Running a restaurant successfully is about great food, customer service, and managing your finances smartly.
The concept of restaurant prime cost is a critical factor that directly impacts your restaurant’s bottom line. It’s like a secret recipe for making your restaurant profitable.
In this article, we’ll explain the restaurant’s prime cost, its components, and how to calculate it.
What are prime costs?
A restaurant’s prime cost consists of its two essential costs:
- the cost of goods sold (COGS), which includes expenses related to food and beverages,
- the labor costs (wages and benefits) for the food preparation and service staff.
Prime costs, often called direct costs, encompass expenses directly tied to producing or providing goods and services.
Calculating the prime cost helps restaurant owners and managers track the fundamental expenses directly impacting their profitability and operational efficiency.
How to calculate your prime costs
Calculating prime cost requires tracking two essential costs:
- the cost of goods sold (COGS)
- the labor costs (wages and benefits)
The prime cost formula
To calculate the restaurant’s prime cost, use the following prime cost formula
Total Cost of Goods Sold + Total Labor Cost = Prime Cost
Let’s look at the example of calculating the restaurant prime cost. Firstly, we need to determine the values of the COGS and the labor costs, which are the prime cost components.
Step 1. Calculating the cost of goods sold
The Cost of Goods Sold (COGS) represents the direct costs incurred by a business in producing or purchasing the goods or services it sells during a specific period. This number signifies the precise quantity of food and beverages consumed in the production of your food and beverage sales.
In the case of restaurants, the examples of the cost of goods sold include:
- Food costs: Purchasing ingredients such as vegetables, meats, seafood, grains, and spices used in menu items.
- Beverages: The cost of purchasing alcoholic and non-alcoholic beverages served in the restaurant.
- Packaging materials: Costs associated with packaging items for takeout or delivery orders, such as containers, bags, and utensils.
- Condiments and sauces: The cost of condiments, sauces, and garnishes used to enhance the flavor of dishes.
- Cleaning supplies: Expenses for cleaning supplies used in the kitchen and dining areas, such as cleaning agents and paper towels.
- Disposable tableware: Costs for disposable plates, cups, napkins, and utensils used for customer service.
- Food packaging labels: Expenses for labeling and packaging materials used to brand and present food items.
- Expendable kitchen supplies: Cost for aluminum foil, parchment paper, and kitchen towels.
The formula to calculate the Cost of Goods Sold (COGS) is as follows:
The Cost of Goods Sold (COGS) = Beginning Inventory Value + Purchases During the Period – Ending Inventory Value
Suppose you run a small restaurant and want to calculate the COGS for the month of July. You know the following values:
- Beginning inventory value (July 1st): $5,000
- Purchases during July (food and beverages): $10,000
- Ending inventory value (July 31st): $4,000
Now, you can use the COGS formula:
COGS = Opening Inventory Value + Purchases During the Period – Closing Inventory Value
COGS = $5,000 + $10,000 – $4,000
COGS = $11,000
In this example, your COGS for the month of July is $11,000. This means that in July, you spent $11,000 on the food and beverages used to produce the meals and drinks sold in your restaurant.
Step 2. Calculating labor costs
Labor costs in a restaurant refer to the expenses associated with employing and compensating the staff involved in various aspects of food preparation, service, and restaurant operations.
In the case of restaurants, restaurant labor costs include, among others:
- Employee wages and salaries: This includes the base pay that restaurant employees receive for their work. It covers both front-of-house and back-of-house staff.
- Overtime pay.
- Benefits: Costs associated with providing employee benefits, which, for example, may include:
- health insurance,
- retirement plans,
- paid time off (vacation, sick leave)
- Payroll taxes and payroll costs
- Training and development: Expenses related to training new and existing employees.
- Uniforms and work attire costs
- Staff meals: The cost of providing meals to employees during their shifts.
- Bonuses and incentives: Additional payments or rewards given to employees for their achievements.
- Employee turnover costs: Costs associated with recruiting, hiring, and training new employees to replace those who leave the restaurant.
The formula for calculating a restaurant labor cost is as follows:
The Total Labor Costs = Total Employee Wages + Employee Benefits + Payroll Taxes + Training Costs + Other Labor – Related Expenses
Suppose you run a small restaurant and want to calculate the total labor costs for the month of July. You know the following values:
- Total Employee Wages (salaries and hourly wages): $15,000
- Employee Benefits (health insurance and retirement contributions): $2,000
- Payroll Taxes (Social Security, Medicare, and unemployment taxes): $1,500
- Training Costs (employee training programs and materials): $500
- Other Labor-Related Expenses (staff uniforms and bonuses): $800
To calculate the labor cost for July, add up all these components:
Labor Cost = Total Employee Wages + Employee Benefits + Payroll Taxes + Training Costs + Other Labor-Related Expenses
Labor Cost = $15,000 + $2,000 + $1,500 + $500 + $800
Labor Cost = $19,800
In this example, the total labor cost for your restaurant in July is $19,800.
For more information on labor costs, check our article with tips on how to control & reduce labor costs.
Step 3. Calculating the prime costs
Having calculated both the COGS and labor costs for your restaurant, you can calculate restaurant prime cost.
In our example, the calculations would be as follows:
Prime Cost = Total COGS + Total Labor Cost
Prime Cost = $11,000 + $19,800
Prime Cost = $30,800
To interpret this number, we need to calculate the prime cost percentage.
The Prime Cost Percentage is a financial metric that shows how much of a restaurant’s total sales revenue is used to cover its prime costs, including the COGS and labor costs.
The formula to calculate the restaurant prime cost ratio is Prime Cost Percentage = (Prime Costs / Total Sales Revenue) x 100
We know that in the case of our example restaurant, a restaurant’s prime costs are $30,800. Suppose the total sales revenue for the same period is $60,000.
Using the prime cost equation, let’s calculate the restaurant’s prime cost percentage.
Prime Cost Percentage = (Prime Costs / Total Sales Revenue) x 100
Prime Cost Percentage = ($30,800 / $60,000) x 100
Prime Cost Percentage ≈ (0.5133) x 100
Prime Cost Percentage ≈ 51.33%
In our example, the prime cost percentage for the restaurant is approximately 51.33%. This means about 51.33% of the total sales revenue covers the prime costs.
Skilled restaurant owners can look closely at how much it costs to make each menu item, dish, or group of menu items. This helps them quickly figure out if some items are making enough money or if they should consider raising menu prices or removing them from the menu.
Why does prime cost matter?
While analyzing the restaurant’s profitability and thinking of improving its financial condition, restaurant owners have two basic ways to improve its profits. They can:
- Increase restaurant sales
- Reduce the prime costs
Many restaurant owners concentrate on improving sales to increase their restaurant’s profit. For that purpose, they implement a food ordering system for restaurants, introduce a loyalty program, and use different marketing tools (for example, restaurant email marketing and/or restaurant SMS marketing).
These are undeniably good methods for increasing restaurant sales, contributing to increased generated profits. However, we cannot forget about restaurant prime costs.
Is it good to increase restaurant sales if you don’t look at your costs? It’s not. Why? You may, for example, waste food daily (say $2-3 a day) that, in the long run, will cost you almost $100 monthly, which you could completely avoid.
You may have a surplus of staff when there are no guests in your restaurant or only one table is occupied. This is also worth looking into to reduce your prime costs.
The cost of ingredients you use for preparing your most popular dishes increased? Look for other food and beverage vendors. You can find a supplier who offers better pricing, and you will maintain the same food quality in your restaurant at lower costs.
Calculating and analyzing your restaurant’s prime costs will help you understand your restaurant profit margin. When you regularly check your prime costs, you’re ensuring you’re not losing money when making and serving food.
How frequently should you calculate your prime cost?
As we already know, tracking prime cost is very important to ensure your restaurant’s profitability.
The frequency of calculating your prime cost can vary depending on the size and complexity of your restaurant and your specific business needs. However, it’s generally recommended to calculate your prime cost regularly.
We recommend calculating prime costs weekly to watch the prime cost performance, as regular monitoring and adjustment of prime costs are essential for effective cost control and financing a restaurant. Thanks to that, you can maintain a healthy prime cost in your restaurant.
What is the average restaurant’s prime cost?
The average restaurant prime cost can vary widely depending on various factors, including the type of restaurant, location, size, menu, pricing strategy, and overall management. There is no fixed average prime cost that applies to all restaurants.
Quick service restaurants generally maintain lower percentages for both food and labor costs compared to full-service restaurants. On the other hand, fine dining establishments typically experience higher labor cost percentages on a day-to-day basis.
According to RestaurantOwner, in table service restaurants, it’s commonly recommended that the prime cost should not exceed 65 percent of total sales. Some well-established casual dining chains keep their prime cost even lower, at 60 percent or less.
However, for most independently owned table service restaurants, achieving a prime cost within 60 to 65 percent of sales can still lead to a healthy net income.
What is the ideal prime cost?
Aiming for a prime cost of 60% or less (ideally 55%) is a good goal in the restaurant business. Half of this cost should come from ingredients, and the other half should come from employee wages and related labor expenses.
The ideal prime cost for a specific dining establishment depends on its unique circumstances, restaurant goals, and market conditions.
Restaurant owners and managers should regularly analyze their financial data and adjust their prime cost management strategies to maintain profitability and prime cost targets.
How to lower your restaurant’s prime costs?
Use the strategies we described below to lower your restaurant’s prime costs.
1. Conduct periodic cost analyses for your restaurant
Continuously analyze your prime costs and compare them to industry benchmarks. Identify areas where costs are higher than desired and take corrective action. Invest in restaurant analytics software to manage your restaurant’s finances.
2. Negotiate pricing with your vendors
When buying in bulk, ask your suppliers for better prices, discounts, or deals. Check and compare supplier prices to ensure you get the most value for your purchased ingredients.
3. Design a functional menu
Use menu engineering to analyze and adjust your menu to maximize your restaurant’s profitability. Consider reassessing and changing the sizes of dishes, recipes, and ingredients to lower your food costs while maintaining quality.
- How To Make a Restaurant Menu (11 Steps)
- Menu Categories: How To Optimize & Personalize Them
- Menu Descriptions: How To Write a Menu (With Examples)
- Menu Engineering: How To Build Profitable Restaurant Menu
- Restaurant Menu Pricing: 10+ Tips to Boost Menu Profit
- 50 Best Restaurant Menu Design Examples & Ideas
4. Manage your restaurant’s inventory
Implement strict inventory control practices to minimize food wastage and prevent over-purchasing. Use restaurant inventory management software to track and monitor inventory levels effectively.
Check out the list of Top 10 Restaurant Inventory Management Software.
5. Optimize your labor
Schedule labor based on how many customers you actually have to avoid having too many employees during quiet times. For that purpose, you can use restaurant scheduling software.
Moreover, you can also teach your employees to do different jobs so that you don’t need to hire extra staff unnecessarily.
6. Train your staff
Teach your kitchen and serving staff to reduce food waste, manage portion sizes, and use ingredients wisely. Foster a culture where your team is mindful of costs and resourceful.
7. Concentrate on employee retention
High employee turnover can lead to more spending on training and decreased efficiency. Concentrate on retaining employees by implementing strategies that help to reduce labor costs and turnover in a restaurant.
8. Run promotions
Plan promotions and specials based on ingredients nearing their expiry date to avoid food waste and lower prime cost percentage.
9. Listen to your customers
Pay attention to what customers say and make changes to your menu and service based on their feedback. Happy customers are more likely to come back, helping boost revenue.
10. Invest in portioning utensils and containers
Investing in portioning utensils and containers is a cost-effective way for restaurants to control ingredient measurements, reduce food wastage, and maintain consistent portion sizes, ultimately contributing to lower prime costs.
- Prime cost is a fundamental financial metric for restaurants, representing the combined costs of goods sold (COGS) and labor expenses. It directly impacts profitability and requires careful management.
- Prime cost includes purchasing ingredients and beverages (COGS) and labor costs for food preparation and service. These elements make up the bulk of a restaurant’s expenses.
- Regularly calculating prime cost helps restaurant owners assess their financial performance, control expenses, set menu prices effectively, and maximize profitability.
- Restaurants’ average prime cost percentages are 60-65% of total sales.
- By managing COGS and labor costs efficiently, restaurants can enhance their financial health and remain competitive in the restaurant industry.
Frequently Asked Questions (FAQ)
The prime cost of a restaurant is the total of two main expenses: the cost of ingredients used in preparing dishes and beverages (COGS) and the labor costs of employees involved in food preparation and service.
As a rule of thumb, many restaurant professionals suggest striving for a prime cost representing 60% or less of the total sales revenue. This widely recognized standard plays a crucial role in maintaining a profitable margin and typically consists of the cost of goods sold (COGS) and labor costs, each contributing around 30% of the total sales.
The formula to calculate prime cost is as follows:
Prime Cost = Cost of Goods Sold (COGS) + Labor Costs
To find the prime cost, you just need to sum up the total cost of goods sold (COGS) and the total labor costs for the chosen timeframe, whether weekly, monthly, or yearly.
The total prime costs of a restaurant are the added-up expenses for both the cost of goods sold (COGS) and labor costs during a specific time, like a week, month, or year. These costs cover everything directly related to making and serving food and drinks in the restaurant for that period.
Food Cost and Prime Cost are two significant financial measures in the restaurant industry, each focusing on distinct aspects of a restaurant’s expenses:
- Food cost – Food cost is the money spent on buying and preparing the ingredients and drinks used in restaurant dishes. It’s all about the cost of the food and drinks on the menu.
- Prime cost – Prime cost, on the other hand, is a broader financial measure. It includes the cost of ingredients (COGS) and the wages, salaries, and benefits of staff directly involved in food prep and service.