Restaurant restrictions are beginning to ease, which is good news for restaurant owners and operators. However, your restaurant probably isn’t yet back to “normal.”
The restaurant industry landscape has changed over the last few years. Your profit margin may look different than before, and the current labor crunch is potentially impacting your operations. In addition, there are still a lot of uncertain factors surrounding dining capacity.
In a fluctuating economy, you don’t know exactly what is going to happen to sales. But if you want to improve your profit margin, you can focus on where you can make a direct impact: controlling expenses.
Your biggest restaurant expenses—food and labor costs—make up your prime cost. Optimizing your prime cost takes data, insights, and sustained effort, but it can directly add profit back to your bottom line. Especially if your attention has been devoted elsewhere, it’s time to brush up on best practices for reducing your restaurant prime cost.
How to calculate restaurant prime cost
As a refresher, your prime cost is your food costs and your people costs (otherwise known as Cost of Goods Sold and your labor costs) over a certain period. How to calculate prime cost, with the following formula:
Prime Cost = Total CoGS + Total Labor
To understand the prime cost dollar amount in context, you can calculate it as a percentage of sales:
Prime Cost as a Percentage of Sales = Prime Cost ÷ Total Sales
Restaurant prime cost as a percentage of sales generally runs around 60%. While this number is a useful benchmark, it can vary widely between quick service restaurants to fine dining, full-service models.
It’s good to know the industry’s prime cost percentage range, but it’s far more important to be able to compare your own historical numbers. If you track your prime cost over time, you can make improvements specific to your unique location. Your goal is to discover your own optimal prime cost percentage that maximizes your restaurant profit margin without sacrificing staff retention or guest satisfaction.
Now that you’re on board with the basics, what areas should you start with in order to reduce your prime cost overall? Here are five areas to focus on.
1. Set a prime cost reduction goal
Once you have historical data about your prime cost, it is time to examine it closely and set a prime cost reduction goal.
Every restaurant owner or operator wants a lower prime cost, because reducing your prime cost can add to your bottom line. However, consider moving beyond general, vague goals.
Restaurants can benefit from the same SMART goal (Specific, Measurable, Achievable, Realistic, and Timebound) tactics that other businesses use. By deciding on a target prime cost percentage, and your timeline, you can better hold yourself and your managers accountable.
Instead of aiming to “reduce prime costs,” consider creating a goal like, “We want to decrease prime cost percentage from 68% to 64% over the next six months.”
2. Review your numbers daily
Once you have your restaurant prime cost goal in hand, it’s time to act on it. Where should you start? Setting up consistent, frequent review of your numbers.
Say you only review your prime cost numbers once a month. If there is a large increase in a certain food cost, or your labor hours, you may not notice it immediately. The issue can add up over the course of the month. By the time you notice it on your P&L or another report, you may not even know how the cost hike started or be able to easily find the root of the problem.
In general, the more often you review your critical reporting numbers, the better. Daily reviews of your prime cost numbers can help you stay ahead of any potential issues and make readjustments that prevent recurring problems.
Frequent review can also improve accountability and buy-in from the store level, because in-store managers or staff can connect the daily decisions they make with the numbers in your restaurant operations reporting.
3. Forecast your labor and inventory
Restaurant owners and operators need to constantly plan ahead, making decisions about where to put resources, and when. Essentially, forecasting is calculating the inventory and labor you will need for your restaurant during certain periods.
For restaurants, forecasting involves estimating crucial information like future sales, customer traffic, or menu ordering mix based on historical data. Forecasting may draw from sales data, market analysis, or broad economic trends.
Forecasting isn’t a perfect tool, but it can be used to recognize trends and proactively plan for the future. It’s especially applicable to your prime cost, because restaurant food cost and labor cost fluctuate over time in relation to sales.
4. Optimize labor costs
Your restaurant scheduling needs to ensure you have the right staff, at the right place, at the right time. Optimizing restaurant labor costs is critical in two ways: labor impacts customer satisfaction, and it also has a huge impact on your bottom line.
However, the labor piece of the prime cost puzzle has become more complicated lately. With wages rising, and a current shortage of applicants for many restaurants, finding and retaining top-quality labor has become more difficult.
Whatever your current labor situation, to make the best out of your restaurant scheduling, keep these best practices in mind.
Schedule Based on Historical Data
As discussed with forecasting above, restaurant scheduling based on data means you are delivering a good guest experience, while still optimizing the lowest labor budget possible.
You know that the schedule you need for a busy Saturday brunch versus a slow Tuesday night is completely different. Consider examining this even further by breaking down your labor data into smaller periods of time, like day part or even 15-minute increments. Breaking down your historical data allows you to see where labor hours are needed the most.
While this can be time intensive to do by hand, restaurant management software can help you efficiently and accurately set up a tracking system to reference as you make new labor hour goals and create schedules.
Once you’ve written and posted the best schedule you can, the next step is to ensure that your staff is following it. A restaurant scheduling system can help you keep track of labor hours from a high level, identifying team members who are approaching overtime.
You can also use a scheduling management system to track employees clocking in early or clocking out late or set up limits on clock in/out times.
Make Real-Time Restaurant Staffing Decisions
To further control your labor costs, empower your managers to make staffing decisions in real time, according to what’s happening during the shift. Your sales forecasting won’t always exactly match up with your actual sales, and managers can be the missing piece to help adjust labor cost in the moment.
Your forecasting data may have indicated a busy Thursday night, but a strong rainstorm at 5:00 p.m. meant that most diners stayed home for the evening. Your store-level manager can use tools like breaks, cuts, or call-ins to better match labor to sales in real time.
5. Control Cost of Goods Sold (CoGS)
Finally, examine the other major piece of your prime cost, your restaurant food cost. CoGS may have fluctuated during the last year as you pivoted your business model to a limited menu, takeout, or delivery. However, with eased restrictions and an increase with dine-in sales, it’s important to re-examine your food costs.
Track Actual vs. Theoretical Food Cost Variance
Your actual vs. theoretical food cost analysis is a powerful tool for controlling costs. Essentially, actual vs theoretical (AvT) analysis examines what you should have spent on food costs, in theory, versus what you actually spent. Your theoretical food cost assumes no mistakes, no incorrect portions, and no food waste. Your actual food cost reflects what really happened in your restaurant.
The difference between your AvT food cost shows your lost profit, representing inventory costs that were wasted. Start optimizing your restaurant food costs by reviewing the variance and addressing the root causes of food waste.
Calculate Your Recipe Costs
To analyze AvT food costs, you need to first calculate your recipe costs.
Your recipe costing connects your sales to your inventory management. Recipe costing breaks down a menu item into all of its individual ingredients, calculating the usage and yield of each food item used, and assigning the recipe an exact dollar amount.
While it is possible to do recipe management by hand, automating the costing ensures better, more accurate results. If your restaurant accounting system, point of sale (POS) system, and restaurant inventory management are integrated, you can automate most of this process.
Purchase the Correct Amount
To ensure that you are spending the optimal amount on inventory, examine your purchasing decisions. After all, if product isn’t on your shelf, you can’t waste it.
First, ensure that your store-level team is completing accurate, timely inventory, so you know the full picture before placing an order. Second, leveraging sales forecasting can provide crucial data for ordering decisions (as opposed to relying on “manager’s gut” for par levels).
Track Invoices for Pricing Errors
You probably have multiple invoices coming into your restaurant every week. While it may seem time consuming to review each line item, reviewing invoices for pricing errors or date entry errors is essential to controlling your food cost.
To avoid hours spent in the back office, consider automating whatever part of this process you can. AP automation can reduce errors, while reporting tools detect prices that are outside of contract rates or large jumps in historical numbers.
Consider Switching Vendors
Finally, examine your vendor relationships. Investing in loyal relationships with vendors is a good strategy for the long-term health of your restaurant.
However, it is beneficial to stay current on your region’s competitive product prices, plus any common fees or charges. If there are lower prices available in your area for certain inventory items, and your vendor won’t match them, it may be time to consider a change.
Your restaurant prime cost makes up a majority of your expenses, making it essential to optimize for your restaurant’s financial health. Reviewing the best practices for reducing your prime cost can help ensure your restaurant is ready for whatever lies ahead.
If you’d like to run your restaurant more efficiently and profitably, consider an all-in-one restaurant management system. Restaurant365 incorporates restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into a cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank.