Now is an excellent time of year for operators to look back at their prime costs and determine where they can increase efficiencies and decrease costs.
Industry supply/transportation issues and labor shortages control much of the conversation these days. Operators have been inhibited by the lasting impacts of the pandemic and are looking for ways to move forward strategically.
Having proper tools to keep tight control of your prime costs is essential to operational efficiency and profitability. Furthermore, by understanding what your prime costs are as a percentage of sales and the proper strategies to control prime costs, operators can look to 2022 with the direct intention to utilize prime cost controls as an additional method to increase profits.
What is Prime Cost?
Your Prime Cost includes your most significant expenses, meaning your cost of goods (food and beverage) and labor expenses (including payroll taxes). These are the first two categories you’ll find on your Profit & Loss Statement.
What is the Prime Cost Formula?
Prime Cost = Total COGS + Total Labor
Prime Cost Breakdown
1. COGS: The COGS acronym stands for Cost Of Goods (or Cost Of Sales). COGS is the first Prime Cost area you see on your Restaurant P&L.
What is the COGS formula?
( Opening Inventory + Purchases – Credits – Ending Inventory ) / Sales = COGS
To learn more about what should be reflected in either food cost and pour cost, review our guide on How to Control Your Cost of Goods!
2. Labor: Labor is the largest expense for most restaurants, and it’s the second and final Prime Cost area on your Restaurant P&L. Your total labor includes your Operational Labor (your FOH & BOH/hourly employees) plus the remainder of your labor. I.E., your salaried employees, payroll taxes, employee benefits, and employee discounts.
Read our post here to learn more about regulating your operational payroll dollars!
What is Prime Cost as a Percentage of Sales?
Prime cost as a percentage of your sales is simply your total prime cost divided by your total sales. Knowing this number helps you determine where your prime cost fits within the industry average. More importantly, however, this allows you to compare against your historical data to ensure you’re making progress over time and maximizing profits.
What is the Formula for Prime Cost as a Percentage of Sales?
Prime Cost as a Percentage of Sales = Prime Cost ÷ Total Sales
What is the Average Industry Range for Prime Cost as a Percentage of Sales?
Prime Costs typically range between 60% – 70% of your sales, the lesser end of the range (or lower without cutting corners) being your ideal target. Keep in mind that this range can vary significantly between quick-service restaurants and full-service restaurants.
Why is it Important to Control Prime Costs?
Operators need to control their prime costs because COGS and Labor are the largest expenses to the restaurant. If you’re lowering your prime costs, then you’re positively impacting your bottom line.
Prime costs can fluctuate greatly depending upon what’s happening around the globe. Commodity prices, staffing challenges, and consumer behavior can all affect your prime costs. Therefore, the more frequently you review your prime costs (and your financial statements, for that matter) the better. We recommend a weekly manager meeting to review P&Ls for this reason. If you consistently assess your data, you’ll be better equipped to make educated business decisions based on opportunities presented in your analyses.
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3 Strategies to Control Prime Costs
Strategy 1: Review and Forecast Labor, then Schedule Accordingly
Getting control of your labor dollars can feel daunting, especially when you’re facing industry-wide labor shortages. When reviewing labor, our best practices include:
- Review Period Trends: Analyze your last three periods, look at your overall labor costs, and see if you can identify any trends
- Review Historical Trends: Analyze YOY trends to highlight areas of opportunity
Note, it’s critical to understand what took place at the time of your trend comparisons (holidays, parties, weather, etc.). This knowledge will help paint the picture in the long run so you can understand if you’re comparing apples to apples or apples to oranges.
What Tools Can Help Forecast Labor & Schedule Accordingly?
- Sales & Labor Analysis Report: Utilizing a tool like a SLA Report (a Sales & Labor Analysis) helps provide you with key metrics to better understand what you’re currently doing in Sales and Labor compared to what you had forecasted in those areas. This report not only shows what you’re doing well, but more importantly, it’s a yellow highlighter on your areas of opportunity within proper forecasting. Forecasting and adjusting based on actual sales allow you to hit your budget goals continuously.
Strategy 2: Take Control of Your Inventory & Optimize Your Menu
Counting inventory is the best way to get an accurate representation of your true usage. Your inventory should be a total of all the food product, nonalcoholic beverage, beer, wine, liquor (Note: For QSRs, we suggest including your packaging in this as well), etc.
Additionally, when you count inventory, you touch everything inside the restaurant; including, all equipment, storage areas, walk-in freezers, etc. So, while you’re counting, you can simultaneously perform a facility maintenance check. In doing this, you can catch any maintenance issues before they become a bigger problem.
Furthermore, keeping tight inventory control helps you alleviate issues like waste, error, portioning issues, or theft – all simple areas to reduce costs by spending the extra time to manage them properly.
We recommend you engage your management team in the process. By doing so, you create a baseline for which the team can make meaningful decisions. Ultimately you’re going to save more money with the impact they can have rather than the actual labor dollars it costs for them to perform inventory. Check out our list of best practices in counting inventory to learn more!
When you know your restaurant’s actual usage, you can compare it to your actual costs. By utilizing that data and comparing it to your sales, you can then establish the optimal steps to maximize your menu’s profitability.
What Tools Can Help Manage Inventory & Optimize Your Menu?
- Weekly Spend Forecast: Just like the name reflects a weekly spend forecast puts you in a position to evaluate and optimize daily spending with a weekly spend forecast. Check out our Declining Budget to learn more about how you can stabilize your costs and increase your cash flow.
- Menu Item Velocity Reporting: Menu Item Velocity Reporting shows daily operational data that identifies sales volume per menu item or category. You can then view which items have positive sales and a positive contribution margin to optimize profitability within your menu. Additionally, it’s critical to ensure you adequately train your staff in merchandising those particular items. Merchandising is how restaurants continue to evolve and sustain permanent, long-term growth. The first step here is to educate your team members on which menu items have the highest velocity and most significant margin. Equally as important, train your team to recognize which items, while still necessary to your menu balance, aren’t the ones that are going to provide your business with the greatest margin contribution.
- COGS Audit Reporting: In a restaurant, COGS is where the managers can make the most impact. When analyzing COGS, you’re looking at your big-ticket items – anything that’s significant in getting food to the customer. With COGS Audit Reporting, you can review and approve item and purchasing variances in real-time to ensure impactful business decisions are being made based on real-time data. Additionally, just like reviewing labor, operators should review COGS for trend analysis on a period basis as well as a YOY basis. Doing so provides you with opportunities to leverage relationships with your vendors – Example: Is there an opportunity for price negotiations or product discounts?
Strategy 3: Leverage Relationships with Your Vendors
Building relationships with all of your reps from your food and beverage vendors can help you maximize savings. Creating a partnership between your restaurant and your vendors is vital to deepen the level of engagement you have to strategize together.
Be prepared before you sit down with your key vendor partners to ensure you know purchasing trends and price volatility. This way, you can ask about applicable programs or discounts specific to your goal and what you need.
What Tools can Help you to Leverage Relationships with Your Vendors?
- Manufacturer Rebate Program: If you’re not currently involved in any manufacturer rebate programs, you might be missing some cost savings that could help decrease your overall cost. A manufacturer rebate program leverages the purchasing power of all its members to negotiate contracts with suppliers that end up benefiting everybody in that organization. As part of a larger group, you’ve got strength in numbers, which leads to lower product costs that you couldn’t attain on your own.
- Invoice Analysis Tool: An invoice analysis enables you to track key inventory price changes and quantities purchased over time. Utilizing this tool provides you with the data to speak intelligently with your vendor partners about various strategies for your franchise players. Examples include the possibility of product substitutions, recipe enhancements, or raising menu prices.
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