Knowing your restaurant’s prime cost is integral to successfully run your business. But what is a restaurant’s prime cost, and how do you calculate it?
A restaurant’s prime cost is the cumulative cost of goods and labor expenses you have accrued.
The prime cost includes:
- Food cost
- Liquor cost (or pour cost)
- Labor cost
Key Terms for Calculating Restaurant Prime Cost
Before getting into how to calculate your restaurant’s prime cost, several terms need defining.
The beginning inventory is the monetary value of your inventory at the start of an accounting period.
It is the cumulative value of goods available for sale or purchase and of goods used or sold in the natural course of business.
Ending inventory, by comparison, is the value of any goods that remain available for purchase when an accounting period concludes.
While the actual products comprising the ending inventory remain consistent irrespective of how you calculate the inventory, the method you use determining your ending inventory may cause the monetary value as recorded in the books to vary.
Cost of Goods Sold
The cost of goods sold refers to the cost a company incurs by producing or acquiring its products. While it takes labor costs into consideration, other factors, such as distribution expenses.
Labor costs derive from the amount of money paid to your restaurant’s employees. They also include:
- Employee benefits
- Payroll taxes
- Insurances – health/workers’ compensation, etc.
Expenses covered by labor costs divide into direct and indirect costs. The combination of these is what gives you your total labor cost.
How to Calculate a Restaurant’s Prime Cost?
When calculating your restaurant’s prime cost, you start by establishing your beginning inventory.
Then you add the beginning inventory to the purchases for the period under examination. For instance, you might focus on the inventory sold over three months.
Next, you subtract the ending inventory from the sum you’ve just established. The resulting figure is the value of goods sold over the interval under inspection. This figure establishes the total cost of goods sold versus left unused in your stores or shelves.
Because the restaurant prime cost derives from both your goods and labor expenses, the next part of the calculation involves factoring in your labor costs. While most restaurants only factor in their employees’ wages, it’s worth remembering that labor costs run to more than employee earnings.
Combining your labor costs with the total goods sold cost produces your restaurant’s prime cost.
What is the Ideal Restaurant Prime Cost to Aim For?
Traditionally, reason stipulated that the restaurant prime cost to aim for was 60-65%, depending on whether the restaurant was full- or quick-service.
But inflation and the rising costs of goods and employment means that isn’t always tenable. Instead, many restaurants strive for and meet a restaurant prime cost of 55%.
Why Restaurant Prime Cost Matters
While it’s never easy to control your restaurant’s expenditure, understanding what you spend your money on and where it is going can go a long way to restoring a floundering business.
To that end, knowing your restaurant’s prime cost becomes an essential way of taking your restaurant’s economic temperature. Regularly assessing your restaurant’s prime cost can help catch problems with:
- Food spoiling
- Surplus goods
- Thieving or disappearing stock
The other benefit of knowing your restaurant’s prime cost value is that it helps establish a profit margin. Restaurants struggle when their restaurant prime cost exceeds 70%. But without an idea of how much is being spent or what it’s spent on, controlling those figures can be challenging.
And while it is possible to consider total goods costs and labor costs individually, neither of these would accurately reflect the restaurant’s actual expenses.
Knowing your restaurant’s prime cost gives you an attributable value for your outgoing expenses, whether on labor, food, or drink.
It is the sum of your labor costs and total goods costs. You can calculate this by following the steps we outlined earlier. However, to accurately calculate your restaurant’s prime cost, you must have an accrual accounting system.
That means your accounting system acknowledges all transactions, irrespective of when cash transactions occur.
Remember that a healthy restaurant’s prime cost aims for a figure of 55%, though 60-65% is also healthy. Whatever your restaurant’s prime cost, once it’s calculated, you will be able to take economic stock of your business and make adjustments as necessary, keeping your restaurant financially healthy for longer.
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