As a restaurant owner, you're focused on profitability. That means you need to stay on top of tracking your finances - and a major tracking point for your industry is prime cost.
At CSI Accounting & Payroll, we've worked with thousands of small business owners - many of whom are restaurant owners - in the past 50+ years. That means we know the questions most-asked about restaurant prime cost, including:
- What is prime cost?
- Why do I need to know my prime cost?
- How do I calculate my prime cost?
What is Prime Cost?
Prime cost is known in the restaurant industry as a combination of your food and labor costs, and it's reported as a percentage of your sales. Labor costs include things like gross payroll, payroll taxes, and workers' compensation.
Managing food and labor costs is a crucial aspect of running a profitable restaurant or food service business. These costs are controllable - to an extent. How do you know where your prime cost should sit? The following section will cover the healthy range of prime cost percentages.
Why You Need to Know Your Prime Cost
You want to keep your costs low - otherwise, you won't be profitable - but there's such a thing as being too low to the point where your customer satisfaction is impacted. Your business can close if your costs are too high, but it can also close if you are not generating sales. There's a range that you should try to stick to.
What Should My Prime Cost Be?
To remain profitable in the restaurant business, your maximum prime cost should generally be lower than 65%. As food and labor costs vary among different types of operations, prime cost ranges may dip as low as 55%. You can't realistically expect to hit 25%, for example.
Finding your sweet spot within this range will help you achieve profitability without negatively affecting service and quality of your offerings. After all, the restaurant industry really only thrives if you have satisfied, repeat customers or good reviews to draw in first-time customers.
How to Calculate Your Restaurant Prime Cost
To calculate your prime cost, you must determine food and labor costs as a percentage of sales. These are important restaurant indicators to be monitoring on a weekly basis. Typically, fine-dining establishments will have higher food and labor costs as compared to more casual establishments, as these costs are influenced by the quality of product and service, pricing structure, and hours of operation.
To calculate your restaurant's prime cost, add your food cost and labor cost.
Example:
Your restaurant does $25,000 in sales for the week. The total cost of food and beverages for the same week comes in at $8,500, so your food cost is 34 percent of sales. The cost of labor for the same week is $6,500, so your labor cost is 26 percent of sales.
Add up the food and labor costs to get your prime cost. In this scenario, your prime cost is 60 percent.
How your prime cost breaks down between food and labor may vary due to your operation. Keep in mind that if one primary cost is in the higher range, the other primary cost should be in the lower range. Without the balance, your prime cost maximum may hinder your profits
Work With an Experienced Restaurant Accounting Firm
Monitoring your prime cost is extremely important to the success of your restaurant. It shows you the sweet spot you need to stay in to keep your doors open. However, it's only a small portion of the finances you need to be aware of as a restaurant owner.
If you want to kick up your accounting to cover year-round tax strategy, compliance, and business advice, you may want to start looking into monthly accounting. Want to see if we can be a good match? Click the button below to schedule a free consultation!
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