Commentary

Have you taught your managers to track prime costs?

There are certain metrics and habits, especially in the independent segment, that managers need to be mindful of on a regular basis

March 24, 2017

By David Cantu, Co-Founder and chief customer officer, HotSchedules

When times get a little tough, you've got to get back to the basics. Right now, restaurant operators are facing a few challenges: manager retention, slowing or static traffic, changing customer demands, and customer interactions that are transforming as fast as a tweet is sent into the twittersphere.

Employee engagement, customer retention, marketing and other social media tactics are important — there's no doubt that those tactics drive bottom and top line growth. But there are certain metrics and habits, especially in the independent segment, that managers need to be mindful of on a regular basis. One of our customers, Scott Vasko, Chief Operating Officer of NXNW/Red's Porch in Austin, Texas recently said it best: “When it comes to our managers, I tell them ‘you've got to manage your people, and you've got to mind the margins.'”

So, what's one of the most basic activities managers should be doing right now to mind their margins?

Calculating and tracking your restaurant's prime costs
If it sounds simple, it's because it is. However, you'd be surprised how many managers and restaurant operators get busy and let their restaurant prime cost calculation fall off as a priority. But your prime cost is the window to your restaurant's profitability and performance.

What is a restaurant's prime cost?

Prime cost is the difference between your revenue and key operating expenses. You get a ratio when you divide your Prime Cost by the total net sales.

Prime Costs = REVENUE - (Cost of Goods Sold + All Labor Costs)
___________________________________________________

Total Net Sales

Here's a quick example:

Simplified P&L
NET SALES
Gross Sales (Beverage)	$4,500
Gross Sales (Food)	$22,500
TOTAL NET SALES	$30,000

P&L Line Items
COGS
Total Cost of Goods SOLD	$6,600
LABOR
Salaried Labor	$1,200	4%
Hourly Labor	$3,900	13%
Payroll & Tax Benefits	$1,200	4%
TOTAL LABOR	$6,300	21%
COGS + LABOR COSTS	$12,900
PRIME COST		57%

Why is it important to calculate your restaurant's prime cost?

It's important to calculate your prime cost because it includes the two most variable costs in a restaurant: labor and goods. When you know this number, and regularly monitor it, you're able to keep an eye on a healthy percentage that maximizes your profitability.

How often should I calculate my prime cost?

Most restaurants only calculate their prime costs annually, losing out on cash or savings in the process.

Generally, it's best practice to calculate and compare your Prime Cost once a week. At the same time, the more you do it and the more you get to know the cadence of your business throughout the year, you may decide that you can move to monthly or quarterly or even by your own unique ebb-and-flow of the volume of business each year.

Your managers should also make it a best practice to:

Check labor expenses daily.
Check sales expenses daily.
Check inventory weekly (some high-dollar, high-perishable items may need to be checked daily.)

What's a good prime cost benchmark for limited service operations?
Industry averages for a restaurant prime cost hover between 55-70 percent of total sales. Full-service restaurants tend to run between 60-65% of total sales. Limited-service restaurants tend to run between 55-60 percent of total sales.

At the end of the day, what you're looking to track is how you performed against what you projected.