What are Restaurant Prime Costs?
Restaurant prime costs are a pretty simple concept when broken down to their core components: Cost of Goods Sold (COGS) and labor. In other words, restaurant prime costs are the largest expenses that your business will have. The final cost of your produce, equipment, and labor combined is the majority of the regular costs that your restaurant will experience, leading to the term prime cost.
Why are Restaurant Prime Costs Important?
Learning to manage and mitigate your restaurant prime cost is crucial to keeping a well-run and (importantly) profitable restaurant. This requires having control over or, at least, awareness of the costs you’re incurring by daily business.
While that may seem like a somewhat obvious statement, restaurant prime cost is pretty easy to lose control over. Once that happens, it’s incredibly difficult to regain momentum — which is why it’s so important to understand what prime cost is and how to control it!
Breaking Down the Prime Cost Formula
Before we can talk about the more hands-on parts of controlling restaurant prime cost, we need to discuss its most basic elements. Below, we’ll be discussing the largest aspects of the prime cost formula, starting with COGS.
Calculating Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) is a term that you’ll hear non-stop in the restaurant world, and that’s for good reason. It’s one of the best indicators you have for how well your restaurant’s proverbial “health bar” is looking — but how does it work?
Here is the formula for COGS and below you’ll see an explanation of the formula’s components.
- Beginning Inventory: The value of the inventory you already had after the previous period.
- Purchased Inventory: The value of the inventory you purchased during this period.
- Ending inventory: The value of the inventory left after the chosen period.
Generally, COGS periods are measured in months or full years as a way to gather a better grasp on how efficient you are in the long term.
Calculating Labor Costs
Our next factor for the prime cost formula is your labor cost. This is the combined cost of hourly pay for employees, salaries, sick pay, payroll taxes, PTO, benefits, and any materials that count as essential for your employees to work (such as uniforms, chef whites, or aprons).
Just make sure that you are compiling your labor costs over the same period that you chose for your COGS.
Prime Cost Formula
The prime cost formula is equally easy to understand with the proper information, so let’s just dive right in.
The prime cost formula uses what we just calculated (COGS and labor) in the following formula:
In practice, this looks like the following:
- COGS: $4,000
- Total labor cost: $5,000
If you want to go one step further you can now divide your prime cost by your total sales to get your prime cost as a percentage of total sales.
Carrying on the example from above if this hypothetical restaurant had $20,000 in total sales this would be their formula.
The prime cost number is your “number to beat” for the period in question. In other words, with the case above, you would need to bring in at least $9,000 to break even during the given period. The final number, your prime cost percentage of sales, is that number shown as a percentage of sales for your chosen period.
Practical Ways to Keep Your Restaurant Prime Costs Low
Okay, now that we know how to calculate restaurant prime cost, it’s time to talk about how to keep it under control. There are a lot of ways that you can keep prime cost low — let’s take a peek.
Negotiating with Suppliers
Any time that you buy produce or materials from a supplier, it’s worth looking at how much you’re paying and how much other options may charge. This is because (at the end of the day), your suppliers are businesses, yes, but they’re also in the world of sales. This means that each client is recurring income for them and, often, that your reps will be open to negotiation if it means keeping business.
While this isn’t to say that you should try to haggle with every sales rep to come through your restaurant, if you notice that you’re paying more for the same item that you could get through another rep, it’s worth talking. Sometimes you’ll be able to negotiate a lower price, keep your supplier, and reduce your overhead.
Reducing Waste
Cutting waste is a massive part of running a restaurant. Whether you opt for portion control or aim to reuse as much as possible through specials, stock, and compost, the simple truth is that you need to keep waste under control. In kitchens, it’s quite common to see old food repurposed into specials and stock (especially with veg and meat scrap) — and I highly recommend considering these steps if possible.
Beyond that, though, it’s important to look at how much food you’re selling and how much is being taken home or thrown out when the guest is done. If you’re over-feeding guests, you could certainly cut down on the portion sizes and get more out of the same amount of product.
Menu Engineering
When considering menu engineering, it’s important to think about what ingredients you have and what you’ll be using regularly. For example, if you need one specific ingredient (let’s say andouille sausage) for only one dish, it’s possible that you may be overspending on that particular sausage. After all, it’s the only thing that uses that item.
Instead, it’s generally best to try and plan a menu that has a good bit of overlap on shared ingredients. This allows you to more easily control COGS and general costs, cut down on labor time for each individual menu item, and generally streamline things a bit more efficiently.
While it’s easier said than done in some cases, if you’re struggling to keep your restaurant prime cost under control, I highly recommend taking a look at your menu to see what you can pare down.
Efficient Scheduling
Since we already talked about labor, it only makes sense to touch on scheduling. When trying to manage labor costs, it’s crucial to keep an eye on your schedule.
Keep track of busy (and slow) hours, and try to schedule around them. While this may seem obvious, it’s quite common in my experience to see restaurant managers overscheduling in the hopes that things pick up; conversely, I also tend to find that when things slow down, schedules get cut immediately in many joints. This is bad.
You should have a firm grasp of how many people it takes to do what needs done efficiently. This means understanding what must be done each day, and planning around that by properly scheduling. If you find that you’re regularly running over budget for prep time or service, it may be time to consider trimming your menu to accommodate for a faster prep period.
Cross-Training Staff
The process of cross-training staff also ties into controlling labor in a larger way than many may realize. By cross-training, you’re able to enable fewer people to do more in a given period (within reason, of course). Equally importantly, though, you’ll have more people who are capable of managing issues that may arise!
This means that ensuring your staff is diversely trained can be a major boon, especially in busier periods. Allow your chefs to learn new stations, your bartenders to learn how to host, and so-on. It’s a small (and easily done) step that can have major benefits if done properly.
Technology and Automation
Finally, we reach what is arguably the most important part of controlling restaurant prime cost — restaurant technology. Using modern software to control inventory, labor, and scheduling means that you have to spend less time in front of an Excel sheet and more time in the kitchen doing what you love most.
Technology is made to improve your life — so let it!
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