How to Calculate & Manage Your Restaurant’s Prime Costs
As a restaurant owner or manager, it’s important that you keep your costs low and your profits high. That’s often easier said than done, however.
For restaurant accounting purposes, your prime cost is the magic number. When this number is high, you may be in trouble. When it’s low, however, your profits will soar. Here’s how to calculate and manage this important figure.
What are prime costs?
In basic accounting terms, your restaurant’s prime costs are the cost of goods sold (COGS) added to your labor cost. That is, the total cost you pay to provide your products to customers.
For restaurants, these include:
- Food costs, including ingredients
- Beverage costs, including both alcoholic and non-alcoholic drinks and garnishes
- Cost of supplies used alongside food and beverages, such as napkins, straws, coffee filters and so on.
Labor costs should include your waitstaff, bartenders, cooks and the like, but if you have strictly administrative personnel, their salaries should not be included because they don’t contribute directly to your final products. You should, however, include payroll taxes, employee benefit costs and insurance for your employees (worker’s compensation, for example).
To help avoid confusion, prime costs do not include:
- Kitchen equipment, such as a stove or refrigerator
- Repairs made to the building or equipment
- Supplies used in other aspects of your business, such as toilet paper for the bathrooms or printer paper for the office
- Decorations and signage
- Landscaping and maintenance expenses
- Utility bills
Prime costs include only items that contribute directly to your final sales products. For a restaurant, these are food and beverage items only.
Why are prime costs important?
Prime costs are important for any business, but they are especially important in the world of hospitality.
- Prime costs are usually the largest expenses for a restaurant. While restaurants do have overhead expenses, prime costs often make up the bulk of all of the company’s outgoing cash flow.
- Restaurant owners and managers have significant control when it comes to prime costs. You may not be able to change your monthly rent payment, and utility bills fluctuate from one month to the next with little warning, but prime costs are measurable and flexible.
- You can use your prime costs to make decisions about nearly every other aspect of your business. As a restaurant manager, you have a plethora of decisions to make on a daily basis. When you know your prime costs, you can make decisions about scheduling waitstaff, ordering paper products and managing your food and beverage supplies. You’ll easily be able to see areas where you can cut back on expenses or possibly do away with an expense entirely.
How can you calculate your prime costs?
To calculate your prime costs, you will first need to calculate your COGS.
The formula for calculating COGS is:
Beginning Inventory + Additional Purchases Made During the Period — Ending Inventory = COGS
So, if you had $15,000 worth of inventory at the beginning of the period, purchased $6,000 more in food and beverage supplies and ended the period with $12,000 worth of inventory, then your COGS was $9,000 for that period.
Using this number, you can calculate your prime cost. Simply add your COGS to your labor costs to find your total prime cost for the period.
COGS + Labor = Prime Cost
Let’s assume your labor costs were $10,000 for the period. Your total prime costs would be $19,000.
For comparison purposes, however, you’ll want to find the prime costs as a percentage of your sales. To find this percentage, simply divide your total prime costs by your total sales.
Prime Cost / Sales = Prime Cost Percentage
For the example above, if your total sales for the period were $59,375, then your total prime costs add up to 32 percent of your sales.
What should your prime cost percentage be?
Because there are so many variables at play, prime costs vary drastically from one restaurant to another. Obviously, a coffee shop with few expenses will generally have lower prime costs (and thus a higher profit margin) than a five-star restaurant.
There are some averages you can use as an estimate, however.
- Fast-food restaurants generally have the lowest labor costs, averaging around 25 percent.
- Table service restaurants usually average between 30 to 35 percent in labor costs.
- The overall range for all types of restaurants includes labor costs between 25 to 38 percent.
Those numbers include only labor, however. For total prime costs, most experts agree that anything below 60 percent is a great start.
How can you manage prime costs?
The best way to manage your prime cost is by tracking the numbers extensively, creating reports that show your total prime cost alongside your total sales. With this information, you can find the expenses that are taking up most of your budget.
You can then take steps to reduce these expenses, reducing your total prime cost and bumping up your profit.
If this sounds like a lot of extra work, don’t worry!
Sourcery is an accounting solution tailored for restaurants that can do all of this for you. Best of all, it’s automated, and you can access your information anywhere.