51 per portion and there are 2000 inmates who submit their menu preferences before the prison orders ( due to health, religious, etc. reasons) pick pork, your facility will receive $ 1,020.00 including shrinkage and .075%  total waste of pork. So basically, the only inventories done in prisons here in Texas are done in the prison commissary. PLS. don't ask how I know this :>)

      In my own business I keep a standardized running par stock. Anything small outside the box is calculated separately  before a price is given.

    I find it easier and less time consuming to just have someone run the inventory right after deliveries. It's simple stupid. I've narrowed all deliveries down to a three hour window on Thurs. morning from 3 to 5 am. each week. I order Wed after close at three for next day. Most anyone including my plongeur can grab a clip, all pars are posted on top or bottom of the product and after the last delivery is made and put up (by vendor) (some hate me but I usually work with the old farts that are still working for the vendor and know this is how it was in the past), usually anyone can run through to make sure all inventory are at 100%. I have a spreadsheet that subtracts ingredients according to sales. It's not a consumer item, my son developed it a few years ago for me with excel. He has it run by downloading sale items from our register and transmitted to my office at home and input into spreadsheet. I understand it won't work for other operations but for me, I like it. We have all our items entered into the register so rotation of items for sale is not a problem. I evolved into this method because weekly bid sheets were never returned. Now I send them monthly and insist on replies. just my 2 cents
     
    Last edited: Apr 11, 2016
  18. justa chef

    justa chef

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    yes...like I said...when you're making money hand over fist and you don't have to worry about making ends meet at the end of each month, they you need not worry.. Hypothetically speaking of course.....
     
  19. kuan

    kuan Moderator Staff Member

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    You need to do it in order to track efficiencies.  Use it as a tool to push yourself.  Do you really need six #10 cans of plums or can you get by with one can a month?
     
  20. pete

    pete Moderator Staff Member

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    @panini  That may be the case for prisons, but I work in the county jail system.  While we do have cycle menus we have to ensure that inmates get a meal every meal.  If we have prepared and portioned properly that shouldn't be an issue, but if a recipe gets screwed up, or we don't pay attention and inmates over portion we have to come up with acceptable substitutions to feed the inmates to ensure we are meeting nutrition guidelines as well as contractual obligations (I work for a 3rd party food contractor).  Yes, I know that some prison systems work on an overall budget, but we work more on an FC basis.  Either way, inventory is still an important part to find inefficiencies and deal with any theft problems.