6-Step Beginner's Guide to Inventory Management

Inventory management can be tricky and time-consuming, especially if you’re a first-time business owner, and any errors or oversights can seriously impact your profitability. However, taking the time to streamline procedures ensures you have complete visibility over your stock, suppliers and wastage, enabling you to account for every dollar and maximise your margins. 

What is inventory management?

Inventory management, or stock control, is the process of sourcing, storing and selling inventory. As a new hospitality business owner, you need to ensure your venue has the right stock, at the correct levels, in the right place, at the right time and, most importantly, for the best price. 

For new hospitality businesses, inventory management can be an overwhelming prospect as venues often keep a lot of stock on hand, have regular deliveries and are susceptible to wastage. However, with the right tools and processes, efficient inventory management can minimise costs, reduce food waste and supercharge your margins. 

This guide covers 6 tips for getting started with inventory management and the best ways to efficiently manage your stock going forward. 

1. Track your stock
2. Record and minimise food waste
3. Calculate your cost of goods sold (COGS)
4. Perform regular stock takes
5. Dive into your data
6. Use inventory management software

1. Track your stock

The first step in effective inventory management is to create an organised yet easy-to-implement system for inputting and tracking your stock as it is purchased, received, prepped and sold. While many hospitality businesses use a spreadsheet for inventory management, several tech solutions can streamline the process for you.

Lightspeed Inventory, for example, enables you to create recipes and batches by entering ingredients that make up your menu items, their quantities and price so you can track stock levels as items are sold, wasted and replenished.

Recipes

With every dish having its own set of ingredients and respective recipes, a platform that facilitates painless tracking of ingredients based on each dish gives you clearer visibility on your margins.

Take a pizza, for example; its list of ingredients may include pizza bases, tomatoes, mozzarella, basil, pepperoni. By inputting your ingredients and their costs into Lightspeed Inventory, you can create recipes for each of your menu items and easily see and store the cost of each dish, adjust its markup price and determine your selling price (and manage margins) accordingly. Every time you sell a dish, the system automatically updates the quantity of the ingredients, giving an accurate picture of your stock levels. 

Batches

Lightspeed Inventory also has an in-built tool that allows you to pre-batch your menu items before service begins.

Let’s say you sell cocktails and want to reduce over-pouring to cut costs and maintain consistency. Lightspeed’s Batches feature enables you to pre-program the exact quantities that should go into your cocktails. These drinks can then be pre-mixed in large quantities before service starts, so they’re ready to pour as soon as the doors open. 

With the batches feature, business owners can easily make informed pricing decisions for their pre-batched items. Plus, the system does the calculations for you.

• Know exactly how much of each ingredient should go into a batch
• Understand the cost of ingredients and how many units each batch will make
• A live margin calculator highlights profit margins as you build recipes and batches
• Suggested pricing is generated based on your COGS and stipulated margins

Suppliers

You can also assign items and ingredients to specific suppliers, which makes ordering quick and easy for you and your staff. When stock needs replenishing, you can: 

• Create a manual purchase order by selecting the items you need from suppliers and generate a purchase order.
• Set email reminders to purchase certain items, e.g. every 1st and 2nd Wednesday of the month, you can opt to receive an email reminder to buy more wine.
• Set recurring orders. These orders will be sent out automatically, at a designated time for pre-determined stock quantities.

Accurately inputting stock into your POS platform allows you to operate more efficiently before food or drinks are even purchased by the customer. It also creates a better process to manage what you’ve bought versus what you’ve sold and how much it costs you.

2. Record and minimise food waste

Whether it’s gone off or been sent back by a customer, every item of food you throw away is money you’ve spent and can’t get back. It’s estimated that 40% of food bought for inventory ends up in the kitchen bin, which undoubtedly eats into already tight profit margins.

Effective waste tracking is an essential element of inventory management and means keeping a close eye on your stock. Taking the time to record how and when wastage occurs is the best way to spot trends, minimise future waste and cut costs to boost your margins.

Lightspeed POS has an in-built waste management feature that lets you know your precise wastage, its costs and take action to minimise future waste. How?

• Easily record waste, who entered it and why
• Inventory is automatically updated in the POS when wastage is recorded
• Minimise waste by running reports to spot trends over time

Keeping track of every spill and broken jar may take a little extra time, but it’s important to get your staff in the habit of recording waste to keep your numbers accurate.  

Accurate inventory tracking isn’t just about knowing what you have on hand. When you know what you’ve wasted, you can assign costs to those losses and understand the impact. When you know why you’ve wasted, you can take measures to prevent it from happening again – saving you money in the long run.

3. Calculate your cost of goods sold (COGS)

Understanding your COGS will paint an accurate picture of how much your inventory costs over a certain period. In turn, this information will help you understand how profitable your menu items are and if you need to make any pricing adjustments.

To calculate your COGS for a given period, let’s say January to May, you will need to confirm three values:

1. Beginning inventory: the total amount of stock you have at the beginning of January
2. Purchased inventory: all stock purchased between January and May
3. Ending inventory: the total amount of stock you have at the end of May

Let’s assume your inventory at the beginning of January was worth $4,000, and during that period, you spent $14,000 on stock. By the end of May, your stock was worth $8,000.

To calculate your COGS for this period, simply add your beginning inventory to your purchased inventory, then subtract your ending inventory from that total. For example:

($4,000 + $14,000) – $8,000 = $10,000

Once you’ve worked out your COGS, whatever you have left is your gross profit. As a rule of thumb, the lower your COGS, the higher your gross profit. Therefore you should aim to reduce your COGS as much as possible (without impacting quality) to maximise your profit margins.

Optimising your COGS is a fundamental aspect of good inventory management. Understanding exactly what is coming in and going out of your business and what it’s costing is imperative for making a profit and avoiding losses.

4. Perform regular stock takes

While this may appear obvious, we find that it often slips through the cracks. Performing a regular, accurate stocktake will ensure your numbers align and help minimise disruption to your business.

When it comes to stocktaking, consistency is key. First, you need to determine how often your stocktakes should be. Frequent checks mean you will pick up on losses sooner and adjust orders accordingly. The longer you leave it between inspections, the more likely you are to find discrepancies.

Traditionally, stocktakes are counted and recorded on a sheet of paper. While this method is still popular, sheets can get lost and accuracy compromised. As a result, many hospitality businesses turn to tech to assist with stocktaking.

Lightspeed POS can be used on a smartphone or tablet to record stock levels directly into the platform. Your stock levels are automatically updated when you buy, make, sell or waste products, making it easy to see if any items are running low or if you’re overstocked. You can even assign stock to different locations for further accuracy, like your bar fridge, storeroom or freezer.

Data from your stocktakes can then be compiled and analysed to help you understand:

• How often you over or under order items
• How quickly certain items get depleted 
• If you need to increaseor decrease your deliveries 

The key to accurate inventory management is to perform consistent stocktakes. By sticking to a schedule, you avoid revenue-draining mistakes like inventory shortages and spoilage.

5. Dive into your data

Understanding exactly how much your dishes cost and how much profit they generate can be tricky, so can calculating your most profitable or least profitable menu items. However, understanding these factors can go a long way in cutting costs and maximising profits.

When it comes to making decisions, data is king and having a solid source of information is invaluable. Lightspeed’s intuitive POS and inventory management platform provides hospitality owners with complete visibility over their COGS, inventory and menu performance. Visual and quick to generate reports ensure you:

• compare your usage with what you forecast and make adjustments to your purchasing accordingly
• know what’s coming in, what’s on its way out, what was wasted and who wasted it
• know what sells well and what doesn’t, thanks to detailed product insights
• have complete visibility of potential gross profits when you build recipes with a live margin calculator
• understand the best and most profitable price for menu items with suggested pricing

These insights are the best way to understand the dynamics of your inventory and take action from them. When you take the time to dive into your data, you’ll have a better idea of how your business operates, what it costs you, and ways to save money.

6.Use inventory management software

When it comes to inventory management, mistakes happen, and people forget things. Utilising technology mitigates these risks to facilitate accurate stock control and minimise avoidable errors.

Most POS platforms have in-built stock control systems that help businesses accurately order, count, manage and sell inventory, all from one centralised system. 

Lightspeed POS allows venues to operate more efficiently by highlighting stock on hand versus what’s been sold. As items are sold or wasted, the system automatically updates the quantity of the ingredients in each meal you sell. When inventory starts to run low, you can set reminders to let you know or create recurring orders that will generate a purchase order to replenish supplies.

The great thing about a POS system’s built-in inventory is that you can monitor everything from one place. This visibility means businesses can save time manually checking their stock, reducing expenses, and minimising waste. Lightspeed Inventory allows you to:

• Adjust the cost and breakdown of dishes by building recipes
• Track fixed and variable ingredient costs
• Determine margins by comparing sales revenue, cost price, and gross profit
• Input supplier details and assign them to specific items
• Automate purchase orders
• Reduce wastage
• See stock levels in real-time

Take control of your inventory management

While inventory management might not be the most exciting task, it’s an essential and unavoidable aspect of running a hospitality business. Efficient stock control impacts your workflows, staff, customers and profit margins, so it’s crucial to map out your processes and ensure your team is aligned. 

With the right tools and a commitment to consistency, it’s possible to minimise your COGS, reduce food waste and maximise your margins through effective inventory management.