Accounting and economic management of catering stocks

Inventory its relationship with the balance sheet (a legal obligation)

In their accounting definition, stocks include all goods, purchased or created by the company and intended to be sold or to be consumed in the production activity. The calculation of these stocks is made compulsory once a year for the balance sheet, which incorporates their value into the assets.

In accounting, stocks are entered on the left of the balance sheet. Their market value is part of the company's possessions. In the day-to-day management of an establishment, the money invested in the acquisition of stored goods is “dormant” money. That is to say that the value of these stocks is conditioned by the duration before the goods are sold. We then say that their level of liquidity is low--in comparison with the availability of cash.

In addition, the stocks of goods entail additional costs: electrical supply of refrigeration equipment, storage conditioning which adds to the high risk of depreciation of the value of the stock for perishable food items.

Good management of stocks of goods therefore appears necessary for the sound and sustainable management of catering establishments.

Economic indicators and ratios to monitor inventory management

Stock valuation

Inventory management begins with the valuation of stored goods. In accounting, there are several valuation methods applicable:

The LIFO method: The valuation of stocks is based on the prices of the most recent invoice and / or the market price and / or the daily price.

The FIFO method: First in, first out. This method is used by food service companies because it is based on the hygiene standard of the same name, which consists of optimizing the management of DLC. The principle of the FIFO method is very simple: the products sold are the oldest in stock. However, it is difficult for small businesses to set up, as they might not have a tool to keep track of the purchase costs of goods. These businesses should therefore choose the LIFO method.

Ratios and indicators

WCR

The working capital requirement (WCR) represents the amount that a company must finance in order to cover the need resulting from cash flow lags corresponding to the disbursements and receipts linked to its activity. The WCR in restoration is explained by the fact that the stored goods are not sold immediately and that during this period, the value of the stock is as much cash not available. Additionally, in regards to the activities of caterers, trade receivables are often settled with a delay which, again, creates a lack of cash.

WCR = Average outstanding trade receivables + Average inventory - Average outstanding trade payables

The WCR is an indicator of the financial health of a company. An exploding WCR is a sign of poor health that can very quickly lead to irremediable cash flow difficulties for an establishment. It can be calculated periodically (every week, every month, every quarter, every semester or every year) and above all, it must be compared and its evolution must be analyzed.

Inventory turnover rate

The inventory turnover rate shows the number of times the total inventory has been sold in a calendar year. The lower the inventory turnover ratio (close to 1), the more the inventory management model should be optimized. Otherwise, a high turnover reflects good management, with limited working capital requirements (WCR).

Stock turnover rate = Turnover ($) ÷ Average stock value

With:

Average stock value ($) = (End of period stock ($) + End of period stock ($)) ÷ 2

Stock flow time

The calculation of inventory run-off time is a variable to monitor in all establishments that handle perishable goods. Catering is the first sector concerned. Calculating inventory flow time involves determining how long, on average, a product will remain in stock before it's exhausted or sold. Therefore, this variable must be reduced as much as possible to achieve optimal stock management.

Stock flow time (d) = (Average stock value ($) ÷ Turnover ($)) x 365

Daily inventory monitoring to improve the economic performance of restaurateurs

Order more accurately from the recipe database

As we have seen, excessively large stocks are not good for the economic health of your business. They reduce the available cash and entail significant ancillary costs. Ordering goods as efficiently as possible is therefore a major issue for chefs and restaurant managers.

The first tool available to professionals to optimize orders is the recipe database. It allows you to know the exact quantities of each ingredient in a recipe to anticipate needs. Its use requires an evolution of practices: we will move from a restocking system consisting of ordering the quantities required, to reach a minimum buffer stock level, to a more predictive system where we will anticipate what we want to produce, in terms of "portions" of recipe, from which the quantities of goods to be ordered will be derived.

Melba is a dedicated management application for gastronomy professionals that will help anticipate your production based on your recipe database. The tool will allow you to:

• digitize your ingredient list
• produce an "intelligent" recipe database which will automatically give you profitability indicators on your dishes
• anticipate your production by calibrating recipes in the desired quantities
• generate supplier purchase orders based on planned production
• tmanage and enhance your stocks (inventories)

Order form generation on Melba:

Adjust orders based on stock status

The second lever for improving profitability is inventory management. It's assumed that regular monitoring will give you sufficient knowledge of your merchandise reserves to order as accurately as possible and limit unnecessary expenses. This monitoring is only done if you have the right tools. The Melba application will allow you to automate part of your inventory management. The tool will manage the restocking every time you receive your orders and it will automatically destock the quantities of ingredients used in the planned production.

Other good practices for reducing stocks

Get your teams working together in the kitchen and in the dining room

It's important to get the kitchen and dining teams to work together to understand and analyze the expectations and habits of your customers. You have to limit the choice on your menu to better control your reserves and adjust the quantities served to avoid waste (which is also a loss for you--what you throw away is not served to another customer). The unsold ratio is a good indicator of which dishes should grab your attention. Reducing this ratio can become a goal for the whole team. In addition, good communication between the teams will make it possible to guide customers to the right products, while limiting unsold products, and avoiding the frustration of orders canceled by lack of stock.

Keep a chart of your main inventory management ratios

Regular monitoring of your ratios concerning the management of your stocks will be your best ally to identify the critical points of your management and quickly take corrective decisions:

• too low a turnover rate on a wine reference will lead you to make a decision on maintaining it or enhancing it à la carte
• A sharply increasing unsold ratio on a dish may lead you to readjust your stock, remove it from your menu or even just change it on your menu (price adjustment, visual change, etc.)
• Too high a working capital requirement (WCR) will force you to review your way of anticipating your production and adjust the quantities stored

Apply the FIFO method in the storage of your goods

The FIFO method should not remain only a method of valuing stocks. The concept of "first in, first out" should also be illustrated in the way you store your goods in your store room and cold room. Indeed, DLC management remains a critical element in optimizing your management and therefore your profitability. Accountability of your teams is necessary for these good practices to last over time.