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Is there a mysterious number haunting the margins of your P&L statement?
It’s probably your prime cost. And it’s not just another figure to gloss over.
Running a restaurant means there will always be another cost ready to burn a hole in your pocket. Food costs, labor expenses, utilities – the list goes on and on.
But among all these figures, prime cost stands out. It’s the metric that keeps successful restaurant owners up at night.
Why?
Because it’s a powerful indicator of your restaurant’s financial health.
Understanding prime cost isn’t just helpful – it’s essential to ensure your restaurant doesn’t become another statistic.
Thus, in this guide, we’ll break down what prime cost is in a restaurant. We’ll walk you through its components, show you how to calculate it, its ratios and explain why it matters so much.
So, let’s get started!
In a nutshell, the prime cost in a restaurant is the sum of your food costs and labor costs. It’s the bread and butter of your financial health, if you will.
Think of it as the foundation of your restaurant’s financial house. Without a solid grasp on this number, you’re essentially cooking blindfolded.
Not a great idea, right?
Prime cost gives you a clear picture of how much you’re spending to create each dish. It’s the cost of goods used plus the cost of labor that prepares them. Simple, yet crucial.
Prime costs are the pulse of your restaurant’s financial health. They tell you if you’re on track or if you need to make some changes.
High prime costs could mean you’re overspending on ingredients or staffing.
Low prime costs? You could be skimping on quality or overworking your team.
Knowing your prime costs helps you make informed decisions. Should you raise prices? Adjust portion sizes? Rethink your staffing schedule? Prime costs guide these choices.
They’re also a valuable benchmark.
Compare your prime costs to industry standards. Are you in line with similar restaurants? If not, why?
So, next time you’re crunching numbers, give your prime costs the attention they deserve. Your restaurant’s future might just depend on it.
Prime costs are one piece of the puzzle. What other costs impact your restaurant sales? Find out with Restaurant Growth.
Now that you know what prime cost means and why it matters, let’s dive into how to calculate it.
Here’s the formula you need to know:
Prime Cost = Cost of Goods Sold (COGS) + Total Labor Cost
Simple, right? But wait, what exactly are COGS and Total Labor Cost? How do you calculate them?
Let’s break it down step by step.
COGS represents the direct costs associated with producing the food and beverages you sell. It’s essentially the ingredients that go into your dishes and drinks.
But there’s more to it than just food and drink costs.
Here’s what you should include when calculating COGS:
Now, what shouldn’t you include in COGS? Let’s clear that up:
Remember, COGS only includes costs directly related to producing your menu items. Everything else falls into different expense categories.
Now that we know what goes into COGS, let’s calculate it.
Here’s the formula:
COGS = Beginning Inventory + Purchases – Ending Inventory
Let’s break this down:
For example, if you started with $10,000 in inventory, bought $20,000 in supplies, and ended with $5,000 in inventory, your COGS would be:
$10,000 + $20,000 – $5,000 = $25,000
This method gives you an accurate picture of what you’ve actually used, not just what you’ve bought.
Labor costs are the second big piece of the prime cost puzzle. They include all expenses related to your staff.
Let’s break it down:
Efficient labor management is crucial. Overstaffing can bloat your prime cost while understaffing can lead to poor service and lost sales. It’s a delicate balance.
Calculating labor costs is straightforward.
Here’s the formula:
Total Labor Cost = Wages + Salaries + Benefits + Payroll Taxes + Worker’s Compensation
Let’s look at an example:
Total Labor Cost = $20,000 + $15,000 + $5,000 + $3,000 + $1,000 = $44,000
This gives you a clear picture of your total labor expenses for the period.
Now that we’ve crunched the numbers for COGS and labor costs, let’s see how it all comes together in our prime cost formula.
Let’s use the examples from earlier:
There you have it! Your prime cost for the period is $69,000.
But what does this number mean?
On its own, not much. The real value comes from comparing it to your total sales.
That’s where the term “prime cost ratio” comes into the picture.
When calculating restaurant prime cost, another term that often pops up is the prime cost ratio or percentage. This metric is crucial for understanding your business’s financial health.
But, what does it mean?
The prime cost ratio is the percentage of your total sales that goes towards covering your prime costs.
It’s a key indicator of your restaurant’s profitability and operational efficiency.
Inflation can significantly impact your prime cost ratio. As the costs of ingredients and labor rise, your prime cost ratio may increase if you don’t adjust your prices accordingly.
Calculating your prime cost ratio is straightforward once you’ve determined your prime cost.
Here’s the formula:
Prime cost ratio/percentage = Prime Cost / Total Sales
Let’s walk through an example to illustrate how to calculate the prime cost ratio.
Imagine you run a cozy bistro called “Flavor Haven.”
Last month, your total sales were $100,000.
Your prime cost breakdown looks like this:
Your total prime cost is $70,000 ($30,000 + $35,000).
To calculate your prime cost ratio, divide your prime cost by your total sales:
$70,000 / $100,000 = 0.70 or 70%
This means 70% of your sales go towards covering your prime costs.
Figured out your prime cost? Now, learn how to implement it in your restaurant operations and boost sales by 3X.
A key question many restaurateurs ask us is “What is a good prime cost percentage for a restaurant?“
The truth is, there’s no one-size-fits-all answer.
Let’s consider the example above. We see that the prime cost percentage for Flavor Haven comes out as 70%.
Is that good or bad? Well, it depends.
While industry standards for prime cost ratio typically range from 55% to 65%, these numbers aren’t set in stone.
Your ideal percentage depends on various factors unique to your establishment such as restaurant type. Location & segment matter too.
And let’s not forget your menu – it plays a significant role in determining your prime cost. And finally, economic conditions, such as inflation and labor market trends, can also impact what constitutes a good prime cost definition for your restaurant.
But remember, this is just a guideline and should be adjusted based on your restaurant’s specific circumstances, including its marketing budget.
Setting realistic prime cost goals is crucial for your restaurant’s success.
Start by analyzing your current costs. Look at your food and labor expenses over the past few months. This will give you a baseline to work from.
Next, consider your restaurant’s unique factors. Are you in a high-rent area? Do you offer premium ingredients? These elements will impact your target percentage.
Don’t forget to factor in seasonality. Your costs might fluctuate throughout the year. Plan for these changes when setting your goals.
It’s also wise to benchmark against similar restaurants in your area. This can give you a realistic idea of what’s achievable in your market.
Remember, setting goals is an ongoing process. Regularly review and adjust your targets as your business evolves.
Keeping your prime cost low is an ongoing challenge. But with the right strategies, it’s entirely achievable.
Here are some tips to help you lower and maintain your restaurant’s prime cost:
Regularly analyze your menu items’ profitability. Consider removing or repricing dishes that aren’t pulling their weight. Add special menu items that can boost profits.
Inconsistent portions can lead to food waste and higher costs. Train your staff on proper portioning techniques.
Don’t be afraid to shop around for better deals. Building strong relationships with suppliers can lead to better prices.
Use a robust system to track your inventory. This helps prevent overordering and reduces waste.
When employees can handle multiple roles, you can schedule more efficiently and reduce labor costs.
Simple changes like using LED lights or energy-efficient appliances can significantly cut your utility bills.
Use scheduling software to optimize your staffing levels based on business needs.
Implementing these strategies takes time and effort. But the payoff is worth it. A lower prime cost in a restaurant means higher profits and a more sustainable business.
Lower your prime costs and boost your profit margins by up to 18% within just 3 months with Restaurant Growth.
In the end, calculating your prime cost isn’t a one-and-done deal. It’s something you should do regularly to keep your finger on the pulse of your restaurant’s financial health. Weekly or monthly calculations can help you spot trends and make timely adjustments.
But the prime cost is not EVERYTHING. Marketing and customer acquisition are equally critical.
At Restaurant Growth, we know that prime cost is just one piece of the puzzle. Success in the restaurant industry requires a holistic approach. That’s where we come in.
Our team of experts specializes in restaurant marketing and operations. We offer 1:1 coaching sessions and webinars to help you master prime cost fundamentals. But we don’t stop there.
We complement your prime cost optimization efforts with our omnichannel marketing services. From social media and SEO to email marketing, we’ve got you covered.
In fact, by boosting brand awareness and supporting operational efficiency, we have helped over 4000+ restaurants turn those prime costs into prime profits.
So, if you’re ready, let’s take your restaurant to the next level.
Get in touch with Restaurant Growth today!
Overlooking hidden costs can skew your restaurant prime cost. Inconsistent tracking leads to inaccurate data. Failing to adjust prime cost targets as your business grows is another trap. Remember, what worked last year might not cut it now. Stay vigilant and adapt your strategies regularly.
Restaurant Owner offers a handy weekly prime cost worksheet. It’s a great tool to get you started on tracking your costs.
To trim your prime cost, start by scrutinizing your menu. Are all items pulling their weight? Next, optimize your labor schedule. Train staff for efficiency. Don’t forget to negotiate with suppliers and reduce waste. Every little bit helps when you’re aiming for that ideal restaurant prime cost ratio.
Several tools can help you keep tabs on your prime cost. Popular options include Toast, MarginEdge, and Restaurant365. These platforms integrate with your POS system, making tracking a breeze.
Choose one that fits your needs and budget.
Remember, the best tool is the one you’ll actually use consistently.
A good prime cost for a restaurant typically falls between 55-65% of total sales. However, what should the prime cost be in a restaurant can vary by concept and location. Fine dining might aim lower, while quick-service spots might run higher.
The key is to know your numbers and continuously work to improve them.
From strategic marketing planning to seamless execution, we’ve got you covered!
