Why is Prime Cost So important?

Calculating restaurant prime costs are critical to managing a profitable restaurant business. Prime costs make up the majority of your expenses. Therefore, knowing how to control them can mean the difference between success or failure. Here’s the formula for calculating prime cost:

Let’s start off by reviewing what goes into prime cost. Prime cost is the grand total of cost of goods sold, which includes food, beverage, draft beer, bottled beer, wine and liquor costs, and total labor cost, to include taxes, benefits, and insurance

In a full-service restaurant, the prime cost will run slightly higher (60%-65%) than a quick-service restaurant (55%-60%).

NOTE: True cost of goods sold can only be calculated when you take inventories to find the value of every product you have on your shelves at least once a month, preferably once a week. This is required because to know your Cost of Goods Sold (COGS) + Total Labor Cost = Prime Cost Your “cost of goods sold” is the cost of the raw ingredients that make up your menu items. The figure represents the amount of food and beverage ingredients you use to produce the food and beverage menu items sold during a specific time period.

Here is a visual of the Cogs Equation

For example, after taking an accurate inventory of your storeroom, walk-in refrigerator and bar, you count $10,000 in inventory at the start of the period. (Let’s say your period is one week). During the week, you received an additional $4,500 worth of new inventory and at the end of the week, after another accurate stock count, you had $8,000 in inventory. To calculate COGS, plug your inventory numbers into the COGS formula.

$10,000 beginning inventory + $4,500 purchases – $8,000 ending inventory = $6,500 COGSUsing the COGS and labor numbers from our examples above, the prime cost would be: $6,500 COGS + $7,000 labor cost = $13,500 prime cost Next, we’ll use the prime cost ratio formula to determine

how much revenue was generated from the prime cost: Prime cost ÷ total sales x 100 = prime cost percentage Using $22,000 in sales during the specified week (again, assuming this number for illustrative purposes only), this is how to calculate the prime cost percentage:

$13,500 prime cost ÷ $22,000 total sales x 100 = 61.4% prime cost or $8500 Towards your direct operating expenses. Right at the optimal level, but what if you missed your mark and had a high prime cost, using the same foundation, but have a higher food cost by just 2 or 3% really throws your prime costs off, and lowers the amount of money you have left to pay bills and makes it harder to run your business

For Example

$10,000 beginning inventory + $4,800 purchases – $7900 ending inventory = $6900 COGS Using the COGS and labor numbers from our examples above, the prime cost would be:$6,900 COGS + $7,000 labor cost = $13,900 prime cost $13,9000 prime cost ÷ $22,000 total sales x 100 = 63.1% prime cost or $8100 which is $400 less money you have to pay bills

Now you can see why it so important to pay attention to your Food Cost, Bar Costs, Labor Costs, and Restaurant Supplies

If you can keep it between 63 and 65% you have a real good change-making through any tough times that may and (trust us they will arrive)

If you want a little more details, watch this clip from the Jimmy and Jonny show on prime costs.  

 

And if you want to catch some of our past episodes, look on the right side and go listen to the full show

 

Thanks

Jimmy and Jonny

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