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Written by: Rinaily Bonifacio
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Last updated: 30 October 2024
Running a restaurant is no easy feat, and keeping an eye on your prime cost is crucial for success. Whether you're managing a fine dining establishment or a quick service restaurant, understanding and calculating your restaurant prime cost can make all the difference.
From labor costs and food costs to cost of goods sold and payroll taxes, every aspect plays a part in your overall expenses.
Useful Read: Direct Labor Cost: A Strategic Management Guide
In this blog, we'll break down the prime cost formula, explain how to calculate your restaurant's prime cost, and share strategies to help you maintain a healthy prime cost percentage.
Let's dive into the numbers and find ways to boost your profits while keeping your restaurant's prime cost in check!
Understanding the components of restaurant prime cost
To get a handle on your restaurant's prime costs, it's essential to understand its key components: cost of goods sold (COGS) and labor costs.
Cost of Goods Sold (COGS)
Cost of goods sold includes all the direct costs involved in making your food and beverages. This means ingredients, beverages, and packaging are all part of COGS. Keeping track of these costs helps you manage your restaurant prime cost effectively.
How to calculate COGS
Cost of goods sold includes all the direct costs involved in making your food and beverages. This means ingredients, beverages, and packaging are all part of COGS. Keeping track of these costs helps you manage your restaurant prime cost effectively.
How to calculate COGS
Calculating COGS involves a few steps:
- Beginning Inventory: Start with the value of your inventory at the beginning of the period.
- Add Purchases: Add the cost of all food and beverage purchases made during the period. This includes everything you buy from your food and beverage vendors.
- Subtract Ending Inventory: Finally, subtract the value of your ending inventory. This gives you your total cost of goods sold.
For example:
- Beginning Inventory: $10,000
- Purchases: $5,000
- Ending Inventory: $8,000
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $10,000 + $5,000 - $8,000 = $7,000
Inventory management tips
To keep your COGS in check, practice good inventory management. Regularly count your inventory, track usage, and use inventory management software to avoid overstocking and waste.
Useful Read: The Restaurant Par Inventory Management Guide for Small Business Owners
Labor costs
Labor costs are another significant component of your restaurant's prime costs. These include wages, salaries, employee benefits, and payroll taxes. Managing labor costs is crucial for maintaining a healthy prime cost percentage.
How to calculate total labor costs
Accurately calculating labor costs involves adding up all wages, salaries, employee benefits, and payroll taxes. Here's a simple method:
- Track Employee Hours: Use a reliable system to track employee hours accurately.
- Add Wages and Salaries: Combine all hourly wages and salaries paid during the period.
- Include Employee Benefits: Add the cost of employee benefits like health insurance and paid time off.
- Account for Payroll Taxes: Don't forget to include payroll taxes in your calculations.
For example, if your total wages and salaries are $20,000, employee benefits are $3,000, and payroll taxes are $2,000, your total labor costs would be:
Total Labor Costs = Wages and Salaries + Employee Benefits + Payroll Taxes
Total Labor Costs = $20,000 + $3,000 + $2,000 = $25,000
By understanding and calculating your COGS and labor costs, you can get a clear picture of your restaurant's prime costs and manage them effectively to boost your profit margins.
Why managing prime cost is crucial for restaurant success
Managing your restaurant's prime cost is key to staying profitable and competitive.
Impact on profit margins
Your restaurant's prime costs directly impact your profit margins. The lower your prime costs, the higher your profit margins. Prime costs include both cost of goods sold (COGS) and labor costs. By effectively managing these, you can ensure a healthy net income.
How prime cost affects profitability
Keeping your prime cost percentage in check means more money in your pocket. For example, if you manage to reduce your prime costs by optimizing inventory and controlling labor expenses, you will see a direct increase in your profit margins. For every dollar saved on prime costs, you effectively boost your profit.
Examples of profit margin improvement:
Consider a quick service restaurant that implements strict inventory management to reduce food waste. By cutting their COGS from 35% to 30% of total sales, they significantly improve their profit margin. Similarly, a fine dining establishment that adopts efficient scheduling can lower labor costs without sacrificing food quality, thereby increasing profitability.
Industry benchmarks
Knowing where you stand compared to the industry average is crucial.
Average prime cost percentages
Typical prime cost percentages vary by restaurant type. Quick service restaurants often aim for a prime cost of 60% or less, while full service restaurants might target around 65%. Fine dining establishments, with higher labor and food costs, might have a slightly higher prime cost percentage.
Ideal prime cost targets
For optimal profitability, your ideal prime cost should be under 65%. However, aiming for a lower percentage, like 60%, can give you a competitive edge. Regularly tracking prime cost and adjusting your strategies accordingly can help maintain or achieve these targets.
By understanding the importance of managing your prime costs, you can take actionable steps to ensure your restaurant remains profitable and competitive. Keeping a close eye on your prime cost components, like COGS and labor costs, and comparing prime cost ratios to industry benchmarks can provide valuable insights for your restaurant's success.
Step-by-step guide to calculating restaurant prime cost
Let's break down how to calculate your restaurant's prime cost with some straightforward steps.
Gathering necessary data
To calculate your restaurant prime cost, you first need accurate data.
Sales reports
Accurate sales data is crucial for calculating your restaurant prime cost. Sales reports show your total sales, including food and beverage sales. You can obtain these reports from your POS system. These reports should be detailed, showing daily, weekly, and monthly sales figures to give you a clear picture of your restaurant's performance.
Cost reports
You'll also need detailed cost reports to calculate your prime cost. These include supplier invoices, payroll reports, and any other documents that show your cost of goods sold and labor expenses. Supplier invoices help you track your spending on ingredients and beverages, while payroll reports give you insight into labor costs, including wages, employee benefits, and payroll taxes.
Calculating total COGS and labor costs
Now, let's get into the nitty-gritty of calculating total COGS and labor costs.
Detailed formulas and examples
Calculating COGS:
- Beginning Inventory: The value of inventory at the start of the period.
- Add Purchases: Total cost of purchases made during the period from food and beverage vendors.
- Subtract Ending Inventory: The value of inventory at the end of the period.
COGS Formula:
COGS = Beginning Inventory + Purchases - Ending Inventory
Example:
- Beginning Inventory: $10,000
- Purchases: $5,000
- Ending Inventory: $8,000
- COGS = $10,000 + $5,000 - $8,000 = $7,000
Calculating Total Labor Costs:
- Track Employee Hours: Use a system to accurately track hours worked.
- Wages and Salaries: Total wages and salaries paid.
- Employee Benefits: Costs like health insurance and other benefits.
- Payroll Taxes: Total payroll taxes paid.
Labor Costs Formula: Total Labor Costs = Wages + Employee Benefits + Payroll Taxes
Example:
- Wages: $20,000
- Employee Benefits: $3,000
- Payroll Taxes: $2,000
Total Labor Costs = $20,000 + $3,000 + $2,000 = $25,000
Determining prime cost ratio
Finally, let's determine your prime cost ratio.
Formula for prime cost as a percentage of sales
Prime cost ratio shows how much of your sales are eaten up by prime costs. The formula is:
Prime Cost Percentage Formula:
Prime Cost Percentage = (Total COGS + Total Labor Costs) / Total Sales * 100
Example calculation
Let's walk through a sample calculation using hypothetical data:
- Total COGS: $7,000
- Total Labor Costs: $25,000
- Total Sales: $50,000
Prime Cost Percentage = ($7,000 + $25,000) / $50,000 100
Prime Cost Percentage = $32,000 / $50,000 100
Prime Cost Percentage = 64%
By following these steps and regularly tracking your prime costs, you can ensure your restaurant operates efficiently and remains profitable. Understanding and managing your prime cost is a surefire way to improve your restaurant’s financial health.
Strategies to maintain and reduce prime cost
To keep your restaurant's prime costs in check, you need effective strategies and consistent effort.
Regular tracking and analysis
Monitoring your prime costs frequently is crucial for staying on top of expenses.
Importance of frequent monitoring
Regular review of prime cost data is essential. It helps you spot trends, identify cost spikes, and take corrective actions before things get out of hand. By tracking prime costs weekly or even daily, you can quickly address any issues that arise, ensuring your costs stay within the ideal prime cost targets. This proactive approach helps maintain a healthy prime cost percentage, keeping your restaurant profitable.
Tools and software for tracking
Using the right tools can make tracking prime costs easier. POS systems like Toast and Square provide detailed sales reports, while inventory management software like MarketMan or BlueCart helps track your cost of goods sold (COGS). For labor costs, tools like 7shifts or Deputy can simplify restaurant scheduling and payroll management, ensuring you accurately track labor expenses.
Optimizing inventory management
Efficient inventory management is key to reducing COGS and maintaining a healthy prime cost.
Best practices for inventory control
Implementing best practices for inventory control can significantly lower your prime cost. Regular inventory counts, setting par levels, and using the first-in, first-out (FIFO) method can help manage inventory effectively. Additionally, maintaining good relationships with food and beverage vendors ensures you get the best prices and terms.
Reducing waste and spoilage
Minimizing waste and spoilage is crucial for lowering COGS. Train your staff on proper storage techniques, regularly check expiration dates, and create a waste log to identify areas where waste occurs. By addressing these issues, you can significantly reduce food costs and improve your prime cost performance.
Menu engineering and redesign
Optimizing your menu can have a big impact on your restaurant's prime costs.
Analyzing menu item profitability
To evaluate which menu items are most profitable, analyze each item's food cost percentage and contribution margin. Use sales data to identify best-sellers and high-margin items. This analysis helps you understand which items boost your profitability and which ones might need a rethink.
Adjusting menu items to lower prime cost
Tweaking your menu can help improve cost efficiency. Consider raising menu prices on popular items, reducing portion sizes, or switching to lower-cost ingredients that don’t compromise on food quality. Menu redesign can help align your offerings with a healthy prime cost percentage.
Efficient labor management
Managing labor costs without sacrificing service quality is a delicate balance.
Scheduling strategies
Creating efficient staff schedules is key to controlling labor costs. Use historical sales data to predict busy periods and staff accordingly. Avoid overstaffing during slow times and cross-train employees to handle multiple roles. This approach helps keep labor costs in check while maintaining service standards.
Balancing labor costs with service quality
Maintaining high service quality while managing labor costs is crucial. Focus on employee productivity and efficiency by providing proper training and setting clear performance expectations.
Offering incentives for high performance can also motivate your team to work efficiently, helping you balance labor expenses with excellent service.
By implementing these strategies, you can effectively maintain and reduce your restaurant's prime costs, ensuring your business stays profitable and competitive.
Regular tracking, inventory management, menu optimization, and efficient labor management are all key components of a successful prime cost strategy.
Utilizing technology for prime cost management
Technology can be a game-changer in managing your restaurant's prime costs effectively.
POS systems and integrations
Advanced POS systems come with features that make managing prime costs easier.
Features of advanced POS systems
Modern POS systems offer a range of features that aid in cost management. These include real-time sales tracking, inventory management, and detailed reporting.
By providing instant access to sales data, POS systems help you keep an eye on your total sales and food and beverage sales, which are crucial for calculating prime cost.
How POS integrations help in cost control
Integrating your POS system with other tools can significantly improve cost control. For instance, linking your POS with inventory management software helps track cost of goods sold (COGS) in real-time.
Integration with scheduling tools can also streamline labor cost management by ensuring accurate tracking of employee wages, labor expenses, and payroll taxes.
This seamless flow of information makes it easier to monitor and adjust prime costs.
Accounting software
Using specialized accounting tools designed for the restaurant industry can simplify managing your prime costs.
Benefits of restaurant-specific accounting tools
Restaurant-specific accounting software offers several advantages. These tools are tailored to handle the unique financial aspects of the restaurant business, including tracking prime cost components like COGS and labor costs.
They provide features for managing direct costs, payroll costs, and generating profit and loss statements, making it easier to keep your prime cost percentage within the ideal range.
Automating cost calculations and reporting
Automation can streamline cost management processes, saving time and reducing errors. By automating cost calculations and reporting, you can quickly generate accurate reports on total prime costs, prime cost performance, and prime cost ratio.
This helps in regular tracking and comparing prime cost with industry benchmarks, ensuring your restaurant maintains a healthy prime cost percentage.
Automation also helps in maintaining a consistent prime cost formula and prime cost equation, simplifying the process of calculating prime cost.
Leveraging technology for prime cost management not only enhances accuracy but also saves time, allowing you to focus on other critical aspects of your restaurant business.
Whether it's through advanced POS systems, integrated tools, or specialized accounting software, utilizing these technologies can lead to more effective tracking of prime costs and improved financial health for your restaurant.
Conclusion
Managing your restaurant prime cost is essential for the success and profitability of your restaurant business. By understanding and calculating prime costs, including the cost of goods sold (COGS) and labor costs, you can keep your expenses in check and improve your bottom line.
Using tools like advanced POS systems and specialized accounting software can simplify tracking prime costs and help you maintain a healthy prime cost percentage.
Regularly reviewing your prime cost components, optimizing inventory management, and implementing efficient labor management strategies will keep your prime costs low while maintaining high food quality and service standards.
For restaurant owners, tracking prime cost performance and comparing prime cost ratios to industry averages can provide valuable insights.
Aim for an ideal prime cost target to ensure your restaurant remains competitive and profitable. By following the steps outlined in this guide, you can calculate your restaurant's prime cost accurately and implement strategies to maintain or lower prime cost percentages.
Remember, a healthy prime cost is key to a healthy net income. So, keep an eye on your prime costs, adjust your strategies as needed, and watch your restaurant thrive.
Make workforce management easy with Shiftbase
Managing prime costs can be a challenge, but with the right tools, it's a breeze. Shiftbase is a SaaS solution designed to simplify employee scheduling, time tracking, and absence management. By streamlining these tasks, you can better manage your restaurant's prime costs and improve overall efficiency.
With accurate time tracking and scheduling, you can reduce labor costs and optimize staffing, ensuring your restaurant operates smoothly. Ready to take control of your prime costs?
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