This year, 2023 is bringing fresh optimism for restaurants. Thanks to technologies like contactless dining and delivery services that have helped them stay afloat during the pandemic, restaurant businesses are now rising from the ashes. In order to ensure and maintain a steady level of success, restaurants must capitalize on every benefit they can.
In this article, we will unlock the secret to understanding the restaurant's prime costs and their significance. Additionally, gain a better understanding of the prime cost formula, which includes components like COGS, labor costs, and more. Plus, discover how to accurately compute your restaurant's prime cost.
The basics of a restaurant's prime cost
Determining the prime cost for a restaurant can be complicated, as it involves accounting for all food, beverage, and labor costs within a specific period such as a weekly and monthly basis.
Prime cost is defined as the combined total of food and labor costs associated with operating a business. It doesn't include other overhead costs such as rent, utilities, or marketing costs. It is a key measure of success for restaurant owners and managers and can help them better understand their profitability.
Many owners wonder what the ideal prime cost should be, which can be measured by food cost as a percentage of total sales plus beverage sales as a percentage of total sales. In other words, prime cost includes food cost, beverage cost, and labor cost.
Food cost represents the general cost of preparing and serving menu items, while labor cost is the wage expense associated with running a restaurant. Together, these two costs make up the majority of a restaurant's expenses, commonly known as prime costs.
Beverage cost, which includes both alcoholic and non-alcoholic drinks, is also included in the prime cost equation. The beverage cost is a percentage of total sales.
Labor costs, which include wages and benefits, should also be incorporated into prime costs as they are a significant portion of the overall cost of running a business. Labor cost consists of 2 main factors:
- Salaries and Wages - This cost is the total of all salaries and wages paid, including overtime.
- Payroll Taxes and Benefits - This cost includes FICA payroll taxes and employer-paid benefits such as health insurance and retirement plans. In estimating the prime cost of your restaurant, it's important to include all costs associated with running the business.
Now that we know the prime cost components of the restaurant, we now can have an easy understanding throughout the discussion.
What Should You Factor into Your Prime Cost Calculation?
Calculating prime cost can be a confusing task, but it's important to get right. After all, it might mean the difference between making or losing money. To accurately calculate the restaurant's prime cost, restaurant owners must take into consideration two distinct factors related to their restaurant's operations.
Total Cost of Goods (COGS)
The Cost of Goods Sold (COGS) is the total expenditure accrued from buying and leveraging food and beverage items to run your restaurant over a specific period.
COGS are made up of the direct costs of consumed goods such as ingredients, and paper products. Indirect costs such as rent or utilities are used to run the restaurant’s kitchen. The cumulative figure obtained is then divided by total sales for a period to give you COGS as a percentage of total sales. Moreover, it's essential to remember that COGS does not cover single-use expenses like restaurant repairs, renovations, or the purchase of new wares.
Total Labor costs
In the restaurant industry, the total labor costs consist of both salaries and wages, including overtime Additionally, payroll tax and benefits such as health insurance must be taken into consideration. A fine dining restaurant like a steak house likely possesses a higher labor cost percentage when compared with a quick service restaurant, as they require more personnel to provide a higher classed service.
Employee wages and salaries, employee benefits, payroll tax, payroll costs, and other related labor costs should be taken into consideration when calculating prime costs.
Thus, knowing the factors for calculating prime costs can help you have an overview of your restaurant’s operations. It can also give you the advantage of being able to make informed decisions on how to improve your restaurant’s operations, leading to increased profitability.
The formula on how to calculate restaurant prime costs
But before we calculate your restaurant's prime costs, let's learn first about CoGS and Labor cost formulas.
You can calculate the cost of goods sold (CoGS) with this formula:
[Beginning Inventory of F&B] + [Purchases] – [Ending Inventory] = CoGS for the period
- Beginning inventory = Food and beverage quantity you have at the beginning period.
- Purchases = the quantity of food and beverage purchased during a given period.
- Ending inventory = the remaining inventory at the close of a given period.
Now, the Total Labor Cost formula is:
Total Labor Cost = [(Hourly Wage) * (Hours Worked)] + (Benefits & Taxes)
After accurately calculating your Cost of Goods Sold (CoGS) and TLC, you are all set to continue with the rest of the prime cost equation.
Calculate prime cost using this formula
Regardless of the size of your restaurant, determining its prime cost is as effortless as adding up your Cost Of Goods Sold (CoGS) and total labor cost.
Prime cost = CoGS + Total labor costs (TLC)
Once you have calculated your prime cost, you can use it to make informed decisions about your restaurant’s pricing strategy. A high restaurant prime cost can indicate that your menu item prices may be too low and that you need to adjust them accordingly.
On the other hand, if your prime cost is too low, it could be an indication that your restaurant is not making enough profit and you may need to either increase your pricing or reduce costs in other areas.
The prime cost percentage of sales
We finally reach this point, I know there's a lot to take in but surely, you will learn a lot from this article. Let's continue, shall we?
Measuring the prime cost percentage of sales is a crucial indicator to gauge the financial success of any restaurant. This metric evaluates how much money goes back into production, labor, and supplies in relation to overall revenue.
The higher the prime cost percentage, the more money is being spent on operating costs and the less is available for profit. A lower prime cost percentage generally indicates greater profitability.
The prime cost percentage can be calculated by taking the total of food, beverage, and labor costs divided by total sales.
Prime cost example calculation
Here's an example of prime cost formula calculation with real-world numbers:
Total Cost of Goods = $2,500
TLC = $3,000
Let's say, the Total Cost of Goods was $2,500 and the TLC was $3,000. Using the formula above, let's calculate the Prime Cost:
Prime cost = $2,500 + $3,000 = $5,500
Therefore, the prime cost for this restaurant is $5,500. The next step would be to calculate the Prime Cost Percentage of Sales. For this, you would need to know the total sales for the period in question. Let's say it was $50,000.
Prime cost percentage of sales = ($5,500/$50,000) x 100 = 11%
In this example, the Prime Cost Percentage of Sales is 11%, which indicates that only 11% of the total sales go back into production, labor, and supplies. This leaves 89% for profit and other expenses.
By closely monitoring your prime cost you can ensure that your restaurant is achieving its maximum potential in terms of profitability.
What is the healthy prime cost for restaurants?
Prime cost varies depending on the restaurant's industry. The ratio of food and labor costs will be less for quick-service restaurants in comparison to full-service restaurants, while fine dining establishments have greater daily labor expenses. There are many factors that can influence your prime cost targets, such as product sales, pricing, operating hours, and level of service offered. These elements can slightly alter both food and labor costs by a few percentage points.
A healthy and profitable restaurant needs to maintain a prime cost of 60% or less which is the industry average percentage, based on the total food and beverage sales. Although this is true across all types of restaurants, upscale dining establishments are likely to experience slightly higher prime costs (60-65%) than fast-food eateries (55-60%).
4 Ways to Achieve Minimal Prime Costs
To achieve greater heights of profit margin and reduce restaurants' prime costs, owners must take proactive steps to minimize expenses. The following are four of the most effective ways to do this:
1. Harness the power of POS to effortlessly streamline inventory, tracking reports, and more.
Embrace your POS system as a reliable ally. Not only should it be tracking essential inventory and labor data, but it can also take the burden of calculating prime cost off your shoulders.
With this invaluable tool in your corner, you have all the information you need right at hand when necessary.
2. Strategize your scheduling to maximize efficiency and productivity.
To effectively manage labor costs in your restaurant, pay attention to the hours you assign each month. The attendance system, hourly wages, hourly employees, and payroll taxes all play a major role in determining these costs.
By strategically scheduling employees' hours for maximum efficiency, you can better control expenses and increase profitability. Also, hourly employees should be monitored to ensure they are using their time wisely and not overstaffing in certain areas or taking too many breaks.
3. Determine menu prices based on the percentage of the food cost.
The prime cost ratio should be taken into account when setting the prices of your menu items. Carefully assess each menu item and its associated costs to ensure that your pricing is fair and appropriate with respect to your cost structure.
Uncontrolled food costs will eat into your profits, so make sure to consider the prime cost when setting menu item prices.
Create your menu pricing based on a strategy that maximizes profitability. The key is to make sure you have a low food cost percentage for each dish or create an extra cushion in the form of higher menu prices. Food quality and presentation are also very important in ensuring customer satisfaction, so don’t forget to take those factors into account when deciding on menu prices.
4. Anticipate your inventory and labor needs for future success.
Restaurants must be able to anticipate key information such as projected sales, customer volume, and menu orders based on previous data. To make reliable predictions, forecasting relies heavily upon past sales numbers along with current market trends and macroeconomic circumstances. Switch suppliers, reduce portion sizes, or renegotiate contracts with vendors in order to ensure that you’re getting the best deals.
To ensure success, restaurant owners and operators must always keep their eyes on the future. Forecasting helps anticipate your inventory needs along with labor demands for any given time period in order to make well-informed decisions that prioritize resources.
For instance, the numbers of shrimps, crabs, and fish can quickly change due to volatile weather conditions. As a result, seafood restaurant owners need to forecast their inventory needs in order to stock up enough supplies before disaster strikes.
How to manage bad prime costs?
Many restaurant owners view their prime cost as an ever-rising figure. This can create a sense of hopelessness in terms of reducing costs, especially for most full-service restaurants with high labor or food costs. However, it is still possible to reduce your restaurant's prime cost by implementing certain measures such as stricter portion control, menu engineering, and more efficient staffing schedules.
Once a year, it’s a good idea to review your costs and come up with strategies for decreasing them. Profit and loss statement analysis is also very important for understanding your expenses, as well as the overall financial health of your restaurant.
To ensure a stay away from bad prime costs - starting inventory, ending inventory, conversion costs, and other costs associated with production should be managed and controlled. Inventory control should include a proper ordering process, accurate tracking of usage, and keeping an eye on the expiration.
Weekly Monitoring of Your Restaurant Prime Costs
Restaurant operators should not wait until the end of each month to review their restaurant's prime cost. To truly understand how your prime cost is affecting business operations, it is essential to know your COGs and Labor costs on a weekly basis. Prime costs weekly can help you identify areas where you can decrease expenses so that your profit margins aren’t compromised.
This will give you a better insight into where money is being spent, and it can help you make decisions that will benefit your bottom line.
Tracking your Restaurant Prime Costs on a Weekly Basis
Calculate your restaurant's prime cost weekly and compare it to industry averages. This is the quickest way to know if your costs are in line with competitors and make immediate adjustments where necessary.
Tools to Use
There are tonnes of tools available to help restaurateurs monitor and manage their prime costs. Most of these tools offer real-time data insights, making it easy for operators to identify any irregularities and take steps to rectify them. Excel spreadsheets, Restaurant POS software, and budgeting tools are all invaluable tools that can help you keep your prime cost in check.
Profit and loss statements can also be used to monitor your prime cost performance. Utilize these tools regularly and make the necessary adjustments for maximum profitability.
Importance of tracking prime cost on a regular basis
If you have a restaurant business, tracking the prime cost of labor and goods sold is essential to your success. Prime cost is an indicator of overall operational efficiency, as it shows the percentage of sales that are being used to cover expenses. It is important to keep an eye on this cost to make sure that it stays well within budget.
Although there may be slight variations in determining prime cost when looking at full-service restaurants versus quick-service establishments (known as fast food chains), the process is still very similar.
Compared to full-service restaurants, daily operations in fast-food establishments are more economical since they require less labor and have lower expenses for both ingredients and personnel. As a result, the costs of running them are significantly lower than those incurred by their counterparts that offer full-service restaurants.
Calculating your prime cost will let you track your restaurant's prime cost number and will tell you how much money is going into running your business and provide an early warning sign if any of these expenses are not being managed properly. restaurant prime cost also reveals the areas where you can make improvements to increase profitability.
Conclusion
As a final thought, successful restaurant operators should always be looking for ways to optimize their prime costs. Managing costs requires discipline and dedication, but with the right tools and strategies in place, you can keep your prime cost in check and maximize profitability. Comparing prime cost ratios and monitoring inventory levels can also provide valuable insights into the financial health of your restaurant and this can be done with the help of inventory management software such as WISK.
Ultimately, by maintaining an eye on costs and revenue, you’ll be better equipped to tackle any challenges that come your way. See your ROI soar as you navigate the world of restaurant prime cost calculations. By understanding and optimizing these crucial figures, you're not just managing costs but also securing long-term profitability.
The key takeaway here is that understanding how to manage costs is essential for ensuring a profitable business. Taking a proactive approach to managing your prime cost will help ensure success both today and in the future. With the right tools, strategies, and forecasting tactics, you can keep your restaurant on track to success!
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