Article

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

Oct. 17, 2024 · Authored by Brian Campbell, David Foster of Foster and Associates

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.