If you’re a restaurant owner and you’re sitting here wondering, “What is prime cost?” then you’ve come to the right place!
Prime cost is the grand total of your total cost of goods sold, such as your food and liquor costs (pour costs) and total labor cost. In order to accurately know your prime cost number, it is essential that you are consulting with a restaurant accounting expert and are on an accrual restaurant accounting system.
You now know that your restaurant’s prime cost is the total of your cost of goods sold and total labor costs.
Total Cost of Goods + Total Labor Cost = Prime Cost
However, there is still more to the equation to get an accurate percentage of your prime cost. You still need to compare your prime cost to your total sales.
Prime Cost / Total Sales = Prime Cost as a Percentage of Sales
The total cost of goods refers to all products that are purchased for sale in your restaurant. To calculate the total cost of goods for your restaurant, there is a specific formula you will need to follow.
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)
Total labor costs refer to all your labor expenses for an individual employee, including employee taxes, benefits, food discounts, insurance, etc. It’s important not to forget to include the additional employee expenses in your labor costs because they will alter your total labor cost expenses. Remember to include the following in your total labor costs:
You’re the restaurant owner of a pizzeria, and you want to know your restaurant’s prime cost for the previous month, so you pull out your sales reports to review your total costs of goods. Upon reviewing your sales report your see that your total cost of goods was $40,000. You then turn to your labor reports and see that the total labor you spent on your employees was $4,500. However, you still need to factor in the additional employee expenses mentioned above, so you estimate that your labor costs were around $5,500. Remembering the equations mentioned above, you can now begin to calculate your restaurant’s prime cost.
Total Cost of Goods + Total Labor = Prime Cost
Total Cost of Goods = $40,000
Total Labor Cost = $5,500
$45,000 + $5,500 =$45,500
Prime Cost = $45,500
Figuring your prime cost can seem simple since it’s just adding two different expenses together. It can be simple, but you first need to know where to look and how to read your reports to accurately figure out your restaurant’s prime cost.
Now that you know your restaurant’s prime cost, you’re ready to figure out your prime cost as a percentage of your sales.
After reviewing your sales report, you see that your sales for last month were equal to $80,000, which is the number that you’ll use in the rest of the formula to calculate your prime cost as a percentage of sales.
Prime Cost / Total Sales = Prime Cost as a Percentage of Sales
Prime Cost = $45,500
Total Sales = $80,000
$45,500 / $80,000 = 56%
Prime Cost as a Percentage of Sales = 56%
We’ve always associated a high percentage with success. However, when it comes to your restaurant’s prime cost, this isn’t the case. The higher your sales and the lower your cost of goods and labor are, the lower your prime cost percentage will be, which is exactly what you’re aiming for. When it comes to your prime cost percentage, you want to aim for between 55% – 60%. So, if you’re the owner of the pizzeria, you’re set up to make a good profit and still have money to pay off other expenses. Now there are concerns when it comes to prime cost percentages that fall above and below the ideal percentages. If your prime cost percentage is below 50%, this could be a cause for concern because it could indicate that the quality of your food is low and you’re overcharging your customers, or you’re overworking your staff. If your prime cost percentage is above 70%, it becomes very difficult to run a profitable restaurant because the additional 30% is going toward the expenses of maintaining your restaurant and keeping your doors open.
With all the formulas and number crunching that goes into finding your prime cost, your prime cost percentage of sales can seem overwhelming. Especially for a restaurant owner who is already juggling everything else. You can’t spend all your time trying to figure out your prime cost to see if your business is profitable or not. So, if you don’t have to, why would you? At Gurian CPA, we like to think of ourselves as the go-to accounting firm when it comes to the restaurant industry. We have a Prime Cost Package, a restaurant accounting solution, for restaurant owners, which is different than any other restaurant accounting solution because we provide you with your information accurately every week. The prime Cost Package for restaurant owners includes:
If you’re a restaurant owner and tired of struggling, give our restaurant accounting experts a call at Gurian CPA! Our team is here to help your restaurant calculate its prime cost and lead you on your way to success!
By: Paige Knight