The most successful restaurants coach their management teams to keep a finger on the pulse of finances by regularly revisiting the question, “What is prime cost?” Many restaurants calculate prime cost and leave it to ride for far too long — weeks or even quarterly. However, you need to understand some fundamentals to truly manage your establishment for maximum profitability, as one of the most crucial metrics is the restaurant prime cost.
By understanding, calculating, and managing your restaurant’s prime cost regularly, you can streamline operations and boost profitability while simultaneously ensuring your restaurant remains financially healthy.
What is Restaurant Prime Cost?
Restaurant prime cost is a critical performance indicator that successful restaurant owners use to monitor their business’s financial health. It also plays a leading role in financial reporting. Prime cost allows restaurant operators to make informed decisions to boost profit margins and helps tremendously with budgeting and cost control. Every savvy restaurateur keeps profit margin top of mind, and prime cost allows you to monitor operational inefficiencies continuously.
Prime cost represents the two most significant expenses your restaurant will face:
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Cost of Goods Sold (COGS): All the ingredients and materials used to prepare menu items and beverages.
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Total Labor Costs: Wages, salaries, payroll taxes, and benefits for all employees.
Considering that the two largest expenses are represented here, you should make it a priority for your owners and management team to understand prime cost, so they can dig into the restaurant accounting and identify areas for cost control.
How to Calculate Prime Cost
Calculating prime cost requires adding up your COGS and total labor costs and then comparing this total to your total sales. Here’s how to do it:
COGS + Total Labor Costs / Total Sales
To express prime cost as a percentage of sales, multiply the prime cost ratio by 100:
(COGS + Total Labor Costs / Total Sales) x 100
For example, if your monthly COGS is $20,000, total labor costs are $10,000, and total sales are $55,000, your prime cost percentage would be:
((20,000 + 10,000) / 55,000) x 100 = 55%
What is the Average Restaurant Prime Cost?
Understanding where your prime cost stands in comparison to industry averages will help you set a realistic target
s. The ideal prime cost varies by type of restaurant, so find one of the benchmarks below that is closest to your establishment:
Quick Service Restaurants (QSRs): Restaurants that provide fast service with a casual atmosphere and limited seating typically run at 55-60%.
Full-Service Restaurants: A good benchmark is under 60% for restaurants that provide service to guests from the beginning of their experience to the end. While under 60% is best here, managing labor to accommodate quality service can be a challenge in the 50% range. To make it happen, you will need the right office tools for data analysis and reporting.
Fine Dining Establishments: Providing attentive service from the entire front-of-house team while the kitchen team coordinates a more unique and sophisticated dining experience requires more labor and higher quality. Fine dining restaurants should aim to keep their prime cost below 65% to ensure profitability. Chefs can easily push creative limits in fine dining kitchens, consuming more hours to prep and using ingredients with higher price points, so a close watch on prime cost is imperative.
You should know that these percentages serve as benchmarks, so your team should strive to align targets with your restaurant type to ensure optimal profitability. Scrutinize the prime cost regularly to ensure you operate within a close range to these numbers.
Why is it Important To Control Prime Costs?
Controlling prime costs is essential for several reasons:
- Profitability: High prime costs can erode profit margins. Lowering them increases your bottom line.
- Budgeting: Accurate prime cost tracking assists with creating realistic budgets.
- Menu Pricing: Asking, “What is prime cost?” and understanding it helps tremendously when you are setting competitive menu prices that maintain profitability.
- Operational Efficiency: Regularly calculating prime costs ensures you’re not overspending on labor and keeps you keenly aware of ever-fluctuating food costs, helping your restaurant run in an efficient, streamlined manner.
Strategies to Control Prime Costs
Keeping your prime costs in check is vital for success. To do so, you’ll need to consider the following strategies:
1. Review and Forecast Labor, Then Schedule Accordingly
Scheduling software aligns labor with sales forecasts and employee availability. Automating the scheduling process can reduce labor costs and ensure adequate staffing during peak times. Tools that provide data-driven forecasting can help you identify your establishment’s busiest periods and adjust labor needs accordingly. This strategy prevents overstaffing and keeps guests from wondering why there are only two servers on the floor. One attractive aspect of implementing and actively utilizing scheduling software is the ability to track labor costs in real time, enabling managers to make data-driven adjustments on the fly.
2. Take Control of Your Inventory & Optimize Your Menu
Inventory management software is a game-changer. It tracks product usage, helps you maintain optimal inventory levels, and minimizes waste. Digital tools can assist your staff, allowing them to focus more deeply on concepts like cross-utilization (using the same ingredient across multiple menu items) of ingredients and significantly reducing costs. Using fresh ingredients in several dishes encourages creativity and thoughtful menu planning.
A responsible chef or kitchen manager who understands the bottom line revisits inventory reports and regularly applies numbers to adjust the menu. An essential part of menu optimization is scheduling regular menu reviews to remove underperforming items and prioritizing the ones that move. Being alerted to discrepancies and potential theft is another invaluable benefit of inventory management software in the kitchen, especially in the bar.
3. Leverage Relationships with Your Vendors
Building strong relationships with vendors leads to better pricing and terms. It’s important to schedule time regularly with your reps to review your product mix. Honest, open communication ensures you are all on the same page, keeping you aware of any opportunities to reduce costs.
You’ll need to understand your prime cost when vendors suggest items they may pitch as “value adds.” Entering a conversation with a rep with this knowledge gives you a clear vision of what costs you can cut without disrupting the integrity of the restaurant’s vision or the guest experience.
For instance, vendors may offer discounts for bulk purchases, provide seasonal promotions, or inform you of options you didn’t know existed. Losing money on that Choice Angus ribeye? Perhaps your rep offers you samples of a needled Select Holstein ribeye from a smaller processor. Perform taste tests and include your rep and kitchen so the team can be informed and trust that the management and ownership team cares. Bringing in front-of-house leads during tastings on a potential new product is often appropriate, as their relationships with guests are as invaluable as offering a product they stand behind.
When teams come together with reps and vendors, you create a community that demonstrates your care for not only your bottom line but the purveyor’s product as well. When your vendors stay informed about your needs and limitations, they can help with creative solutions and place you at the top of their list for deals.
Embracing technology and automating BOH operations calculations and analysis is vital as you regularly manage the books, specifically your restaurant prime cost. Technology takes the burden off the lofty goal of analyzing prime cost weekly, allowing you to make small, manageable adjustments. These incremental improvements will position you for consistent success and allow you to stay ahead of issues that hinder business growth and profitability.
