How to Calculate Your Restaurant’s Prime Costs
As a restaurant owner, you probably already know the importance of controlling costs—but keeping track of your restaurant prime costs can be especially challenging. Prime cost is an important metric for measuring profitability and managing resources efficiently, so business owners must understand exactly how to calculate this crucial number.
In this blog post, we'll walk you through each step of calculating your restaurant's prime cost and provide tips on how to lower prime costs so you can make sound budgeting decisions and optimize profits. Let's get started!
Prime Cost: What Is Prime Cost?
Prime cost is an important accounting term for the direct costs associated with producing goods and services. Prime cost is made up of three components: direct materials, direct labor, and overhead.
- Direct materials are those resources acquired from outside sources for production, such as raw materials or parts.
- Direct labor includes wages paid to employees directly involved in the manufacturing process.
- Overhead costs, also known as indirect costs, include the salaries of supervisors and other personnel not directly involved in the production, energy costs, depreciation on equipment used for production, and rent on facilities used for production.
Restaurant Prime Cost
Restaurant prime cost is the sum of a restaurant's direct costs, including the cost of goods sold (COGS) and labor costs. It is one of the most important metrics for restaurants to track to understand their overall financial performance.
Restaurant COGS are the direct costs associated with purchasing and preparing food, while labor costs can include wages, payroll taxes, and employee benefits. By tracking prime costs, restaurateurs can determine their profitability and make informed decisions about their pricing strategy, menu structure, staffing levels, etc.
How to Calculate Prime Cost In a Restaurant
Calculating prime costs in a restaurant is an important step for owners and managers to understand their operating costs. Prime cost is the total costs associated with producing a product or service, including labor and material expenses.
To calculate the prime cost in a restaurant, you need to know two things:
- Cost of Goods Sold (CoGS): CoGS is the total cost incurred from producing each menu item. It includes all food costs (raw ingredients, packaging, delivery fees, etc.) plus beverage costs (alcoholic beverages, sodas, juices, etc.).
- Total Labor Cost: This figure takes into account wages and salaries paid to employees involved in preparing the food and drinks that appear on the menu. It also includes payroll taxes, employee benefits, and other associated costs such as uniforms or equipment.
Prime Cost Formula
The formula for calculating prime cost is:
Cost of Goods Sold (CoGS) + Total Labor Cost = Prime Cost
For example, let's say that a restaurant has CoGS of $10,000 and a Total Labor Cost of $5,000 with Total Sales of $25,000. Using the formula above, let’s determine the restaurant's Prime Cost.
Prime Cost = Cost of Goods Sold (CoGS) + Total Labor Cost
Prime Cost = $10,000 + $5,000
Prime Cost = $15,000
Now, let's determine the percentage!
Prime Cost Formula (%)
Prime Cost / Total Sales
$15,000 / $25,000 = 60%
Knowing your prime cost is important to understand how much you are spending to produce a product or service and determine the profit margin. Additionally, it will help inform pricing strategies and budgeting decisions.
Restaurant owners must understand their prime costs to make smart business decisions for their establishment. By calculating their prime cost regularly, owners can ensure they have an accurate financial picture of their operations and adjust spending as needed.
What Is a Good Prime Cost for a Restaurant?
A good prime cost for a restaurant typically falls between 55% and 60%. This means up to 60% of a restaurant's total sales is devoted to purchasing materials and labor. This percentage can help restaurants keep their costs at a reasonable level while ensuring that there is enough money to cover overhead and other expenses.
How to Lower Prime Cost
There are many ways to lower your restaurant's prime cost. Here are a few tips:
1. Complete a Cost Analysis for Your Restaurant Regularly
A cost analysis is understanding how your restaurant is spending its money. It gives you visibility into all costs associated with running a business and helps you identify opportunities to lower prime costs. When conducting a cost analysis, consider fixed and variable costs such as rent, utilities, labor, food, beverage, and other operating expenses. To get the most accurate picture, review your financial records for the last several months and look for any trends or changes in spending.
2. Evaluate Your Labor Costs
raw ingredients, packaging, and delivery fees. Look at staff scheduling to ensure you are not overstaffed or understaffed during peak times, review employee wages and incentive pay structures, and consider automating tasks where appropriate. Additionally, find ways to improve operational efficiency by streamlining processes and delegating responsibilities to allow employees to focus on higher-value activities.
3. Reduce Restaurant Food Waste
Food waste is one of the restaurants’ most significant contributors to higher prime costs. Reducing food waste can greatly improve profitability, as it saves money on wasted ingredients and helps reduce labor and storage costs associated with managing the waste.
To reduce food waste, restaurants should track food usage patterns and ensure that accurate portion sizes are being used for each dish. Also, restaurants should ensure that staff is trained in proper TCS food handling techniques to reduce food spoilage and contamination.
4. Evaluate Suppliers and Supply Costs Regularly
Review what you are buying and from where. Compare different vendors and prices to ensure you get the best possible price on items purchased regularly. Try negotiating for better prices, discounts, or other benefits that can reduce the cost of supplies. Purchasing in bulk can also reduce costs by taking advantage of volume discounts.
5. Redesign Your Menu
Redesigning your menu is a great way to lower prime costs in restaurants. Not only can you analyze the costs associated with individual items, but you can also consider the overall balance of your menu. Is there enough variety to appeal to different types of customers? Are all items priced appropriately, considering the cost of the ingredients?
If certain items are too expensive, consider adjusting their prices or removing them from your menu altogether. You might also consider adding dishes with cheaper ingredients, such as grain bowls or salads. Additionally, consider smaller plate sizes for appetizers and desserts to help reduce food costs.
6. Utilize Your POS to Simplify Inventory Tracking and Reporting
Using a point of sale (POS) system can make it easier for restaurant operators to track and report on their inventory. This helps you monitor your prime costs more closely and identify areas where you can reduce spending. POS systems can give you real-time visibility into an item's purchase and sale prices, so you can easily detect if vendors are charging too much or your selling price is too low. You can also use the data from restaurant POS systems to see which items are selling better than others, adjust the pricing accordingly, and make more informed decisions about what to stock.
These tips can help lower your restaurant's prime cost and increase profitability. With some planning, you can ensure that your business remains successful.
Why Is Prime Cost Important?
Prime cost is important in the restaurant industry as it tracks key costs associated with running a restaurant. It also manages costs, sets prices, and identifies cost-saving opportunities. By tracking prime costs, restaurants can monitor their expenses and measure the profitability of certain items, menu items, or services.
Frequently Asked Questions About Restaurant Prime Cost
Get the answers to some of your most pressing questions about restaurant prime cost below:
What Is a Prime Cost Item?
A prime cost item is an item that does not have a predetermined price at the time a contract is signed. This means that the buyer and seller must agree on, or allow for (allowance), the supply and delivery cost to be determined later. This allows both parties to benefit from an open market where prices fluctuate, and goods may be bought at the best available price.
What Is Prime Cost In Hospitality Industry?
In the hospitality industry, the prime cost is a key metric for tracking and measuring performance. Prime cost refers to the total costs of goods and labor that are associated with producing or delivering a service or product. It is also known as a direct cost and varies depending on the type of business. For example, in a restaurant, the prime cost would include the following:
- Food costs.
- Wages and benefits of employees.
- Rent and utilities related to the establishment.
What Are 4 Types of Costs a Restaurant Can Have?
Restaurants incur many different kinds of costs to operate. These costs can be broken down into four types:
- Fixed Costs: These costs remain the same every month and include things like rent, loan payments, insurance premiums, and property taxes.
- Variable Costs: These costs can fluctuate monthly depending on how much business the restaurant does. Examples of variable costs include food and beverage ingredients, utilities, labor costs, and marketing.
- Start-Up Costs: These costs are one-time expenses that are incurred when opening a new restaurant, such as purchasing restaurant equipment and furniture, setting up a website, or obtaining licenses and permits.
- Operational Costs: These costs cover the day-to-day operational expenses of running a restaurant, such as salaries, payroll taxes, and employee benefits. Operational costs include the cost of goods sold (COGS) and the expenses associated with purchasing food and beverage ingredients for each dish or drink sold. COGS should always be tracked to ensure your restaurant meets its profit goals.
In addition to these four costs, restaurants may incur additional expenses related to expansion or remodeling, supplies and inventory, and miscellaneous items. Keeping track of all costs is essential for a restaurant’s success and profitability.
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