Increasing rent and labor charges present an added challenge for restaurant owners when it comes to money management.
There are all kinds of restaurant costs—some you can anticipate, others that show up at your doorstep unannounced. Today we’re talking about arguably the most popular of the bunch: restaurant prime cost. We’ll unpack what this is, how to calculate it, and why it matters to you and the future of your restaurant.
What is a Restaurant Prime Cost?
Your restaurant prime costs are critical to the success of your business. Because prime costs make up the majority of a restaurant’s core expenses, your profitability quite literally depends on them.
Whether you’re just starting out as a restaurateur and looking after money matters on your own, or you’ve been outsourcing your financials to a trained specialist, financial literacy allows you to make informed decisions that will protect both your restaurant’s health and its profit margin.
Restaurant prime costs combine your product costs (commonly referred to as COGS or “cost of goods sold”) and your people costs. On the product side, you’ll include everything from fresh produce to spirits, coffee filters, and other food and drink-related supplies. Similarly, people costs cover salaries and wages along with taxes, insurance, benefits, and any other expenses associated with maintaining a team of employees. What’s not included are one-time, non-inventory costs like a power bill, equipment repair, or new track lighting for above the bar.
The formula looks a little something like this:
Calculating your restaurant prime cost takes the guesswork out of how much you’re spending on things like inventory, part and full-time staff, and other variables called “controllable expenses.” It’s a simple calculation with powerful implications.
While it’s helpful to understand money out, let’s not forget about money in, AKA your sales. Dividing your product and people costs by your total sales produces what’s called a prime cost ratio:
(COGS + TOTAL LABOR COST)/SALES = PRIME COST RATIO
You can calculate this contextual ratio for virtually any length of time (daily, weekly, monthly, etc.), but as a general rule, the more often you run the numbers, the more reliable an idea you have of how you’re faring financially. If you only check in on your prime cost ratio every quarter, for example, you likely won’t be seeing the full picture. This limits your ability to continue to build cost-savings and other efficiencies into your business.
Keep in mind, too, that the goal here is not just to optimize your prime cost percentage, but also to achieve a consistent result over time.
What is a Good Prime Cost Percentage?
You may be wondering: is there a “magic number” for the restaurant industry to strive towards?
Your “perfect” restaurant prime cost depends on a host of factors: the type of restaurant you own (casual, full-service), your menu, concept, hours of operation, whether you’re paying rent or own your building outright, and so on. For example, if you own a fast-food franchise with self-order kiosks, your prime costs will generally be lower than a swanky Italian eatery in the heart of downtown.
According to Investopedia, full-service restaurants should aspire to a prime cost between 66% and 67% of their total sales, and limited-service restaurants between 60% and 62%.
Gain more insights about your restaurant expenses with our free Food Cost Calculator.
How to Optimize Your Restaurant Prime Cost
If, as you start to pay closer attention to your restaurant prime percentages, you find that you’re consistently outside Investopedia’s target range… what then?
Well, it’s time to hit take a red pen to your books and decide where you might be able to cut back on costs. Before you do, though, ask yourself: are you setting SMART restaurant goals (specific, measurable, attainable, realistic, and time-bound)? Exercises like these are not equivalent to a frenzied closet purge; it’s about data-driven decision making that will inch you closer to your restaurant vision of success.
Here are two ways to chip away at your restaurant prime costs without compromising the entire customer experience:
1. Streamline scheduling
As wages continue to creep up so, too, do labor costs. Restaurants in regions with minimum wage increases have seen their labor costs spike by as much as 12%; this puts restaurateurs in a compromising position, forced to make decisions that will preserve their profit margin but might inadvertently put the restaurant’s reputation at risk.
If, for example, you decided to reduce the total number of staff on the Friday night dinner shift—a proven peak time for your restaurant—what you’ll likely find is the short-term gain (labor savings) is eclipsed by the long-term pain (increased customer wait times, slower table turnover, negative Yelp reviews, and so on).
Even though you can’t control government-mandated labor laws, you can control how you manage them. This is where employee scheduling software solutions like 7shifts comes in. These platforms save time and money, sparing you hours of laboring over the coming weeks’ schedule, seamlessly integrating with your POS and payroll systems and suggesting scheduling solutions based on past performance and sales forecasts.
2. Reduce food waste
Along with ghost kitchens and plant-based menu options, restaurant experts predict waste reduction initiatives (as part of a bigger conversation around sustainability) will be a priority heading into this new decade. Minimizing food waste not only communicates a restaurant’s values to its customers, it also has significant financial (not to mention environmental) benefits.
Restaurant inventory management software offers a simple, streamlined solution to the pervasive problem of food waste. By feeding you real-time data regarding what’s currently in stock, and what your customers are or aren’t ordering, you can easily optimize your inventory and reduce—if not eliminate—expired ingredients destined for the bin.
Accurately estimating your costs and sticking to your budgets is critical in opening and running a successful restaurant. While controlling costs is one of the most challenging tasks in the restaurant business, it’s also the most important. Costs impact your profitability. And if you don’t control them, you risk closing your doors.
Stay on top of your restaurant’s prime costs and focus on optimizing your labor to keep your margins healthy.