This week I wanted to revisit a few things related to inventory and the impact that high inventories has on our overall Financial Picture
In many accounts, weekly inventories are mandated especially in our PL operations. Weekly inventories are a trusted process that helps determine your food consumed for a specific range, usually tied to our weekly calendar closing period of Thursday. Weekly inventories and consumption are most accurate when ALL Pcard purchases and vendor invoices are processed within the week received. This allows for your total inventory to be reflective of all items brought into the community and then actual consumption will follow the course.
There are 3 strong components of food cost that are driven by accurate inventories. These components include;
· Inventory Cost per day
· Inventory days on hand
· Inventory turns
To calculate each of these components follow these formulas and examples
Inventory Cost per day
Take your Monthly FC for the month ending and divide that number by service days in the month
Example
Monthly FC = $30000
Days in the month = 30
Inventory cost per day = $1000
With this example you should also take your budgeted food cost for the month and divide it by the number of days to insure that these numbers match. If they match, you have made your FC budget for the month. If they do not match any variance will be falling to PBO either positive or negative. This can be a great test of your financial skill as a leader.
Inventory Days on hand
Take your end of month inventory total and divide that number by service days in the month
Example
Inventory taken at month end = $12000
Food cost per day = $1000
Inventory days on Hand = 12,000/1000 = 12 days
The standard for Morrison Community Living, inventory days on hand is not to exceed 6 days at optimum levels for food, and 25 days for optimum levels for Paper. For every day that you are running above the standard has financial impact to Compass as you are keeping too much food or paper on your shelves. This overage creates risk for waste of food, theft or other issues that could be out of your control. Additionally, having food on the shelves that you don’t use within 6 days you are reducing cash flow from an accounting standpoint.
Inventory Turns
Take the number of days in the year and divide that by your inventory days on hand
Example
Days in the year = 365
Inventory days on hand = 12
Inventory turns – 365/12 – 30.4
The goal is to keep your inventory turns as high as possible. This helps to avoid theft, waste and other uncontrollable issues due to food expirations and overall savings of stored foo and paper items. Following these factors related to turns will result in increased revenues to your PBIT.
As with any formulas, your performance is only as good as your budget compliance. Please use these formulas to help you better understand these three components of food cost. Inventory Cost per day, Inventory Days on hand and inventory turns.
Kevin J Mclaughlin | Regional Director of Operations