Prime costs key to measure health of your business

Do you know the minimum amount of sales needed to make a profit? Calculating your prime costs is a good benchmark.

Prime costs for restaurant owners are the total cost of goods sold plus total labor costs. Cost of goods sold (or COGS) is the combined costs of food and beverage ingredients sold at your restaurant, including related supplies like napkins and straws.  When looking at your total labor costs this would include not only wages and payroll taxes, but employee benefits as well like insurance and retirement plan costs.

In other industries, such as construction, prime cost is the total direct cost of production, which is the cost of raw materials and direct labor.

Knowing your prime cost is a valuable tool to know the health of your business and to make adjustments in operations to increase profitability. For restaurant owners, prime costs are the largest expense, but they are also made up of expenses that can be controlled by management.

In today’s tight labor market, knowing your prime costs can help you identify areas in your operations that can be improved, such as controlling inventory, renegotiating supplier contracts, minimizing overtime, or optimizing your scheduling.

Most experts recommend keeping prime costs at or less than 55% to 60% of sales.  Anything less than that is beneficial, so long as service and employee culture are not suffering.  This is usually a good benchmark for paying other expenses and making a profit.

Tracking your prime costs consistently is also recommended to make informed decisions about inventory, scheduling or developing a strategy for controlling food and labor costs. To make an impact on your prime costs it is recommended you look at it regularly.  The more time that goes by without reviewing and analyzing prime cost, the more likely you have missed out on an opportunity to reach prime cost goals.  We recommend looking at this on a monthly basis instead of quarterly, so you can pivot throughout the year as needed.

We at Antares Group use Sage Intacct for our best-in-class accounting system. This powerful cloud-based platform can be customized with dashboards and reporting to meet your needs. Please contact us today to learn more about prime costs and if we can help you customize your Sage Intacct dashboards.

Kristin Ward is Manager with our Business & Tax Advisory Group. She can be reached at kward@antarescpas.com.