By David Scott Peters
For decades restaurants have been run with one key number in mind to ensure they have a chance of making money. That key number is called prime cost.
What is prime cost?
Prime cost is the grand total of your total cost of goods sold, which includes both food cost and liquor (also known as pour cost), and total labor cost. In order to have an accurate prime cost number, you must be on an accrual accounting system (sign up for a consultation, and I’ll cover accrual accounting with you).
To calculate your actual cost of goods sold accurately, you start with you beginning inventory, add to it your total purchase for that period (in this example, let’s say one month), then subtract your ending inventory. This sum product of this calculation will give you your total cost of goods sold (the total of all product you physically used or left your shelves during that month). You can quickly see that if you don’t follow this formula and show your total purchases as your cost of goods sold that you will NEVER have an accurate number to evaluate your business… and that’s how many businesses go wrong fast.
Now, while total labor cost sounds simple, and it really is, many restaurants still calculate this number wrong. Total labor cost includes not only the total wages your employees have earned for that period (again for this example we will use a month), and this is where most restaurants stop, but is also includes total taxes, benefits and any insurances paid (workers’ compensation and health insurance).
What is the ideal prime cost?
While I am not a trained economist, I am not a certified public accountant and I am not a statistician, what I am is a restaurant expert who works with more than a hundred restaurant owners in all of North America on a daily basis. And what I can tell you is that if your restaurant is doing at least $800,000 or more a year that the prime cost target is 55 percent. The margins are just too tight to go any higher.
How to get to 55 percent
I know what you are thinking: “NO WAY! There is just no way I can achieve that target prime cost and still have anybody on the floor to serve the guests or in the kitchen cooking food, or without reducing the quality of the product I serve.”
The reality is there is a way, and I have members achieving it over and over again.
Prime cost is something I come back to again and again because it’s the magic number. It’s a core component of my teaching. But for the purposes of this blog post, let’s look at some sample labor strategies and systems you can use to get you closer to 55 percent.
1) Budget Labor: Use our labor allotment system, members have seen a minimum reduction in labor cost of at least 1 percent and many as high as 10 percent. It’s much easier to hit a target when you have one, and it’s that much easier when you’ve spelled out for your managers how much money they have to spend, how many FTEs (full-time equivalents) and how many hours they have to schedule each and every schedule in order to stay within your budgeted targets.
2) Tracking: Track labor on a daily basis enables management to make small changes on a daily basis to stay on budget.
3) Training: Implement a training system (we offer one for full-service and one for quick-service as well as for management training) to reduce labor costs due to lower turnover and increased sales due to happy guests.
While the list goes on, these are actionable systems you can implement today and will be on your way to a 55 percent prime cost. What is really incredible is they work for any restaurant, no matter what kind of service or food you serve.
No matter what path you choose… TAKE ACTION! And get your prime cost to 55 percent.
David Scott Peters is a restaurant expert, speaker, coach and trainer for independent restaurant owners. He is the developer of SMART Systems Pro, an online restaurant management software program helping the independent restaurant owner remain competitive and profitable in an industry boxed in by the big chain restaurants. He is best known as the SMART Systems guy who can walk into any restaurant and find $10,000 in undiscovered cash before he hits the back door… Guaranteed! Learn more at www.TheRestaurantExpert.com.