As a restaurant owner knowing your key performance indicators is huge and knowing your prime cost is one of the most valuable key performance indicators a restaurant owner can know. Knowing your prime cost is essential when you’re running a restaurant as it gives you more control to facilitate change and make more money. Most restaurant owners are so focused on increasing sales, while very few focus on decreasing their costs. The difference between the two is what can set a successful restaurant owner apart from the rest. Although focusing on increasing sales is important, controlling your restaurant’s costs is what will lead your restaurant on the path to success! Our restaurant accounting professionals at Gurian CPA want to give all restaurant owner’s the chance at success by helping them understand what prime cost is and how you can calculate your restaurant’s prime cost.
What is prime cost?
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.
How to calculate prime cost
You now know that your restaurant’s prime cost if the grand 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 in order 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
Total Cost of Goods:
Total cost of goods refers to all products that are purchased for sale in your restaurant. In order 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:
Total labor costs refer to all your labor expenses for an individual employee including employee taxes, benefits, food discounts, insurance, etc. It’s important to not forget to include the additional employee expenses to your labor costs because it will alter your total labor cost expenses. Remember to include the following in your total labor costs:
- Salaried employee wages
- Hourly employee wages
- Bonuses
- Food discounts
- Overtime
- Payroll taxes
- Healthcare insurance
- Sick and vacation days
Restaurant Prime Cost Example:
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 our your sales reports to review your total costs of goods. Upon review 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 your 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 your restaurant’s prime cost.
Now that you know your restaurant’s prime cost, you’re ready to figure 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%
What is the ideal prime cost for a restaurant?
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 customer, or you’re overworking your staff. If your prime cost percentage is above 70% it becomes very difficult to be run a profitable restaurant because the additional 30% is going toward the expenses of maintain your restaurant and keeping your doors open.
With all the formulas and number crunching that goes into finding you prime cost and your prime cost percentage of sales can seem overwhelming. Especially for a restaurant owner that 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 your information accurately on a weekly basis. The prime Cost Package for restaurant owners includes:
- All business accounting and bookkeeping services
- Weekly prime cost reports
- Accounts payable
- Bill pay
- Cash flow analysis
- House restaurants accounts
- Reconciliation of vendor statements
- Client approves all vendor invoices prior to payments
- Assist with payroll processing
- Maintain general ledger
- Bank reconciliations
- Required government filing and payments
- Tip allocation
- Inventory control
- Cost of goods
- Payroll services
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 it’s prime cost and lead you on your way to success!
By: Paige Knight
