Not hitting your Prime Cost targets? Tips on ways to reach them!

As in nearly any business, managing revenue and expenses is a constant balancing act. And for restaurant owners that balance can be fraught with uncertainty as costs of goods fluctuate. A key metric for restaurants to monitor is “Prime Cost.” Prime Cost represents the two biggest expenses you have – cost of goods sold (COGS) and labor cost – calculated as a percentage of your total sales. Managing these two categories of expenses is one of the most important tasks you, as a manager or owner, will undertake.

Today’s point of sale systems, complemented by additional available software, can provide you with the data you need to monitor these two expenses. But simply having the data available is not enough. You should be actively managing these expenses and acting upon that data. Simply collecting data without acting upon it will not improve your bottom line, but knowing how to use collected data can help increase profitability.

Prime Costs

Prime Costs are not like your fixed costs. While your lease payments may be the same from month-to-month, prime costs move dynamically. Any change in the price of the groceries and/or liquor you buy, your scheduling, your sales volume or your menu mix, etc. all impact your prime costs. Here are a few good examples:

1. The price of the steaks you sell increased by 20% last week, but you didn’t catch the increase right away and don’t react to it until weeks later.
2. You lost a key employee in the kitchen. Rather than hiring and training a replacement, your managers opted to schedule overtime for multiple kitchen staff members to cover, which in turn increases your labor cost.
3. The new bartender was not trained properly and has been overpouring on mixed drinks. If you don’t monitor volumes weekly, you may not realize how this impacted your liquor costs until after your next inventory.

Research indicates that Prime Cost targets range from 58% to 62% of sales dependent upon the type of restaurant you operate – quick service, family, sandwich, subs, casual dining or fine dining. For this article we will use an average of 60% as a target. Prime Cost over 65% makes it extremely difficult to make a profit unless you have high sales volumes, regardless of the type of restaurant you operate.

It is important to remember that in particular circumstances, your COGS may be as high as 40% or more. That is okay IF your labor costs are 20% or less. It is the combination of the two that defines your Prime Cost. Running a 30% labor cost? Then your COGS target needs to be 30% or less. You should use Prime Cost as a percentage of revenue to determine a benchmark for your restaurant that can be compared on a weekly, monthly and annual basis.

Calculating Prime Cost

Accurately calculating your Prime Cost is a critical part of managing restaurant profitability. Here’s the scoop on how to calculate these costs:

Cost of Goods Sold (COGS) reflects the cost of the raw ingredients that make up your menu items. This number represents the amount of food and beverage ingredients you use to produce the menu items sold during a specific time period.

To calculate COGS, take your beginning food and beverage inventory, add in your purchases in these categories and subtract your ending inventory. This number reflects what your restaurant actually used during the period between inventories. Here’s an example:

• Your beginning food and beverage inventory the first week totaled $8000. You purchased $4,000 in food and beverage products that week. Your ending inventory was $6000.
• Beginning food and beverage inventory + purchases - ending inventory = COGS for that week.
• $8000 + $4000 - $6000 = $6000
• So you used $6000 for the week
• To calculate your COGS as a percentage, divide your COGS by the sales for the week. If your establishment sells alcoholic beverages, the best way to do this is to break out your inventory and purchases by category – food in one and liquor in the other. When arriving at a percentage of food cost versus liquor costs, divide each by the respective sales in that category. The result will give you your percentage cost for each category.
• In our example, if you did $20,000 in sales for the week, using the total COGS of $6000, you would divide $6,000 by $20,000 to arrive at a total COGS percentage of 30%.

So, you have the COGS for the week as 30%. Now it’s time to calculate the labor cost for the week:

Calculate your payroll for the week. It is best to do this by separating the front of house and back of house. It would be even better if you are able to do this by individual job categories – for instance servers, host/hostesses, bussers, etc. in the front and line cooks, prep cooks, dishwasher/utilities, etc. for the back. Multiply the hours worked by the rate of pay. This gives you your unburdened labor cost, meaning the costs before payroll taxes, workers compensation insurance, employee health insurance and any other employee benefits you offer. If you have the option through your Point of Sale (POS) system, choose “fully burdened labor” for a more accurate labor cost number.

You will also need to factor in salaried employees. The easiest way to do this is to take the total monthly salaries and calculate your daily salaried employee cost by dividing the total by the number of days in the month. Multiply the daily total by seven to get your weekly salaried labor cost.

• With today’s systems, your POS may be able to give you all of this information directly without additional calculations.
• For our example, we are going to say that our fully burdened (taxes, benefits included) labor cost for the week totaled $7,000.
• To calculate the labor cost percentage, you divide the $7,000 in labor cost by the $20,000 in sales.
• This gives us a labor cost of 35%

Our Prime Cost for the week is the COGS of 30% added to our labor cost of 35% giving us a total Prime Cost of 65%. This is 5% over our target of 60%, so you have some work to do to reach your 60% target.

What Can You Do to Control Prime Costs?

To help control prime costs, you may consider doing some of these things:

• Set goals – Create a Prime Cost target specific to your restaurant and share it with the management team and staff. The target needs to be specific, measurable and attainable. Review your progress frequently and update your target as needed.
• Take inventory– consistently, accurately and often. Weekly is best. Why? If you have a problem, the sooner you find out the sooner you can take action to correct it.
• Check your recipes – Verify that your recipes are accurate, including yields. Make certain that your recipes are in a format that is easy for your kitchen staff to use. Then make certain your kitchen is following recipes exactly.
• Update costs – Update recipe costs as frequently as possible. Integrating your purchasing, inventory and recipes is the easiest way to do this. Some POS systems offer additional software modules to accommodate this tracking, as well as some restaurant management software systems.
• Control your purchases – Buy only what you need and use purchase orders. When you buy too much product, it can often result in waste, spoilage and over-portioning. Advanced software programs can prevent over-ordering by suggesting order amounts based upon your past usage calculated by sales volumes. The same software can flag any ingredients that have increased in price since your last purchase.
• Evaluate your suppliers and supply costs regularly – Great food service distributors know it is in their best interest for you to be successful. Make sure to lean on suppliers for the best pricing they can give you.
• Use Pars – Establish and maintain daily prep level pars and schedule prep for off-peak times. This maximizes the use of your kitchen “down time” so that your staff is more productive during these slower time periods.
• Pre-portion key items – For example, if you have a recipe that calls for 10 shrimp per serving, pre-portion those during off-peak time so that each serving is the correct portion. This not only helps to control food cost but also speeds up production on the line.
• Sell your most profitable items – Calculate your most profitable items, not by food cost percentage, but by dollar profit margin per item. Train servers in the art of suggestive selling. Many POS systems will assist in identifying your most profitable items. If your system does not do this, you may be able to pull your POS data into your restaurant accounting and inventory system to get the data you need.
• Compare theoretical use to actual use – Calculate your theoretical food cost regularly. Theoretical food cost is just that. If your POS recorded 52 chicken breasts sold, then your theoretical use would be 52 chicken breasts. When you compare what you actually used (let’s say our inventory showed we actually used 60 chicken breasts not 52), with what you should have used and see a variance, that gives you specific, actionable steps you can take to correct this. Was it waste? Make sure you are using a “waste tracking” sheet every shift in your kitchen and that all waste (and the reason for that waste) is being tracked. Was it theft? For your higher value items, typically proteins, you might institute a daily reconciliation of what was sold versus what was actually used. This helps identify the problem quickly so you can act to correct it.
• Know your SPLH – Learn your sales per labor hour (SPLH) for front and back of house. This reflects a key performance indicator and is a key metric in managing your labor costs. Examine your schedules. Are you bringing in a busser right when you open, instead of 30 minutes later when there are actually tables to clear? Do you need two hostesses at opening, or can you stagger start times to bring additional hosts/hostesses in later as you get busier? The same applies to the end of the evening. While you may need five line-cooks during peak business, you may be fine with just three during your last hour of operation.
• Utilize part-time employees – Use a mix of at least one-third part-time staff so that you have scheduling flexibility and minimize overtime.
• Crosstrain your staff – This is an invaluable way to overcome situations where you need that extra cook on the line, but only for an hour or two. Cross train your morning prep cook to work a station on your line during lunch rush, then when it slows down, return to completing his or her prep work.

Prime Costs can be quite volatile. They will often creep up before an operator notices, especially if you are not looking at them on a daily or weekly basis. Data is important, but acting upon that data is the key to controlling your prime costs. And while it is important to control your prime costs, do not sacrifice your food quality or guest service in doing so. Use today’s technology to assist you in the management of your restaurant business. There are excellent cloud-based all-in-one restaurant software systems in the marketplace that can integrate to your POS system, your payroll service, food and beverage suppliers and even your banks. The easier you can make it to convert the information you have into action steps, the more effective you will be in hitting your prime cost targets.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.