If you've been in the restaurant business for any length of time, you've probably been told that accurate cost of goods sold (COGS) calculations require regular inventory counts. It's become gospel in our industry – count everything monthly, adjust your books, and you'll have precise financial statements.

But what if this widely accepted practice is actually making your financial reporting less accurate, not more?

The Traditional Inventory Formula: A Closer Look

The standard COGS calculation promoted in restaurants for decades is:

COGS = Beginning Inventory + Purchases - Ending Inventory

This formula appears logical on the surface. Track what you started with, add what you bought, subtract what you have left, and you'll know exactly what you used. The restaurant industry has built entire management systems around this concept.

The Math That Changes Everything

Here's something most restaurant owners don't realize: given a sufficient time period, the beginning and ending inventory components of this equation become negligible.

Think about it this way – if you're analyzing COGS over a full year, and your beginning inventory in January is $8,000 and your ending inventory in December is $8,500, that $500 difference represents a tiny fraction of your annual purchases. For a restaurant doing $1.2 million in annual sales with a 30% food cost, that $500 variance represents just 0.14% of total food purchases.

This means that over meaningful time periods, your COGS calculation essentially becomes:

COGS = Purchases

The inventory adjustments that restaurants stress about each month often represent rounding errors in the bigger financial picture.

The Accuracy Problem Nobody Talks About

But here's the bigger issue: inventory counts are only valuable if they're 100% accurate. And anyone who has actually worked in restaurant operations knows that perfect inventory counts are virtually impossible.

Consider the variables that make accurate counts nearly impossible:

• Partial containers: How do you measure exactly how much is left in that 50-pound flour bag?

• Staff accuracy: Even well-trained employees make estimation errors

• Product variations: Different delivery dates mean different weights and measurements

• Storage accessibility: Items stored in hard-to-reach places get approximated

• Time pressure: Accurate counts take time that most restaurants can't spare

When you adjust your financial statements based on these inherently inaccurate counts, you're not improving accuracy – you're introducing systematic errors into your reporting.

What We See in Practice

In our years of working exclusively with restaurants, we've seen this pattern repeatedly: restaurants that obsess over monthly inventory adjustments often have more volatile and less predictable COGS reporting than those that focus on purchase management.

We've watched operators spend hours each month counting inventory, only to see their food cost percentages swing wildly from month to month based on counting inconsistencies rather than actual operational changes. This creates false alarms and missed opportunities because management is responding to data noise rather than real trends.

A Better Approach: Operational Inventory Management

While we don't recommend adjusting financial statements based on inventory counts, we absolutely believe in strong inventory management practices. The goal should be operational control, not financial statement adjustments.

Par Levels: Establish minimum and maximum quantities for each item to prevent over-ordering and stockouts while maintaining consistent inventory levels.

Hot Counts: Track your most expensive and fastest-moving items daily or weekly. Focus your attention on where it will have the biggest impact.

Ordering Guides: Develop systems for purchasing that take into account usage patterns, delivery schedules, and storage limitations.

Waste Logs: Track and categorize waste to identify operational improvements and training opportunities.

These practices give you operational control over inventory without the false precision of financial adjustments based on imperfect counts.

The Bottom Line

Your time and energy are limited resources. Instead of spending hours each month creating the illusion of precision through inventory counts, invest that time in operational improvements that actually reduce costs and improve consistency.

At Armitage Accounting, we help restaurant owners focus on the financial metrics that actually drive profitability. Contact us to learn how we can help you build better systems for managing your food costs.