Determine Your Food Truck's Proper Inventory Level
The inventory for your mobile food business is the food and other supplies that you’ve purchased and placed in storage. Whether the value of the food is $500 or $10,000, until you sell it to a customer, it isn’t doing anything for your business, other than taking up space, tying up money, and in some cases, spoiling.
Inventory is nothing more than a cost until it’s sold. Also, the larger your inventory, the less money you have available for other aspects for your business.
Because most of your inventory is highly perishable, if you fail to use an item within its limited shelf life, off to the garbage it goes, along with some of your hard-earned profits.
In an ideal world, you should maintain a level of inventory large enough to allow you to serve your customers without running out of an item. Not only that, but you should also run out of a particular item only at the same time as the next delivery truck pulls up to the back door of your commercial kitchen.
Being able to maintain a proper level of inventory is a key step in running a successful food truck business. Without an efficient inventory management system in place, keeping the proper amount of inventory on hand can result in potential losses showing up in a variety of forms.
Spoilage, theft, over-portioning, waste, cooking errors, and unrecorded sales are just a few of the ways you can lose money. With food cost being such a large portion of your total business, wasting just a small portion of your total food cost can represent a lot of money lost.
An easy way to determine whether you’re carrying an appropriate amount of inventory is to calculate your number of days of inventory. This number tells you how many days your existing inventory will last, based on how much food you’re using in an average day, which translates to your average daily food cost.
Calculating your number of days of inventory is a two-step process. (Note: To do the following calculations, check your financial statements for the number of days in the period, food cost for the period, and ending food inventory.)
Calculate your average daily food cost, using this equation: Average daily food cost = food cost ÷ number of days in period.
So if your food cost for the period (say, 30 days) is $15,000, you’re average daily food cost is $15,000 ÷ 30 days = $500.
Calculate your number of days of inventory with this formula: Number of days of inventory = ending food inventory ÷ average daily food cost.
For example, take the ending food inventory (on your balance sheet), say, $5,000, and divide by the average daily food cost you just calculated, so $5,000 ÷ $500 = 10 days’ worth of food on hand, or days of inventory.
This calculation tells you that at the end of a 30-day period, you had about ten days’ worth of food on hand. For most food trucks, this amount is far too excessive an inventory. Most food truck owners optimize food inventory at three to five days of food on hand.
Ideally, they have less than a week of produce and fresh products and more than a week in the freezer and dry storage areas; however, the average of all their food products on hand is about five to six days. So the entire inventory turns over every week or so.
In the preceding example, having ten days’ worth of inventory probably indicates that you have too much food on the shelves. If operationally feasible, lowering inventory levels to three to five days of sales will cause your food costs to drop almost immediately.
Don’t reduce your inventory levels to the point that you’re constantly running out of products. Instead, reduce or eliminate the amount of excess inventory that you don’t need and won’t use.