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Click here to listen to audio interview on Prime Costs with David Scott Peters.
Every independent restaurant operator I know seems to be on this great quest to find out some magical number or percentage they must hit to be profitable. I am always asked, “What should my food cost be? What is the average food cost for an operation like mine?” The same questions are asked for liquor cost and labor cost as well.
I usually like to say there is no such thing as “average” in any given restaurant and that I wouldn’t be concerned about what everyone else does. I talk about the factors that affect the numbers, from what you charge to what your item-by-item sales mix is running. The list goes on.
But the truth is there IS one number that every restaurant operation should shoot for if they want any chance of making any money in this business. This is what is referred to as Prime Cost.
What is Prime Cost?
Prime Cost is the sum total of your controllable expenses. For anyone who has attended my workshop, they know that I refer to controllable expenses as those expenses that are in the day-to-day control of management. How management manages these costs each and every shift does and will influence your bottom-line positively or negatively. They are also often called variable expenses because they go up or down with sales.
I categorize controllable expenses as food cost, pour cost and labor cost. How your managers hire, train and supervise your employees has a direct impact on whether you have any cash in your bank account to pay your bills or take home to your family.
If the kitchen is not following your recipe book to the letter, your cooks maybe over portioning each dish costing you profits on every customer that walks through your door. If your managers are not paying attention to your hour-by-hour sales volumes and keep your entire staff working until the end of the shift when crickets begin chirping in your dinning room, you can count on the fact that your precious commodity, CASH, will pour out of your bank account like a raging river after a record rain fall. No line of sandbags can keep you safe.
Add your total food cost dollars, your pour cost dollars and your labor cost dollars together. Take that number divided by sales and you will get your Prime Cost Percentage. This is absolutely the one number every restaurant operator must pay attention to.
If you have any chance of making money in this competitive business, your Prime Cost should be 60 to 65 percent of your sales, and if possible even lower.
Think about it. That means for every dollar you ring up at your register, you have already spent 60 to 65 cents. Now you can see why the average restaurant only ever makes a nickel on every dollar in sales. You are left with 35 to 40 cents to pay every other expense your restaurant has, including you.
Controlling Your Prime Cost
It’s well worth it to put some considerable time and energy in getting your Prime Cost under control. It is indeed the one number that is true to every restaurant operator. Please understand, however, there are a number of ways to achieve this goal.
You could run a total cost of good sold percentage of 38 percent. At the same time you could be running a 22 percent labor cost for a Prime Cost of 60 percent.
Or you could be running a total cost of good sold of 25 percent and a total labor cost of 35 percent for a total Prime Cost of 60 percent. Both scenarios set you up for success. You find yourself in deep trouble when you total cost of goods sold is 38 percent and your labor is 35 percent. You can’t trim costs in every other category enough to allow you to make a profit.
Before you do anything else, take a moment and think about whether your controllable expenses are in line, and whether you can even tell me what your Prime Cost is.
If you can’t answer either of these questions, put this article down, grab a pad of paper and something to write with and start putting together an action plan to not only know these numbers, but control them.
If you need to learn more about the Prime Cost calculation or ways to control these numbers, go to www.smilebutton.net where you will find a wealth of resources to help you run more profitably.
David Scott Peters is the founder of Smile Button Enterprises, LLC, an Independent Restaurant Coaching and Training Company and is know as the SMART Systems guy who can walk in to any restaurant in the United States and find you $10,000 in undiscovered cash before he hits the