{"id":26674,"date":"2024-12-05T07:22:14","date_gmt":"2024-12-05T12:22:14","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=26674"},"modified":"2024-12-05T07:22:15","modified_gmt":"2024-12-05T12:22:15","slug":"restaurant-prime-cost","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/restaurant-prime-cost\/","title":{"rendered":"What every restaurant operator needs to know about prime cost"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-us\/blog\/category\/growth-customers\/\" class=\"entry-header__link\">Growth &amp; Customers<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tWhat every restaurant operator needs to know about prime cost\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2024-12-05T07:22:14-05:00\">December 5, 2024<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"What every restaurant operator needs to know about prime cost\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-us\/blog\/restaurant-prime-cost\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author has-dark-background-color alignfull\">\n\t<div class=\"container\">\n\t\t<div class=\"col\">\n\t\t\t\t\t\t\t<div class=\"co-authors\">\n\t\t\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-us\/blog\/author\/bill-fuesz\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/08\/BillFueszHeadshot-350x350.jpg\" class=\"entry-author__image\" alt=\"Bill Fuesz\" \/>\t\t\t\t<span class=\"entry-author__name\">Bill Fuesz<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n<p>Restaurant costs continue to rise, none faster than prime costs. <\/p>\n\n\n\n<p>But what exactly makes up prime cost, and what can you do to get it under control for a healthy bottom line? <\/p>\n\n\n\n<p>If you\u2019re unsure or looking for some ideas, you\u2019ve come to the right place.<\/p>\n\n\n\n<p>First, some hard data. <\/p>\n\n\n\n<p>In its most recent<em> State of the Industry Report<\/em>, the National Restaurant Association noted that 76% of those restaurateurs surveyed reported higher average food costs, and nearly all (98%) said labor costs are a moderate or significant challenge. <\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-here-s-what-we-ll-cover\">Here&#8217;s what we&#8217;ll cover<\/h4>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#h-what-is-prime-cost\" data-level=\"2\">What is prime cost?<\/a><ul><li><a href=\"#h-the-cost-of-goods-sold-cogs\" data-level=\"3\">The cost of goods sold (COGS)<\/a><\/li><li><a href=\"#h-labor\" data-level=\"3\">Labor<\/a><\/li><\/ul><\/li><li><a href=\"#h-prime-cost-targets\" data-level=\"2\">Prime cost targets<\/a><\/li><li><a href=\"#h-tracking-prime-cost-with-technology\" data-level=\"2\">Tracking prime cost with technology<\/a><ul><li><a href=\"#h-labor-management-platforms\" data-level=\"3\">Labor management platforms<\/a><\/li><li><a href=\"#h-integrated-pos-systems\" data-level=\"3\">Integrated POS systems<\/a><\/li><li><a href=\"#h-inventory-management-platforms\" data-level=\"3\">Inventory management platforms<\/a><\/li><li><a href=\"#h-business-intelligence-solutions\" data-level=\"3\">Business intelligence solutions<\/a><\/li><\/ul><\/li><li><a href=\"#h-final-thoughts\" data-level=\"2\">Final thoughts<\/a><\/li><\/ul><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-prime-cost\">What is prime cost?<\/h2>\n\n\n\n<p>Those are the two main components that make up prime cost. <\/p>\n\n\n\n<p>Specifically, prime cost consists of:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-the-cost-of-goods-sold-cogs\">The cost of goods sold (COGS)<\/h3>\n\n\n\n<p>This includes all the ingredients and related materials (such as disposable food containers, coffee filters, paper goods, etc.) used to prepare and serve menu items. <\/p>\n\n\n\n<p>COGS doesn\u2019t include overhead (non-inventory related) costs, such as equipment, property expenses, utilities, licenses, franchise fees, etc.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-labor\">Labor<\/h3>\n\n\n\n<p>This includes the wages, salaries, benefits, insurance and taxes associated with the staff directly involved in producing and serving food and beverages.<\/p>\n\n\n\n<p>The prime cost formula is simple:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-cogs-labor-costs-prime-cost\"><strong>COGS + Labor costs = Prime cost<\/strong><\/h4>\n\n\n\n<p>Simple, but that doesn&#8217;t mean calculating it is easy, as you\u2019ll need to pull in data either manually or using whatever technology you have available, such as inventory management and payroll systems.<\/p>\n\n\n\n<p>As COGS tracks ingredients and materials, a precise COGS number depends on accurate inventory management using this formula: <\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-cogs-starting-inventory-plus-additional-purchases-minus-ending-inventory\">COGS = (starting inventory plus additional purchases) minus ending inventory.<\/h4>\n\n\n\n<p>For example, with a starting inventory of $15,975, additional purchases of $4,650 and ending inventory of $7,525, COGS equals $13,100.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-prime-cost-targets\"><strong>Prime cost targets<\/strong><\/h2>\n\n\n\n<p>Prime cost is typically shown over a week or a month. <\/p>\n\n\n\n<p>The industry benchmark is 60% to 65% for the prime cost ratio, which compares prime cost to total sales. <\/p>\n\n\n\n<p>It\u2019s a key performance indicator as it relates to profitability. <\/p>\n\n\n\n<p>For the example above, let\u2019s assume labor costs of $3,380. <\/p>\n\n\n\n<p>That gives a prime cost of $16,480. If total receipts come in at $24,752, this gives us a prime cost ratio of 68%.<\/p>\n\n\n\n<p>While the benchmark for prime cost ratio is 60% to 65%, that will change based on the type of restaurant. <\/p>\n\n\n\n<p>QSRs have lower food and labor cost percentages than full-service restaurants, and fine dining establishments have higher labor costs. <\/p>\n\n\n\n<p>Also, the mix of menu items will influence prime costs as liquor is typically a higher margin item.<\/p>\n\n\n\n<p>You can get more granular and precise prime cost guidance by looking at individual menu items. <\/p>\n\n\n\n<p>By analyzing prime costs on a per-menu-item basis, you can identify which items are most profitable and make data-driven decisions about pricing and menu offerings. <\/p>\n\n\n\n<p>Other restaurateurs will go through the same exercise and then take a mix of approaches to find their ideal prime cost ratio. <\/p>\n\n\n\n<p>The <em>State of the Industry Report<\/em> notes that operators took the following actions:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>60% are shopping for new suppliers<\/li>\n\n\n\n<li>53% remove items from their menus<\/li>\n\n\n\n<li>45% cut costs in other areas, so that higher prime cost ratios are offset<\/li>\n\n\n\n<li>39% adjust portion size<\/li>\n\n\n\n<li>37% increase food-waste tracking<\/li>\n\n\n\n<li>29% substitute their menus with low-cost items<\/li>\n\n\n\n<li>19% increase their purchases from local sources<\/li>\n<\/ul>\n\n\n\n<p>On the labor side of the prime ratio equation, some restaurateurs are optimizing their staff schedules to reduce costs.<\/p>\n\n\n\n<p>You can create significant efficiencies in different areas of your food and labor cost while maintaining quality and customer service.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-tracking-prime-cost-with-technology\"><strong>Tracking prime cost with technology<\/strong><\/h2>\n\n\n\n<p>By using technology and integrating data from various sources, businesses can gain valuable insights into prime cost, optimize their operations, and make informed decisions to improve profitability.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-labor-management-platforms\"><strong>Labor management platforms<\/strong><\/h3>\n\n\n\n<p>Labor management platforms provide businesses with advanced tools to streamline scheduling and optimize staffing levels. <\/p>\n\n\n\n<p>These platforms go beyond basic scheduling systems by incorporating data analysis and forecasting capabilities. <\/p>\n\n\n\n<p>By using historical sales data and predictive analytics, restaurant businesses can make informed staffing decisions, ensuring adequate coverage during peak hours while minimizing labor costs during slower periods. <\/p>\n\n\n\n<p>These platforms empower businesses to find the perfect balance between customer demands and efficient staffing, ultimately improving operational efficiency and profitability.<\/p>\n\n\n\n<p>Imagine having the ability to predict your busiest times and schedule your staff accordingly. <\/p>\n\n\n\n<p>With labor management platforms, you can reduce the guesswork and ensure that you have the right number of employees on hand to provide excellent service without overspending on labor costs. <\/p>\n\n\n\n<p>This not only enhances customer satisfaction but also boosts your bottom line.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-integrated-pos-systems\"><strong>Integrated POS systems<\/strong><\/h3>\n\n\n\n<p>The integration of point-of-sale (POS) systems with other business tools, such as inventory management and labor management tools, offers a comprehensive view of prime cost. <\/p>\n\n\n\n<p>By merging data from multiple sources, you can gain real-time insights into sales trends, inventory levels, and labor costs. <\/p>\n\n\n\n<p>This integrated approach enables operators to find areas of improvement, make data-driven decisions, and refine their operations to maximize profitability.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-inventory-management-platforms\"><strong>Inventory management platforms<\/strong><\/h3>\n\n\n\n<p><a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/inventory-management\/\" target=\"_blank\" rel=\"noreferrer noopener\">Inventory management<\/a> platforms are essential for maintaining optimal stock levels and reducing waste. <\/p>\n\n\n\n<p>These platforms provide detailed tracking of inventory down to the ingredient level, tying data seamlessly to recipe creation, food costing, buying, and receiving tasks. <\/p>\n\n\n\n<p>By integrating with POS systems, they offer real-time insights into inventory levels, helping businesses avoid over-ordering and minimize wastage.<\/p>\n\n\n\n<p>Consider the benefits of knowing exactly what you have in stock at any given moment.<\/p>\n\n\n\n<p>Inventory management platforms, such as Margin Edge and Craftable, allow you to track inventory usage, set reorder alerts, and even automate buying when stock levels are low. <\/p>\n\n\n\n<p>This ensures that you always have the necessary ingredients on hand to meet customer demand without overstocking, which can lead to spoilage and increased costs. <\/p>\n\n\n\n<p>Efficient inventory management not only saves money but also enhances the quality and consistency of your offerings.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-business-intelligence-solutions\"><strong>Business intelligence solutions<\/strong><\/h3>\n\n\n\n<p>Business intelligence solutions, like <a href=\"https:\/\/www.sage.com\/en-us\/sage-business-cloud\/intacct\/\" target=\"_blank\" rel=\"noreferrer noopener\">Sage Intacct<\/a>, provide businesses with customizable dashboards and reports that offer deep insights into key performance indicators (KPIs) related to prime cost. <\/p>\n\n\n\n<p>These platforms enable operators to check sales trends, labor costs, and other financial metrics, allowing them to find patterns, spot opportunities, and take proactive measures to drive profitability. <\/p>\n\n\n\n<p>With data visualization and advanced reporting capabilities, you can easily track performance, benchmark against industry standards, and make strategic decisions to improve overall financial health.<\/p>\n\n\n\n<p>Sage Intacct provides a dashboard view of metrics that include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Prime cost ratio<\/li>\n\n\n\n<li>Food cost ratio<\/li>\n\n\n\n<li>Inventory loss ratio<\/li>\n\n\n\n<li>COGS ratio<\/li>\n\n\n\n<li>Diner count<\/li>\n\n\n\n<li>Average daily sales<\/li>\n\n\n\n<li>Available seats<\/li>\n\n\n\n<li>Available seat hours<\/li>\n\n\n\n<li>Table count<\/li>\n\n\n\n<li>Average check size<\/li>\n\n\n\n<li>Revenue per available seating hour (RevPASH)<\/li>\n\n\n\n<li>Revenue per diner<\/li>\n\n\n\n<li>Dining transaction count<\/li>\n\n\n\n<li>Dine-in transaction count<\/li>\n\n\n\n<li>% Dine-in<\/li>\n\n\n\n<li>Take-out transaction count<\/li>\n\n\n\n<li>% Take-out<\/li>\n\n\n\n<li>Hourly worker count<\/li>\n\n\n\n<li>Staff labor cost ratio<\/li>\n\n\n\n<li>Management labor cost ratio<\/li>\n\n\n\n<li>Total labor cost ratio<\/li>\n<\/ul>\n\n\n\n<p>Imagine being able to visualize your restaurant&#8217;s performance at a glance. <\/p>\n\n\n\n<p>Business intelligence solutions transform complex data into easy-to-understand visuals, helping you quickly find trends and make strategic decisions. <\/p>\n\n\n\n<p>Whether it&#8217;s adjusting your menu based on sales data or optimizing labor costs, these tools offer the insights you need to stay ahead of the competition and ensure long-term profitability.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-final-thoughts\">Final thoughts<\/h2>\n\n\n\n<p>With the right accounting platform, you can combine data from multiple sources, including best-of-breed POS systems, inventory management and labor management tools, to get a comprehensive view of prime cost. <\/p>\n\n\n\n<p>In addition, platforms such as Sage Intacct offer customizable dashboards and reports that allow operators to check key performance indicators, find trends, and make data-driven decisions to improve profitability.<\/p>\n\n\n\n<p>By using these technologies, you can gain deeper insights into your prime cost, streamline operations and optimize profitability. <\/p>\n\n\n\n<p>This enables you to make data-driven decisions, adapt to changing market conditions, and stay competitive in an ever-changing landscape.<\/p>\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to our Sage Advice Newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get our latest business advice delivered directly to your inbox.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-ab515c6e-7e90-4c2f-a67e-113872516e8b\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Subscribe<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg\" class=\"single-cta__image\" alt=\"Working from home with tea in hand\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Discover what makes up prime cost, and what restaurants can do to get it under control for a healthy bottom line.<\/p>\n","protected":false},"author":1427,"featured_media":20157,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[46,44],"tags":[4,170,153,168,155],"business_type":[40,41],"lilypad":[],"context":[],"industry":[52,452],"persona":[],"imagine_tag":[466,468,436,444],"coauthors":[609],"class_list":["post-26674","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-growth-customers","category-strategy-legal-operations","tag-business-intelligence","tag-business-strategy","tag-growing-a-business","tag-sage-accounting","tag-staying-competitive","business_type-small-business","business_type-growing-business","industry-food-beverage","industry-hospitality"],"sage_meta":{"region":"en-us","author_name":"Bill Fuesz","featured_image":"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2023\/09\/GettyImages-1446478827.jpg","imagine_tags":{"466":"Food &amp; Beverage","468":"Grow your business","436":"Intacct Accounting","444":"Intacct Medium Business"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice 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