What is prime cost and how do I track it?
Prime cost is the sum of your cost of goods sold and your labor costs, typically expressed as a percentage of total sales. For restaurants and food service businesses, these two expense categories represent 55-65% of every dollar you bring in. That’s why prime cost is the number restaurant owners watch more closely than almost anything else.
Cost of goods sold includes everything you purchase to make what you sell. For a restaurant, that’s food, beverages, paper goods, and anything that gets consumed in the production of a meal. For a manufacturer, it’s raw materials and components. The key is tracking what you actually use, not just what you buy. Inventory sitting in your walk-in doesn’t count until it gets plated.
Labor costs include more than just wages. Add payroll taxes, workers’ comp, health insurance, and any other employee-related expenses. Some operators only count hourly staff in prime cost, while others include salaried managers too. Pick a method and stick with it so your numbers stay comparable month to month.
To calculate prime cost percentage, add COGS and labor together, then divide by total sales. If you spent $25,000 on food and beverage and $30,000 on labor last month, and sales were $100,000, your prime cost is 55%. That leaves 45 cents of every sales dollar to cover rent, utilities, equipment, and profit.
Track this weekly, not monthly. Monthly reports tell you about problems after they’ve already cost you money. Weekly tracking catches waste, over-scheduling, and purchasing issues while you can still fix them. Run the numbers every Monday for the previous week and compare to your target.
For food cost tracking, you need accurate inventory counts. Take inventory weekly at minimum, same day and time each week. Food cost equals opening inventory plus purchases minus closing inventory. Divide that by food sales for the period to get your food cost percentage.
Labor tracking requires pulling your payroll data weekly. Most payroll systems can generate reports by week. Add all labor-related costs, not just gross wages. Divide by total sales for that same period. If your labor percentage creeps up, look at your schedules and sales forecasts.
Prime cost benchmarks vary by restaurant type. Full-service restaurants typically target 60-65%. Quick service runs lower, often 55-60%. Fine dining might run slightly higher. The right target depends on your concept, but tracking consistently matters more than hitting a specific number.
The restaurant industry lives and dies by prime cost. A restaurant running 70% prime cost barely covers overhead and leaves nothing for profit or unexpected expenses. One running 58% has room to absorb a slow week or invest in improvements.
If your accounting system isn’t set up to generate these numbers easily, talk to your Nampa bookkeepers about structuring your chart of accounts for prime cost reporting. The goal is making this calculation quick enough that you’ll actually do it every week instead of dreading it.
The Treasure Valley's Tax and Accounting Team
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