How To Calculate Your Restaurant Prime Cost Properly
Robert Baratheon calls it counting coppers (yes I am doing a Game of Thrones reference) and it is the most dreaded part of the business for most restaurant owners. However, it can be the difference between the life and death of your restaurant. So here is a breakdown of what is Prime Cost and how to properly calculate it.
What Is Prime Cost
Prime Cost is the total of your cost of goods sold + the total cost of labour divided by your sales. Here is an example
$20000(COGS) + $17000 (LABOR)
Prime Cost = 57%
What Is COGS The first step to properly knowing your restaurant COGS is to have a proper inventory system in place (more on that in an upcoming blog post) as you need to know what you have in the restaurant, what the restaurant has bought and what the restaurant has sold.
First step is to account for what you have in stock so you need to count all your food, alcohol and non-alcoholic (NAB) products at the beginning of your restaurant fiscal week. (note here - having a system is way more efficient than running excel documents or scratch notes) After you have counted everything and attributed the proper cost of each item as per what you actually pay for them, it will give you a total. For this exercise, let's say that the total is $15000.
The second step is to calculate how much product your restaurant purchased for that same fiscal week. These should be products that are used to create your offerings to your restaurant guests (more on this below). For this exercise, let's say that the total purchases for the restaurant are $10000.
The third step coincides with the first step of the next fiscal week. At the end of the current fiscal week (and beginning of the other), you repeat step 1 in counting your full inventory. For this exercise, let's say that the total is $5000.
Here is how the equation looks:
$15000 (starting inventory) + $10000 (purchases) = $25000 (total inventory)
$25000(total inventory) - $5000 (ending inventory) = $20000 (COGS)
$20000 (COGS) / $65000 (SALES) = 30.76%
What Are My Labor Costs
Restaurant labor costs are notoriously miscalculated all the time. Most restaurant owners and/or managers forget that there is a cost to running a payroll, benefit contributions, government as well as medical contributions above the pay of the employee.
As a side note here, we recommend to separate your labor costs into 3 lines, front of house (FOH), back of house (BOH) and management/ownership (salaried). This does not change how you calculate labors costs but it does give you a great idea of which part of your restaurant needs work if any.
Here is how the equation looks:
$5000 (management) + $3000 (FOH) + $7000 (BOH) + $1500 (contributions) + $500 (benefits) = $17000 (Total Labor)
$17000 (Total Labor) / $65000 (SALES) = 26.15%
What Is Not Included In Prime Cost
Restaurant Prime Cost does not include any operational costs, capital expenses, renovations, marketing and rent. Those should be kept tracked of as well (new blog post coming on this subject) as it gives you the full picture however, Prime Cost allows you to get a gauge of your restaurant profitability and is usually the one expense that tends to run amok which is why there is so much hype around Prime Costs.
What Is My Target Prime Cost
Conventional industry standards says that a restaurant Prime Cost should be at 60%. We at 8590 and at our Restaurant Consulting Firms encourage restaurant owners and managers to build their strategies, menus, pricing and labor management to reach below 50% costs. (new blog post coming on this subject)
When Should I Calculate Prime Cost
Restaurant Prime Cost should be calculated weekly at a minimum. Some high volume restaurants do it daily in order to keep their targets and goals in line with day to day fluctuations. For most restaurants though, weekly is quite sufficient and allows the management and ownership team to modify the schedule and orders for the upcoming week in order to stay within targets.
A side note here, there are multiple software, apps and companies that offer solutions for each of these steps, there are even one stop solutions available at very reasonable prices. Don't forget, time is worth a lot more than money.