Calculating restaurant prime costs: A key lever to maximise profits.

This article has been written by Pilla Founder, Liam Jones, click to email Liam directly, he reads every email.

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Cost of goods sold (COGS)

Cost of goods sold (COGS) are the direct costs associated with the production of menu items, including ingredients, packaging, and other miscellaneous costs. These costs fluctuate with market prices, making it important for restaurant operators to monitor and control them closely.

To calculate COGS, restaurant operators need to consider the beginning inventory, purchases, and ending inventory for each ingredient, along with any other associated costs. For quick reference, here's the formula required to calculate cost of goods sold.

COGS = Beginning Inventory + Purchases - Ending Inventory

The food cost percentage, a significant component of COGS, is calculated by dividing the cost of food by the total sales. Tracking this percentage is important for comparing prime costs against industry averages and historical data, which can help optimise profits and identify opportunities for cost savings.

We have another blog covering food costs which goes into much more detail on this. You can click find this by scrolling further down on this page.

Labour costs

Labor costs include wages, payroll taxes, employee benefits, and other related expenses incurred in hiring employees in the restaurant business. These costs can be effected by various factors, including overtime, employee turnover and changes in minimum wage laws. Optimising labour costs is important for maintaining a profitable restaurant, as high labour costs will lead to decreased profitability and reduced capacity to invest in expansion or manage cash flow.

To control labour costs, restaurant owners and managers need to consider various strategies, such as enhancing employee experience to lower turnover, optimising employee scheduling, and cross-training staff to improve efficiency. Effectively managing labour costs, restaurants can achieve an optimal prime cost percentage, ensuring financial success and long-term sustainability.

We have another blog covering labour costs in more detail. You can click find this by scrolling further down on this page.

Calculating prime costs: Methods and formulas

The calculation of prime costs is a key metric in a restaurant’s financial health and so it's important to establish its standing relative to the industry average. There are two different approaches to calculate prime cost. The first one is the basic method, and the second is the detailed method.

The basic method is to add COGS and labour costs, while the detailed method includes additional factors such as occupancy and marketing expenses.

  • •Basic prime cost calculation

When calculating prime cost using the prime cost formula, the basic calculation involves adding the cost of goods sold (COGS) and labour costs to determine the total prime cost. Labour costs include, employee salaries, wages, benefits and other related costs

These costs typically range between 25% and 35% of sales, depending on the type of restaurant.

Calculating COGS involves considering the cost of ingredients used to prepare menu items, such as sauces, garnishes, condiments and other food items.

Understanding the basic prime cost empowers restaurant owners and managers to effectively monitor and regulate their expenses, ensuring their establishment’s profitability and competitiveness.

  • •Detailed prime cost calculation

The detailed prime cost calculation provides a more broader picture of a restaurant’s expenses by including additional factors like occupancy costs and marketing expenses. Occupancy costs comprise of rent, insurance, real estate taxes and common maintenance fees, while marketing expenses are usually calculated as a percentage of gross sales, typically ranging between 3% to 6%.

Taking these additional factors into account, restaurant owners and managers can acquire more profound insights into their establishment’s total expenses and potentially make better decisions to optimise prime costs. This detailed method enables restaurants to:

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    Identify cost-saving opportunities

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    Adjust their strategies accordingly

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    Improve profitability

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    Achieve long-term success.

To calculate the prime cost percentage, divide the prime cost by total sales and multiply the result by 100. Monitoring the prime cost percentage is critical for identifying areas of improvement and ensuring that the restaurant’s costs are in line with industry standards.

Prime Cost Percentage = (Prime Cost / Total Sales) * 100

Ideal prime cost percentages and benchmarks

The ideal prime cost percentage varies depending on the type of restaurant, with full-service restaurants typically aiming for a restaurant prime cost of 60%-65% of total sales, while quick-service establishments may strive for a prime cost of 50%-60% of total sales.

Maintaining restaurant’s prime costs within these ranges is crucial for ensuring profitability and sustainability in the competitive restaurant industry.

Comparison of their prime costs against these industry benchmarks allows restaurant owners and managers to spot areas for improvement and implement required adjustments in their operations. This could involve changing suppliers to reduce food costs, optimising employee scheduling, or implementing menu engineering strategies to improve profitability.

Staying within these ideal prime cost percentages can help restaurants maintain a competitive edge in the market and achieve long-term success.

For full-service restaurants, maintaining prime costs between 60%-65% of total sales is crucial for ensuring profitability and sustainability. Factors that can lead to prime cost percentages exceeding 65% include:

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    Higher food prices for higher quality food

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    Higher labour costs for skilled workers

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    Inadequate inventory management in a complex operation

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    Poor overall cost control

Through careful monitoring and control of their prime costs, full-service restaurants can streamline their operations, enhance profits, and uphold food quality and customer satisfaction.

Quick-service restaurants usually aim for a prime cost of 50%-60% of total sales in order to achieve the most profitable margins. These establishments typically have lower food and labour costs compared to other types of restaurants, allowing them to reduce their overall expenses and optimise their profits.

Maintaining a lower prime cost enables quick-service restaurants to secure financial success and remain competitive in the dynamic restaurant industry.

Strategies for controlling and reducing prime costs

Controlling and reducing prime costs is essential for maximising profits in the restaurant industry. By implementing best practices, restaurant owners and managers can keep their prime costs down and remain profitable. Some of these strategies include regular inventory management, optimising employee scheduling, and menu engineering and pricing.

Adoption of these strategies allows restaurants to pinpoint areas for improvement, implement needed adjustments in their operations, and obviously improve financial performance. Through effective prime cost management, restaurants can maintain food quality and customer satisfaction while ensuring long-term sustainability and success in the highly competitive industry.

  • •Regular inventory management

Regular inventory management is important for maintaining accurate usage, reducing waste, and managing costs effectively. By tracking and managing inventory, restaurant operators can minimise food waste and spoilage, optimise purchasing, and decrease the cost of goods sold (COGS).

Implementing efficient and effective inventory control systems, such as dividing the inventory into divisions for easier organisation and retrieval, can help streamline the inventory management process and provide valuable insights into cost control.

We've wrote more in depth blogs about inventory control which you can find by scrolling down.

  • •Optimising employee scheduling

Optimising employee scheduling can help control labour costs by considering factors like holidays, special events, busy periods and seasonal fluctuations. Scheduling strategies can assist in controlling labour costs by ensuring that the most proficient staff are scheduled to handle the majority of the customer footfall.

By implementing predictive scheduling and optimising labor hours, restaurants can effectively manage their labour costs and maintain an optimal prime cost percentage. This not only helps improve profitability but also enhances the overall efficiency and effectiveness of the restaurant’s operations.

  • •Menu engineering and pricing

Menu engineering and pricing strategies can help balance food costs and profitability while protecting customer satisfaction. By analysing the data that compares actual usage to actual costs and sales, restaurant owners and managers can establish optimal steps to maximise menu profitability.

Strategically setting menu prices can improve customers’ perception of value, resulting in greater revenue and financial success.

Using technology to monitor and manage prime costs.

Using technology to monitor and manage prime costs will give you valuable insights for decision-making and help identify areas for improvement. By using tools such as POS systems, restaurant owners and managers can streamline inventory tracking and help automate prime cost calculation.

Besides simplifying multiple aspects of prime cost management, technology solutions can provide other valuable insights into cost control, sales trends, and menu performance so restaurant owners and managers can make better decisions and optimise their operations for peak profitability.

  • •POS systems for inventory tracking

POS systems can significantly simplify inventory tracking and prime cost calculation for more efficient restaurant operations. By logging inventory data, POS systems provide easy access to the necessary information, making it simpler to calculate and manage prime costs.

In addition to facilitating prime cost calculation, POS systems can also integrate with invoice processing and overall inventory management so it's important to choose the right software.

  • •Inventory management software

Inventory management software is another powerful tool that can be used to monitor and manage prime costs, sometimes even more effectively than POS systems. This type of software allows restaurant owners and managers to have real-time visibility into their inventory levels, track ingredient usage, and manage supplier relationships.

Inventory management software can significantly streamline the process of tracking and controlling food costs. By providing detailed insights into the cost of each ingredient used, it enables better forecasting and helps to prevent overstocking or running out of key ingredients.

The software can automate the process of reordering supplies when they reach a certain level, reducing the time spent on manual inventory checks. This not only helps to maintain a consistent food quality but also optimises the cost of goods sold (COGS).

In addition, inventory management software can integrate with other systems like accounting software, providing a more comprehensive view of the restaurant's financial health. This holistic approach can lead to more accurate prime cost calculations and better cost control strategies.

  • •Employee scheduling software for labour costs

Employee scheduling software is a crucial tool for controlling and calculating labour costs in the restaurant industry. This type of software aids in optimising the workforce by ensuring that the right number of staff are scheduled at the right times, so avoiding unnecessary overtime costs or understaffing during peak hours.

The software can automatically calculate labour costs by integrating employee wage rates with their scheduled hours. It can also factor in different pay rates for overtime, holidays, or special events, providing a more accurate calculation of overall labour costs.

Scheduling software can also provide predictive analytics based on historical data, helping restaurant managers forecast labour needs more accurately and manage labour costs more effectively.

By providing real-time visibility into labour costs, employee scheduling software empowers restaurant owners and managers to make informed decisions about staffing, ultimately helping to optimise prime costs and enhance profitability.

Reporting and analytics for decision making

Reporting and analytics tools can provide valuable insights for decision-making and help identify areas for improvement in managing prime costs. By unifying sales data from a POS system with COGS and labour cost insights, restaurant owners and managers can gain a more comprehensive understanding of their establishment’s financial performance and make more informed decisions to optimise prime costs.