The economy may be in flux right now, but as restrictions start to lift and limited dine-in is allowed in most states, restaurants are at a critical juncture. Over the past few months, reporting may have taken a back seat to more pressing concerns. However, as the restaurant industry and your business move to a new normal, returning to tracking and controlling costs is more important than ever.
If your restaurant is emerging from survival mode to a break-even point or even slight profitability, it is important to reevaluate and tune up the largest expense for your restaurant: your restaurant prime cost.
Restaurant prime cost overview
Your restaurant’s prime cost is made up of the products and the people that you need to keep your restaurant in business. Your prime cost is a fundamental metric to track, because it includes your two largest expenses: food and labor.
As the majority of your controllable expenses, your prime cost has an enormous impact on your profitability. While you may not be able to change your monthly rent, utility rates, or taxes, you do have significant control over your prime cost. When you lower your prime cost even by a small percentage, that percentage is added directly back to your bottom line.
Prime Cost Formula Review
Calculating your prime cost is one of the first steps to making smarter decisions about nearly every facet of your business. Especially as you track your prime cost over time, you can start to see patterns and fluctuations that can point you toward which costs should be examined more closely.
Once you understand a few formulas, you can easily calculate your prime cost. Your prime cost is a simple formula:
Total Cost of Goods Sold (CoGS) + Total Labor Cost = Prime Cost
CoGS (Cost of Goods Sold)
Your CoGS is made up of the products you purchase to make the menu items you sell. For a restaurant, this includes your food and beverage ingredients, as well as other supplies like napkins, coffee filters, etc. With a focus on delivery and takeout, CoGS also includes packaging, utensils and other extras that aren’t part of your dine-in CoGS. It does not include one-time costs like repairing a broken oven or buying new tables for the dining room.
To calculate your CoGS totaled during a given period, you can use the following formula:
Beginning Inventory + Additional Purchases Made During the Period — Ending Inventory = CoGS
As you reopen your dining room, it is more important than ever to stay on top of your inventory management. You will likely be operating without parallel historical sales data with which to inform your inventory decisions, so you will need to start tracking new patterns in inventory levels and adjusting your orders.
Optimizing Your Labor by Streamlining Your Scheduling
Your labor cost includes labor expenses such as wages for both salaried and hourly employees, payroll taxes, health or workers compensation insurance, and any benefits you offer.
Employee Wages + Taxes + Benefits + Insurance = Total Labor Cost
While the wages for your salaried employees may hold steady, your hourly employee payroll can fluctuate greatly from week to week. To keep your payroll relatively consistent for your prime cost calculations, consider taking advantage of technology like scheduling software. Scheduling systems can enable tools like overtime monitoring or streamline real-time tracking of labor cost percentage goals. By carefully measuring your labor costs, you can start to spot trends and understand where you may be able to optimize your scheduling.
Prime Cost Percentage of Sales
Looking at just the total dollar amount of your prime cost doesn’t tell you the full story. Your prime cost in dollars will fluctuate throughout the year, and it may not be helpful when comparing your financials to industry benchmarks. To truly understand the whole picture of your prime cost, you will need to compare your prime cost to your total sales as a percentage, using the following formula:
Prime Cost / Total Sales for that time period = Prime Cost as a Percentage of Sales
By understanding this relationship between what you needed to spend relative to what you were able to sell, you have a more complete picture of how your prime cost as a percentage of sales relates to your profitability.
Give your prime cost a tune-up by optimizing your inputs
Whether you just started to calculate your prime cost or you’ve been tracking it for years, a periodic “tune-up” of your prime cost can help you ensure you are optimizing the large food and labor expenses for your restaurant.
To stay profitable in a challenging economy, many restaurant owners and operators try to focus on increasing sales. However, this effort is wasted if you don’t also focus on your prime cost.
Dial in your Cost of Goods Sold
An accurate CoGS totaled figure relies on accurate inventory tracking. An effective inventory management system not only prevents food waste and overordering, but it also informs reliable, up-to-date numbers that you can use to inform critical business decisions. With updated CoGS and inventory numbers, along with an integration with your sales data and menu prices, you can calculate the profitability and popularity of your menu items and ensure that you are optimizing your profit.
Reevaluate Your Cost of Labor
Your labor cost, especially with hourly employees, can quickly add up without proactive evaluation. Small things like improperly-trained employees, or overstaffed shifts may not seem important at the time, but these inefficiencies can add up and increase your prime cost. By taking a closer look at your labor costs, you can start to optimize your labor spend by implementing adjustments like scheduling based on sales forecasts or using cross-training to gain labor efficiencies. For example, if you’re new to takeout and delivery and plan to continue to use these off-premise revenue channels after you reopen your dining room, using employees in multiple roles will give you more flexibility in scheduling.
What’s a good prime cost to shoot for?
Food and labor costs vary between different types of restaurants. However, in general, an ideal prime cost percentage of 60% of your total sales indicates that, if the rest of the business is being run efficiently, your restaurant is probably making a profit.
This may range between a quick service restaurant (55-60%) as opposed to a full service restaurant (60-65%). Your product mix, pricing, hours, and quality of food and service can impact the food and labor costs that make up your prime cost.
Your prime cost will also fluctuate with your sales levels and seasonality. This reality makes it essential to track your prime cost frequently and consistently. Understanding the monthly or weekly fluctuations over time not only allows you to understand trends in your business, but it also helps you adjust any aberrations as they happen, rather than wasting the opportunity to add profit back to your bottom line.
While understanding industry standards is helpful, try not to get lost in the comparison, especially during these uncertain times. The most important practice is setting your own benchmark or prime cost target and comparing your progress over time.
Conducting a tune-up of your restaurant prime cost is essential in any economy, but when times are tough, an optimized prime cost can be the difference between profitability and being in the red. When you evaluate your prime cost, you discover areas of waste and possible improvements that can help your entire operation run more efficiently.
If you would like to easily track your inventory and labor costs to gain insight into your operations, consider a comprehensive, restaurant-specific inventory management solution. With Restaurant365 you can save on food and labor costs by making adjustments in the moment, based on completely up-to-date information. Restaurant365 incorporates restaurant accounting software and restaurant operations software into an all-in-one, cloud-based platform that’s integrated with your point-of-sale system, as well as to your food and beverage vendors, and bank.
For 10 tactics you can start implementing today to reduce your prime cost, download our prime cost e-book, Guide to Reducing Restaurant Prime Costs.