By Ryan Karolak
If you’re in the restaurant world then you are well aware that margins are slim and competition is fierce.
High food quality, a great staff and a strong reputation are increasingly necessary to survive as a restaurant in a big city. Of course, all of these things independently cost a lot of money. To make things even more difficult, achieving this trifecta is a lot easier said than done. To help you determine how these elements work together, you will want to have a good understanding of prime cost.
What is prime cost?
As a formula, prime cost is fairly simple.
Here it is: COGS (cost of goods sold) + labour cost / food sales.
Let’s start by breaking out what goes into this formula; COGS, labour cost and food sales.
Cost of goods sold or COGS
Cost of goods sold or COGS consists of the cost of the ingredients that you put together to form dishes on your menu (including the stuff that gets wasted). This does not include the dishes, linens, electric bill and other business overhead costs, which are usually relatively “fixed costs” each month.
Understanding labour cost
Labour cost includes the cost of employee wages and salaries (including salaries owners pay themselves). It also includes any benefits you pay out to your employees + payroll taxes.
Food sales is the revenue you bring in from your diners.
So, the goal is to keep your food cost as low as possible while staying competitive on quality, service and reputation. How do we do this? There are two ways this percentage goes down: lower your costs and/or increase your sales.
This may sound like an obvious point, but the conclusion we can draw from this is that often the only way we can lower our food cost is to focus on cost part since increasing food sales any further may be impossible.
Assuming you do everything possible to lower the actual cost of the goods you buy, the next thing to do is figure out your optimal amount of hours to stay open. If you have really slow days or parts of days, those are the times that drive your food cost way up due to lack of sales. By closing during those times, you drive the food cost percentage down. Of course, staying closed too often will drop your sales so much that the percentage will go back up.
Again, prime cost = COGS (cost of goods sold) + labour cost / food sales.
Monitor your food cost percentage and play with your hours to find the optimal amount of time to stay open.
About the author:
Ryan Karolak works in sales and marketing for BlueCart and is a recent graduate of NYU’s Stern School of Business. Ryan’s hobbies include record collecting, sports and nature. Ryan lives in Brooklyn, NY.