How to Calculate Restaurant Prime Costs [Formula]
Calculating restaurant prime costs are critical to managing a profitable restaurant business.
Prime costs make up the lion’s share of a restaurant’s expenses. Therefore, knowing how to control them can mean the difference between a successful restaurant and a failing restaurant.
In order to control your prime costs, it’s important to first understand what restaurant prime costs are, what your target prime cost ratio should be, and ultimately what actions you can take in order to track performance against your target prime cost ratio.
What are Restaurant Prime Costs?
In the most simple terms, prime costs are the combined costs of a restaurant’s products and its people.
In other words, it is the sum of the total cost-of-goods-sold (COGS), which would include pour costs (for non-alcoholic beverages, beer, liquor, and wine) and restaurant food costs, and the total labor costs, which would include salaries and wages, taxes, benefits and insurance.
These “prime” expenses are under the direct control of management and are referred to as “controllable expenses.” A restaurant’s “controllable expenses” present both the greatest exposure for losses as well as the greatest opportunity to improve your restaurant’s profits.
Therefore, having accurate, timely insight into prime costs and understanding the factors that influence restaurant prime cost are critical for owners, finance folks, managers, chefs, etc. By itself, however, the sum of COGS and labor costs is not all that helpful. Instead, we need to evaluate the Prime Cost Ratio.
Restaurant Prime Cost Ratio
What’s even more important than calculating restaurant prime costs is knowing how to calculate your restaurant’s prime cost ratio. Your prime cost calculation only tells you the money that is going out the door. To make the prime cost calculation valuable, we need to put the number into context.
We need to know the proportion of the money that is coming in the door (sales revenue) compared to the money that is going out the door.
In other words, the prime cost ratio represents the ratio of your COGS and labor costs relative to your sales revenue. It’s one of the most important metrics that your restaurant should track and manage.
To calculate prime cost ratio, you must divide your prime costs (COGS + labor) by your sales revenue for the same period. You can do this on daily, weekly, monthly, quarterly and annual basis to gain insights from historical trends, seasonality, etc.
Let’s say you operate a full-service casual restaurant concept.
Each year, your restaurant generates $750,000 in annual sales revenue. The total cost to execute your menu (food, beverage and liquor, if applicable) is $232,500 and the total labor cost (front-of-house and back-of-house) for the year is $210,000.
To calculate the restaurant’s prime cost, you would divide the sum of the controllable expenses by the sales figures, giving you a prime cost ratio of 59%.
What Is a Good Prime Cost Ratio?
Keeping with the example above, let’s assume that your restaurant has a 59% prime cost ratio. This is actually a terrific ratio for a full-service casual restaurant!
However, what might be a good restaurant prime cost ratio for one restaurant may not be the same for another. It all depends on the concept, the operations, the level of service, menu, etc.
Typically, restaurant prime cost ratios can range between as low as 50% up to 70%. Full-service restaurants tend to be higher because of higher quality (thus higher priced) ingredients as well as higher labor costs (bigger, more skilled teams). Limited-service restaurants are typically on the lower end of the spectrum.
According to some industry averages offered by the folks at RestaurantOwner.com, a full service restaurant’s prime costs are typically around 65% or less as a percentage of total sales and a limited-service restaurant’s prime costs are typically around 60% or less as a percentage of total sales.
As a general industry benchmark, 60% or lower is a good benchmark to keep in mind – with half attributed to COGS (30%) and half attributed to labor (30%).
Knowing What’s Best for Your Restaurant
In order to know what a good restaurant prime cost ratio would be for your restaurant, you really have to drill down into your numbers. Ultimately, you want this number to be as low as possible without jeopardizing the quality of the food or the experience that your guests have come to expect.
To do so, you have to capture and compare prime costs from week to week or even day to day. If you were to only look at the data from an annual basis, you would be missing out on how the costs trend from week to week and where the opportunities for improvement are hidden.
Are food costs trending upwards? Are rising wages causing labor costs to increase consistently? How do this year’s numbers compare to the same period last year?
Having a tool like xtraCHEF will make this exercise much easier. Being able to digitize vendor invoice data, closely monitor ingredient prices, and categorize and analyze food costs allows operators to easily identify where opportunities to cut costs and improve margins are hiding.
You can also reduce labor costs by automating manual, time-consuming back-of-house processes like invoice data entry, placing orders with vendors, managing inventory, etc. Keeping your time focused on higher priority activities will make them more productive and your business more profitable.
Getting down to the details of your restaurant’s prime costs is a critical exercise and is essential to being able to monitor the financial health of your business.
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