Learn how to calculate restaurant prime costs to increase the profitability of your restaurant.
This pandemic has been the worst nightmare for the food & beverage industry. No matter what country you reside in, the lockdowns and the limited operating capacity has definitely put a dent on your sales.
Restaurant owners are forced to adapt and steps have been taken to bring back the sales that were lost. Most businesses have taken their shop online and have enlisted delivery partners like Uber Eats, DoorDash, and Zomato. These delivery apps have shown that they’re a useful tool in bringing in sales but what you don’t see behind those sales figures are the corresponding costs that come with it when you subscribe to their service.
Looking at sales figures alone won’t improve your profitability. Let’s say you had a $10,000 revenue for the month of July. However, what owners or managers tend to overlook is the direct costs needed to achieve that revenue. Your cost of goods is $5,000 and your payroll expense is $4,000. That leaves you with $1,000 for your fixed and variable expenses. What do these numbers mean? In the next sections, we’ll be discussing prime costs for restaurants and its impact on your bottom line.
Prime Costs Explained
From what we’ve written above, you should already have an idea what restaurant prime costs are. The prime cost of a restaurant is the total figure of your Cost of Goods Sold (COGS) and Cost of Labor (COL). These are the direct costs that are associated with the purchase and production of your menu items.
Based on the example given above, the total restaurant prime cost is worth $9,000. We’ll show you what it’ll look like on your top line P&L.
|XYZ Company P&L|
|Dine-In Sales||$ 3,000.00|
|Take-Out Sales||$ 7,000.00|
|Direct Costs||$ 9,000.00|
|Cost of Goods||$ 5,000.00|
|Cost of Labor||$ 4,000.00|
|Gross Profit||$ 1,000.00|
The P&L above shows your top line performance and anyone with a business sense would know that a restaurant with numbers like these won’t last long. The next question that we should begin to ask is, what is a good prime cost for a restaurant? What number should I be targeting so I can sustain operating my restaurant and earn profits?
Industry Standards for Prime Costs
Throwing out a number as an industry standard for prime costs is a poor way to guide a restaurateur. There are different types of restaurants and their ideal prime cost will depend on what type they are.
For example, a QSR will have lower cost of goods because their operations can do batch cooking and it won’t affect the quality of the product while a fine dining restaurant will always have higher cost of goods since all dishes are freshly made and the ingredients being used are usually more expensive.
A franchise restaurant has higher COGS since the ingredients they’ll be using will be sourced from the company who owns the restaurant. The company usually adds a 25-30% margin to the items and is then passed on to the franchisee. On the other hand, if the company who owns the restaurant has their own company-owned stores, their COGS will be lower than that of the franchisee.
As a simple guide for everyone, here’s how the industry standard looks as a percentage.
Prime Cost Calculator
We’ve shared the prime cost formula above but in this section, we’ll be going through a detailed approach on how to compute the necessary figures to get your prime cost. Any type of worksheet will do but for this example, we’ll be using Microsoft Excel or Google Sheets.
To compute for COGS:
Open a new workbook on your Excel or Sheets
Gather the necessary data to fill up the workbook. The data you’ll be needing are as follows – Raw Material Name, As Purchased Unit, As Purchased Unit Cost, Conversion, Beginning Inventory Count, Purchased Inventory Count, Ending Inventory Count.
It should look like this.
Plug in the amount for the respective item and its inventory. To get the amount, multiply the beginning inventory count, purchased inventory count and ending inventory count by the As Purchased Unit Cost.
With all these data available, you can now compute COGS with this formula.
Your data computing for your COGS should look like this. Do this for all the necessary raw materials in your restaurant and get the total.
Taking the example from the figure above, the total COGS for the selected time period is 175,659.38.
To compute for COL:
Computing for cost of labor is not as tedious as computing for your COGS. There are restaurant management software out there that can help in computing your payroll. Check out our article on the Best Restaurant Management Software in 2021 to learn more.
However, if you don’t have a payroll software system, there are still ways to compute for your cost of labor via Excel.
On the file where you created the COGS worksheet, create another worksheet for COL.
Similar to our SOP for computing COGS, we must also get the necessary data we need to compute COL. These are: Employee Name, Position, Hourly or Monthly Rate, Time In and Time Out Records, Overtime Records and other necessary attendance related records for the time period you’re computing for.
Your template should look like this:
Repeat the process of Step 2 for all your employees and get the total gross amount. That amount will be your cost of labor or COL.
The final file should look like this.
From the example shown here, your total cost of labor for the month of July is 220,669.60. If you have multiple stores, then the COL for Store A is 81,139.35 and Store B is 113,730.46.
To calculate the Prime Cost of Store A:
Given both examples above, we can now compute the prime cost of Store A. The COGS is 175,659.38 and COL is 81,139.35, for a total of 256,798.73. If the revenue of Store A is 458,907.81, then the prime cost percentage for Store A is 55.96%.
The formula to compute for a restaurant’s prime cost percentage is:
Expert Tips and Tricks to Reduce Prime Cost
Here are some operational efficiencies that you can run in your restaurant to reduce your prime costs.
1. Maintain a Two Week Inventory Stock Level
Keeping a healthy inventory level will prevent wastage, spoilage and running out of stocks, thus improving your profitability. Planning your inventory levels can help you understand your potential sales given peak and non-peak seasons to meet demand.
In order to meet your desired inventory level, you have to identify your minimum stock level, your re-order level, and your re-order lead time. Make sure these items are track daily as these will provide you with an efficient method of ordering and maintaining stock levels.
2. Menu Engineering
Menu engineering is the overall study of your products’ profitability and popularity together with placing them strategically on your menu to motivate customers to buy. With your products menu engineered, you will have knowledge on which menu items are of low cost and highly popular with these customers. Equipped with this knowledge, the promotions can be tailored around these menu items for maximum profitability.
Costing out all your menu items and recipes is part of the process of menu engineering. Make sure the target is set for the costs of all menu ingredients so you can set your ideal selling price.
3. Track Employee Productivity
A metric that keeps track of employee productivity is sales per hour worked and customers served per hour worked. Your goal by tracking these two metrics is to maintain the perfect balance between your employees being overworked and underworked.
Tracking employees who have the lowest sales per hours worked and customers served can show that whenever he or she’s on the floor, the team is being less productive as compared to those employees who have higher sales and customers served. A decision can be made that the employee with low productivity is just adding to your labor costs.
4. Better Schedule Management for Employees
Knowing how much manpower you’ll need during operations will lead to better productivity from your employees. The things you need to consider when scheduling employees are: average daily sales, peak hours, and non-peak hours. By knowing these, you’ll know how many employees you’ll need to put in a day.
Consider a twelve-hour operation that runs from 11AM until 11PM for a small QSR. How much manpower do you think you’ll need? Equipped with knowledge of your average daily sales data and peak/non-peak hours, you’ll be able to decide whether you need four or five – (1x) Morning Shift (10AM-8PM), (1x or 2x) Mid Shift (12PM-10PM), (2x) Closing Shift (2PM-12MN). By effectively knowing when to add or reduce manpower from a shift can help in reducing labor costs.
Your restaurant prime costs are an indicator of whether a change needs to happen. It’s basically a percentage that can lead to a myriad of decisions: Do I need to reduce the weight on a certain product item? Do I need to redesign my menu? Do I need to cut down on employees? Do I need to hire more part time employees? The bottom line is that tracking is a must for prime cost in food and beverage industries as they become useful to you when key decisions are needed to be made.