Prime cost is an important metric for any restaurant to understand how it is performing and how its largest expenses compare to its revenue. Read on below to discover what prime cost is, how to calculate it, and use our helpful calculator to calculate your restaurant’s prime cost metric.
What is prime cost?
Prime cost is the combined total of what you spend on ingredients and what you spend on people. These are the two largest controllable expenses in a restaurant, which is why operators watch this one number more closely than almost any other line on the P&L.
Why is prime cost important?
Prime cost is the clearest single measure of how well a restaurant controls its two biggest expenses, food and labor, which together usually take up well over half of every sales dollar. Because those costs are largely within management’s control, a shift in prime cost points directly to something that can be fixed, such as over-portioning, overstaffing, or rising vendor prices. It also shows whether a restaurant can stay profitable, since whatever remains after prime cost has to cover rent, utilities, marketing, and owner profit. Tracked weekly, it gives operators time to adjust while the period is still open, instead of finding out weeks later that the month got away from them.
How do you calculate prime cost for restaurants?
Prime cost % = (Cost of goods sold + Total labor) ÷ Net sales × 100
Example: a restaurant with $100,000 in sales, $30,000 in cost of goods sold, and $31,000 in labor has a prime cost of $61,000, or 61%. Click here to use our Sous Chef Accounting Prime Cost Calculator to determine your restaurant’s prime cost metric.
What counts as labor and cost of goods sold?
| Cost of goods sold | Labor |
|---|---|
| Food purchases adjusted for inventory change | Hourly wages, including tips paid through payroll |
| Beverage purchases adjusted for inventory change | Salaried manager and kitchen leadership pay |
| Packaging and to-go supplies (varies by operator) | Payroll taxes, benefits, workers’ compensation |
Cost of goods sold is purchases plus beginning inventory minus ending inventory. If inventory is not counted, or invoices are not entered, this number will be wrong.
What is a good prime cost?
The common rule of thumb is 55% to 65% of sales. Under 60% is generally considered strong. Above 65% usually means little room is left for rent, utilities, and profit. Concepts differ: a full-service restaurant with a large team and a high-cost menu will often run differently from a quick-service concept. Use the range as a guardrail and compare each location to its own history and to its sister locations.
Why your prime cost may not be accurate
Prime cost is only as reliable as the inputs behind it. The most common problems we see in restaurant books are vendor invoices not yet entered, inventory counts that do not reconcile, and payroll that has not been accrued to the right period. Any of these makes prime cost look better or worse than reality, and decisions get made on the wrong number. Sous Chef Accounting offer Restaurant365 Maintenance and broader outsourced accounting services to provide restaurants with accurate, actionable reporting around prime cost.
Want these numbers without chasing them? Sous Chef Accounting handles restaurant bookkeeping, Restaurant365 setup and upkeep, and fractional CFO work. Talk to our team.
Frequently asked questions
What is a good prime cost percentage?
Most operators aim for a prime cost between 55% and 65% of sales, with 60% a common target. The right number depends on your concept, menu, and market, so track your own trend alongside the benchmark.
What is included in labor for prime cost?
All labor counts: hourly wages, salaried manager and kitchen leadership pay, payroll taxes, benefits, and workers’ compensation. Leaving out manager salaries or payroll taxes is a common reason prime cost looks better than it is.
How often should I calculate prime cost?
Weekly. A monthly number arrives too late to change anything, while a weekly number lets you adjust scheduling and ordering while the period is still open.
Why is my prime cost lower than 55%?
Usually something is missing, not something going unusually well. Unentered vendor invoices, an inventory count that is too high, or payroll that has not been accrued will all make prime cost look better than it is.
How can I lower my prime cost?
Start with the larger of food cost or labor cost. On the food side, review actual vs. theoretical variance, keep recipe costs current, and count inventory consistently. On the labor side, build schedules from a sales forecast instead of last week’s schedule.
