What every restaurant operator needs to know about prime cost

Restaurant costs continue to rise, none faster than prime costs.

But what exactly makes up prime cost, and what can you do to get it under control for a healthy bottom line?

If you’re unsure or looking for some ideas, you’ve come to the right place.

First, some hard data.

In its most recent State of the Industry Report, 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.

Here’s what we’ll cover

What is prime cost?

Those are the two main components that make up prime cost.

Specifically, prime cost consists of:

The cost of goods sold (COGS)

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.

COGS doesn’t include overhead (non-inventory related) costs, such as equipment, property expenses, utilities, licenses, franchise fees, etc.

Labor

This includes the wages, salaries, benefits, insurance and taxes associated with the staff directly involved in producing and serving food and beverages.

The prime cost formula is simple:

COGS + Labor costs = Prime cost

Simple, but that doesn’t mean calculating it is easy, as you’ll need to pull in data either manually or using whatever technology you have available, such as inventory management and payroll systems.

As COGS tracks ingredients and materials, a precise COGS number depends on accurate inventory management using this formula:

COGS = (starting inventory plus additional purchases) minus ending inventory.

For example, with a starting inventory of $15,975, additional purchases of $4,650 and ending inventory of $7,525, COGS equals $13,100.

Prime cost targets

Prime cost is typically shown over a week or a month.

The industry benchmark is 60% to 65% for the prime cost ratio, which compares prime cost to total sales.

It’s a key performance indicator as it relates to profitability.

For the example above, let’s assume labor costs of $3,380.

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%.

While the benchmark for prime cost ratio is 60% to 65%, that will change based on the type of restaurant.

QSRs have lower food and labor cost percentages than full-service restaurants, and fine dining establishments have higher labor costs.

Also, the mix of menu items will influence prime costs as liquor is typically a higher margin item.

You can get more granular and precise prime cost guidance by looking at individual menu items.

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.

Other restaurateurs will go through the same exercise and then take a mix of approaches to find their ideal prime cost ratio.

The State of the Industry Report notes that operators took the following actions:

• 60% are shopping for new suppliers
• 53% remove items from their menus
• 45% cut costs in other areas, so that higher prime cost ratios are offset
• 39% adjust portion size
• 37% increase food-waste tracking
• 29% substitute their menus with low-cost items
• 19% increase their purchases from local sources

On the labor side of the prime ratio equation, some restaurateurs are optimizing their staff schedules to reduce costs.

You can create significant efficiencies in different areas of your food and labor cost while maintaining quality and customer service.

Tracking prime cost with technology

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.

Labor management platforms

Labor management platforms provide businesses with advanced tools to streamline scheduling and optimize staffing levels.

These platforms go beyond basic scheduling systems by incorporating data analysis and forecasting capabilities.

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.

These platforms empower businesses to find the perfect balance between customer demands and efficient staffing, ultimately improving operational efficiency and profitability.

Imagine having the ability to predict your busiest times and schedule your staff accordingly.

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.

This not only enhances customer satisfaction but also boosts your bottom line.

Integrated POS systems

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.

By merging data from multiple sources, you can gain real-time insights into sales trends, inventory levels, and labor costs.

This integrated approach enables operators to find areas of improvement, make data-driven decisions, and refine their operations to maximize profitability.

Inventory management platforms

Inventory management platforms are essential for maintaining optimal stock levels and reducing waste.

These platforms provide detailed tracking of inventory down to the ingredient level, tying data seamlessly to recipe creation, food costing, buying, and receiving tasks.

By integrating with POS systems, they offer real-time insights into inventory levels, helping businesses avoid over-ordering and minimize wastage.

Consider the benefits of knowing exactly what you have in stock at any given moment.

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.

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.

Efficient inventory management not only saves money but also enhances the quality and consistency of your offerings.

Business intelligence solutions

Business intelligence solutions, like Sage Intacct, provide businesses with customizable dashboards and reports that offer deep insights into key performance indicators (KPIs) related to prime cost.

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.

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.

Sage Intacct provides a dashboard view of metrics that include:

• Prime cost ratio
• Food cost ratio
• Inventory loss ratio
• COGS ratio
• Diner count
• Average daily sales
• Available seats
• Available seat hours
• Table count
• Average check size
• Revenue per available seating hour (RevPASH)
• Revenue per diner
• Dining transaction count
• Dine-in transaction count
• % Dine-in
• Take-out transaction count
• % Take-out
• Hourly worker count
• Staff labor cost ratio
• Management labor cost ratio
• Total labor cost ratio

Imagine being able to visualize your restaurant’s performance at a glance.

Business intelligence solutions transform complex data into easy-to-understand visuals, helping you quickly find trends and make strategic decisions.

Whether it’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.

Final thoughts

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.

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.

By using these technologies, you can gain deeper insights into your prime cost, streamline operations and optimize profitability.

This enables you to make data-driven decisions, adapt to changing market conditions, and stay competitive in an ever-changing landscape.