Have you ever wondered why some service restaurants can offer lower prices than others, even with seemingly similar menus? The answer lies in a key metric called prime cost.
This article unveils the secrets behind prime cost and how it impacts your service restaurant's success. Explore how to calculate it, analyze its components, and discover strategies for keeping your prime cost under control.
What is Prime Cost in a Restaurant?
Prime cost is a significant financial metric in the restaurant industry, representing the combined total of Cost of Goods Sold (COGS) and labor costs. Prime costs account for 60-70% of a restaurant's total expenses. Restaurant operators must monitor and manage prime costs to improve profitability and operational efficiency.
Good Prime Cost Percentage for a Restaurant
A good prime cost percentage for a restaurant is between 55% and 65% of total sales. For full-service restaurants, aim for 60-65%. Quick-service restaurants should target around 55%. Keeping prime costs within this range helps ensure profitability without compromising food and beverage sales quality.
Components of Prime Cost
Cost of Goods Sold (COGS)
COGS includes the direct costs of producing the food and beverages sold by your restaurant. This covers the cost of raw ingredients and beverages. Effective inventory management and supplier negotiations are key to keeping COGS under control. Tracking food cost percentages can help in maintaining food quality without compromising profitability.
Further reading: How to Create a Restaurant Income Statement: Guide for Understanding Restaurant Profit and Loss Analysis
Labor Costs
Labor costs cover wages, salaries, and benefits for your staff, both front-of-house and back-of-house. Managing labor costs involves optimizing staff schedules, reducing overtime, and boosting productivity. It includes payroll costs, payroll taxes, and employee benefits such as health insurance. Calculate your labor cost to keep your prime cost within the desired range.
Importance of Managing Prime Cost
Enhancing Profit Margins
By keeping prime costs under control, restaurants can improve their profit margins. Even small reductions in prime cost can lead to significant profitability improvements. Achieve a prime cost that aligns with your profitability goals by focusing on increasing efficiency and reducing waste.
Operational Efficiency
Monitoring prime costs helps identify inefficiencies in purchasing, inventory management, and labor deployment. This allows for better resource allocation and improves operational strategies. Full-service restaurants and quick-service restaurants alike benefit from effective cost control measures. Use POS systems to track prime cost as a percentage of total sales.
Budgeting and Forecasting
Accurate tracking of prime costs is essential for effective budgeting and financial forecasting. It aids in making informed decisions about pricing, menu changes, and cost-cutting measures. Comparing prime cost ratios and prime cost percentages to industry averages can help set benchmarks and goals. Regularly calculate your restaurant's prime to stay on top of financial performance.
Strategies to Control Prime Cost
Inventory Management
Implement a robust inventory management system to reduce wastage and theft. Track usage closely to know your prime cost and order only what you need. This prevents overstocking and keeps costs measurable.
Supplier Negotiations
Build strong relationships with suppliers and negotiate better prices. Bulk buying and long-term contracts can lower your prime cost. Always compare supplier prices and consider local vendors to cut delivery costs, benefiting your bottom line.
Further reading: Learn About the Benefits of a Chart of Accounts for Restaurant
Efficient Scheduling
Use scheduling software to align staff hours with peak times, reducing unnecessary labor costs. Cross-train employees to handle multiple roles, providing flexibility and reducing the need for additional hires. This is vital for keeping restaurant labor costs in check.
Menu Engineering
Analyze your menu items to identify high-margin options. Adjust menu prices or remove low-profit items. Introduce dishes that are cost-effective to make but can be sold at a premium. Regularly review and update your menu to maintain profitability and manage the largest expense in your restaurant business.
Tools and Technologies for Prime Cost Management
POS Systems
Modern POS systems provide real-time data on sales and inventory, helping you track the cost of sales accurately. They enable better order management, reducing over-ordering and helping you calculate prime cost effectively.
Scheduling Software
Labor scheduling software helps plan shifts efficiently, cutting down on overstaffing and minimizing labor costs. It ensures compliance with labor laws and optimizes total labor costs, which are a significant part of your restaurant's prime cost.
Accounting Software
Integrated accounting software simplifies the tracking of expenses and revenues, offering a clear view of your financial health. It helps monitor prime costs, providing insights for better decision-making and assisting in restaurant accounting.
How to Calculate Prime Costs in Restaurants
Step-by-Step Calculation
- Calculate Cost of Goods Sold (COGS):
- Beginning Inventory: Start with the inventory value at the beginning of the period.
- Add Purchases: Include the cost of all food, beverages, and consumables bought during the period.
- Subtract Ending Inventory: Deduct the ending inventory value.
- COGS Formula:
- COGS = (Beginning Inventory + Purchases) − Ending Inventory
- Calculate Labor Costs:
- Wages and Salaries: Include all wages and tips.
- Employee Benefits: Add costs for health insurance, retirement contributions, etc.
- Payroll Taxes: Include Social Security, Medicare, and other payroll taxes.
- Total Labor Costs:
- Total Labor Costs = Wages and Salaries + Employee Benefits + Payroll Taxes
- Add COGS and Labor Costs:
- Prime Cost:
- Prime Cost = COGS + Total Labor Costs
- Calculate Prime Cost as a Percentage of Sales:
- Prime Cost Percentage:
- Prime Cost Percentage = (Prime Cost / Total Sales) × 100
Frequency to Review Restaurant's Prime Cost
Review your restaurant’s prime cost at the end of the week. Regular monitoring helps catch issues early and allows for timely adjustments. This practice keeps costs in check and maintains a healthy bottom line. Frequent reviews also aid in adjusting menu prices, managing labor, and optimizing inventory.
Prime Cost in Financial Statements
- Restaurant P&L: Your restaurant's profit and loss (P&L) statement will show prime costs under expenses. This helps in evaluating the financial health of the restaurant.
- Monthly Cost Tracking: Keeping track of prime costs monthly allows operators and managers to make informed decisions on raising menu prices or lowering prime costs without compromising quality.
Impact on Business
- Fine Dining vs. Casual Restaurants: Fine dining establishments often have higher prime costs due to quality ingredients and skilled labor. In contrast, casual restaurants have lower prime costs.
- Operational Adjustments: Learning how to calculate your restaurant’s prime cost can help in making necessary adjustments to keep your restaurant profitable.
- Consult Your Accountant: For accurate financial management, always ask your accountant for detailed analysis and advice.
Role of Accountants and Bookkeepers in Calculating Prime Cost
Accountants' Role
- Financial Recording and Reporting: Ensure accurate recording of all financial transactions related to inventory and labor costs. Prepare detailed reports breaking down COGS and labor expenses.
- Cost Analysis: Identify cost trends and variances, providing insights for cost-saving and efficiency improvements.
- Compliance and Taxation: Manage payroll taxes and ensure compliance with tax regulations. Prepare necessary financial statements for tax filings and audits.
Bookkeepers' Role
- Daily Transaction Recording: Record sales, purchases, payroll, and other financial transactions daily to maintain up-to-date financial records.
- Inventory Management: Track inventory levels, purchases, and usage to ensure accurate COGS calculations and perform regular inventory audits.
- Payroll Management: Process payroll and maintain records of hours, overtime, and tips for accurate labor cost calculations.
- Data Entry and Reconciliation: Enter financial data into accounting software and reconcile bank statements regularly to ensure accuracy.
Key Takeaways
- Prime Cost Formula: Use the prime cost formula to calculate your prime cost by adding food and labor costs.
- Components: Prime cost includes restaurant food and beverage costs and labor costs.
- Calculation: To calculate your prime cost, total prime cost includes invoices from food and beverage vendors and employee wages.
- Importance: Prime cost is one of the most critical metrics for restaurant owners to monitor.
- Target Percentage: Aim for a prime cost of 50 - 60% of total sales for effective restaurant management.
- Tracking: Labor costs include wages, benefits, and payroll taxes for a certain period of time.
- Overhead Costs: Overhead costs are not part of prime costs but are essential for overall financial health.
- Efficiency: Restaurants have lower prime costs when they effectively manage food and labor without wanting to compromise on quality.
How can Taxfyle help?
Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.
At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.
