Are your Prime Costs under control?
If you don't know what your Prime Costs are every month for your restaurant, then your restaurant is probably losing money. What are your Prime Costs? Why are they so important? How can you get your Prime Costs under control?
"Prime Costs" is a term commonly used to describe the two largest categories of expenses in a restaurant. It is a combination of your total Costs of Goods Sold and your total Labor Costs. The total Costs of Goods Sold generally refers to all of your combined food and beverage expenses and often also even includes paper products like cups and napkins and food wrapping or packaging used to serve the food products. The total Labor Costs generally refers to all costs directly associated with your monthly labor, including salary and hourly wages, payroll taxes, and benefits.
Your monthly Prime Costs are usually expressed as a percentage of your monthly sales. If your sales total for the month was $100,000 and your Prime Costs total was $72,000 for the month, then your Prime Costs would be expressed as 72% of sales. A Prime Costs percentage of 72% may be good for some restaurants, but not so good for others. What should your restaurant's Prime Costs be?
There is no particular Prime Costs percentage that would be ideal for all restaurants. Some restaurants may operate successfully with a Prime Costs figure of 72%, and other restaurants might fail with a Prime Costs figure that high. The Prime Costs will often fall between the range of 50% to 80% of sales for most restaurants, and you can probably bet that your restaurant will not be particularly profitable if your Prime Costs are closer to 80%. There are many successful national restaurant chains that try to maintain Prime Costs of no higher than 66%, and constantly aim for 60% or lower. To better determine what a good Prime Costs figure might be for your restaurant, you might want to look at the Costs of Goods Sold and the Labor expenses individually.
What amount or percentage should your Costs of Goods Sold be? Like the Prime Costs, the monthly Costs of Goods Sold is often expressed as a percentage of the monthly sales. If your sales total for the month was $100,000, and your Costs of Goods Sold total for the month was $34,000, then your Costs of Goods Sold would be expressed as 34% of sales. So is a 34% Costs of Goods Sold figure good or bad? Well, it depends on the restaurant. A successful fast food chain restaurant that serves Mexican food might have a Costs of Goods Sold figure less than 28%, while a successful high end steak house restaurant might have a Costs of Goods Sold figure over 38%. Most restaurants nationwide tend to fall between the range of 25% to 40% for their Costs of Goods Sold.
What amount or percentage should your Labor Costs be? Like your Prime Costs or your Costs of Goods Sold, the monthly Labor Costs can also be expressed as a percentage of the monthly sales. If your sales total for the month was $100,000, and your Labor Costs total for the month was $38,000, then your Labor Costs would be expressed as 38% of sales. So is a Labor Costs figure of 38% good? Again, it depends on the restaurant. Restaurants nationwide vary in their Labor Costs percentage from around 25% to over 40%. A fine dining restaurant with table service and bar staff will often have a Labor Costs percentage of 35% or more. A fast food restaurant may commonly have a Labor Costs percentage of less than 28%.
So if your restaurant has a Costs of Goods Sold of 34% and a Labor Costs of 38% it make your Prime Costs a total of 72% of sales. Is that good or bad? If you are running a fast food pizza restaurant, a Costs of Goods Sold of 34% is probably too high. If you are running an upscale dining restaurant, a Labor Costs of 38% might not be that bad. You will have to try and set reasonable goals that match your restaurant's needs. Then you need to try to reduce your Costs of Goods Sold and your Labor Costs in ways that do not compromise the quality of your products and services.
How do you reduce your CoGS? Finding better sources for your food products is an easy way to reduce your CoGS, particularly if you have a friend in the industry like Epicures, Inc. We routinely help our clients to locate new sources for their food products that help reduce their CoGS without sacrificing quality, and we usually do it at no cost to our clients. It is easier than you might think, just give us a call and we can help.
How do you reduce your Labor Costs? Reducing your Labor Costs requires diligent examination of all of the daily, weekly, and monthly tasks by every employee in a restaurant. Careful analysis often reveals wasted time and repetitive tasks that create unecessary expenses. Simply reducing one hour on a schedule that may not be needed daily can make a slight reduction in your Labor Costs. One hour on a weekly schedule may not sound like much, but if you are a part of a chain of 250 restaurants, that simple adjustment in all of your restaurants could save your company as much as $10,000 a month.
At Epicures, Inc. we often find ways to help reduce both your CoGS and your Labor Costs at the same time. We have helped many clients to eliminate labor and food costs without sacrificing quality, and in fact even improving the quality of products or services. Simply give us a call and we can work together to help reduce your CoGS, your Labor Costs, and your Prime Costs.
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