When trying to increase profit, many restaurant owners and operators focus on increasing sales, which might be the more obvious route. But another way you can increase profit is by digging into your costs and finding ways to lower them. Finding ways to better control your restaurant's costs is a sure-fire way to improve the financial health of your business.
Below, learn what prime cost is, how it differs from prime cost as a percentage of your sales (another important metric), why you should try to lower your prime cost, and how you can make that happen.
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What is Prime Cost?
Prime cost is the combined costs of your food and ingredients — AKA Cost of Goods Sold or COGS — plus all of your labor expenses. You can calculate prime cost using the following equation.
Total COGS + Total Labor = Prime Cost
Total cost of goods sold refers to all ingredients and products purchased for use in your restaurant. Read this article to learn more about cost of goods sold and for a quick way to calculate it.
Total labor refers to your labor expenses plus taxes, benefits, food discounts, and insurance. Here's an example: If you pay an employee $10 an hour, it actually costs you closer to $12 or $13 an hour with added costs. Include that total number when you're calculating costs. Read this article to learn more about labor cost percentage and for a quick way to calculate your labor costs.
But these two calculations aren't the end of the story. You'll need to compare your prime cost to your total sales. Here's the equation for prime cost as a percentage of sales:
Prime Cost as a Percentage of Sales = Prime Cost / Total Sales
Let's take a look at this example scenario: A bakery owner wants to know the prime cost of their business last month. They go over their sales reports and see they had a COGS of $30,000.
Looking over the labor reports, they see that the total labor for their team cost $4,000 for the month. But then they have to factor in taxes, comped food, and other benefits, which they estimate will bring costs up to $5,000.
Using the equation explained above, this is now a pretty easy math problem to solve.
Prime Cost = Total COGS + Total Labor
Prime Cost = $30,000 + $5,000
Prime Cost = $35,000
Knowing that the bakery owner's COGS totaled $30,000 and their labor cost, including benefits, totaled $5,000, you just have to add these two numbers together to find their prime cost: $35,000.
If their sales for the month were $60,000, they would use that number to figure out the prime cost as a percentage of sales.
Prime Cost as a Percentage of Sales = Prime Cost / Total Sales
Prime Cost as a Percentage of Sales = $35,000 / $60,000
Prime Cost as a Percentage of Sales = 58%
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What is the Average Restaurant Prime Cost?
According to Bacon, a software tool specifically designed to track restaurant prime cost, the average new user is running between a 74% and 76% prime cost as percentage of sales.
This only leaves about 25 cents per dollar for the rest of expenses, including rent, business services, and paying yourself.
The ideal prime cost
Ideally, you want your prime cost to be below 60% of sales. If you really want to crush it, shoot for 55%. A prime cost below 50% means you're likely cutting corners in some way, which will only hurt you in the long run. The best customers are the ones that keep coming back, and providing customers with a great experience at a good value is a crucial factor in keeping them coming back for more.
Comparing prime cost
Prime cost is extremely volatile and will directly fluctuate with the amount of business you're doing. But the real goal here is to keep your prime cost as percentage of sales number as consistent as possible. If you own a seasonal business, you'll expect to sell less in slower months, but you can also expect to have a smaller staff for every shift. Plan accordingly so your prime cost percentage doesn't shoot up when your sales mellow out.
One big piece of advice is to not compare bulk prime cost with another restaurant's and consider yours to be better or worse. Why? There are dozens of factors that go into determining your food cost. Are you factoring in beverages, plastics, cleaning supplies, and to-go containers? Do you buy sustainable local produce?
The same goes for labor. If your staff is experienced and exceptionally trained, it'll cost you more, but it’ll also ensure a that your staff is happy and your guests are getting a great experience. That means you’ll be able to make up the difference with slightly higher menu prices, because customers are willing to pay more for exceptional meals and experiences. You’ll also keep people coming back again and again.
This is all to say that food costs and labor costs should only be used to determine a benchmark for your own establishment, one that can be compared and referenced on a weekly or monthly basis — not as a measure of comparison against other businesses.
Why's It Important to Track Prime Cost?
Costs are fluctuating all the time. With wages and labor costs on the rise, as well as rising food and produce prices and the potential for supply chain disruptions due to COVID-19, tracking prime cost monthly or even weekly keeps you informed so you can adjust menu prices and alter your staffing strategies as necessary with more accuracy and confidence.
How to Maintain a Low Restaurant Prime Cost
If your restaurant is seeing higher prime costs than you'd like, set a reasonable timeline and measure your expectations by following these steps.
1. Set a goal
Set a target prime cost percentage you want to hit by the end of the year and hold yourself accountable when it comes to meeting that goal. Instead of saying, "I want a lower prime cost percentage," set a specific, measurable, and attainable goal, something like, "I want my prime cost percentage to decrease from 72% to 60% in the next seven months."
2. Track prime cost components regularly
Track your COGS and your labor cost at least monthly to help you hit your goal. That way, you don't have to wait a full year to realize you should have adjusted menu prices.
3. Redesign your menu
Make sure your menu is engineered to take advantage of high impact, impressive items with lower COGS. If sales are decreasing, maybe it's time to reconsider your ingredients or portion sizes. Assuming sales stay the same after you make the change, you may see your prime cost as a percentage of sales even out.
Calculate Prime Cost with This Free Calculator
Want to be able to calculate your restaurant prime cost wherever you go? Download this free restaurant prime cost calculator.