Although “Prime Cost” is rarely found as a line item on a restaurant P&L allowing an excessive prime cost is a key contributor to failure in the hospitality. We all know that whatever segment of the industry we’re in; full or quick service, pub or cafe, coffee shop or espresso stand, that it’s all about controlling your business. Control requires information. Your accountant deals with your operation after the fact when the money is already spent.
Be Pro Active. Don’t Wait For Your Accountant to Tell You You’re In Trouble!
What Is “Prime Cost”? Simply stated it is a restaurant’s total food and beverage costs plus total payroll costs for a specific period of time. That total divided by total sales = P.C.%
It’s just that easy! The important thing is the ability to view Cost of Goods Sold and Labor Expense as a single number or percentage. One way to insure that you are on the road to profitability road is complete a cost estimate. This should be done weekly so you’ll have the opportunity to correct unprofitable trends. Some even calculate their prime cost percentage on a daily basis. However, in most instances a weekly summary is sufficient. It’s really not that difficult to add a couple items to your Daily Activity Report. You do have a DAR, right? If not , click on the link below to see one example of a DAR. You’ll need to know F&B purchases for the day as well as total labor dollars. The “control” concept is the same no matter what size operation you have.
Note: When computing daily labor expense you might as well figure Sales-Per-Man-Hour a well. Just divide the total number of hours by total sales. “SPMH” is a measure of productivity which does not take into account different pay levels. It does not replace a labor cost figure but it’s just good to know. Again if you click on the link in the “Bio Box” you’ll find more information about this kind of stuff.
What Do You Look at First on Your P&L?
It’s common to hear people comment that they look first at the bottom line. My first glance at a P&L statement is Prime Cost and, since it is rare for it to be included as a line item, I usually have to figure the percentage in my head. Prime cost is one of the best indicators of restaurant profitability and how well the business is managed on a day-to-day basis. Restaurants whose P.C. is anything above 57% nearly always have issues with product consistency and food quality and for that matter, poor management practices. How a restaurant controls its prime cost is often a very telling indicator of how well the business is being managed overall.
Since P.C. is such an important number, you may want to have your accountant or bookkeeper modify their P&L to show prime cost as its own line item.
