Main cost: more than 57% can mean problems
Although “principal cost” is rarely found as a line item in a restaurant’s profit and loss, allowing excessive principal cost is a key factor in hospitality failure. We all know that whatever segment of the industry we are in; full or fast service, pub or cafe, coffee shop or espresso stand, it’s all about controlling your business. Control requires information. Your accountant takes care of your operation after the fact, when the money is already spent.
Be proactive. Don’t wait for your accountant to tell you he’s in trouble!
What is “Prime Cost”? Simply put, it is the total food and beverage costs of a restaurant plus the total payroll costs for a specified period of time. That total divided by total sales = PC%
It’s that easy! What is important is the ability to view cost of goods sold and labor expenses as a single number or percentage. One way to ensure that you are on the path to profitability is to complete a cost estimate. This should be done weekly so that you have a chance to correct unprofitable trends. Some even calculate their principal cost percentage on a daily basis. However, in most cases a weekly summary is sufficient. It really isn’t that difficult to add a couple of items to your Daily Activity Report. You have a DAR, right? If not, click the link below to see an example of DAR. You will need to know the food and beverage purchases for the day, as well as the total labor dollars. The concept of “control” is the same no matter what size of operation you have.
Note: When calculating daily labor expense, you can also calculate Sales per man-hour. Simply divide the total number of hours by the total sales. “SPMH” is a productivity measure that does not take into account different salary levels. It is not a substitute for a labor cost figure, but good to know. Again, if you click on the “Bio Box” link, you will find more information on this kind of thing.
What is the first thing you notice in your profit and loss?
It is common to hear people comment that they first look at the final result. My first look at a profit and loss statement is Prime Cost, and since it’s rare for it to be listed as a line item, I usually have to calculate the percentage in my head. Preferential cost is one of the best indicators of restaurant profitability and how well the business is run on a day-to-day basis. Restaurants whose PC is above 57% almost always have problems with product consistency and food quality, and indeed poor management practices. How a restaurant controls its primary cost is often a very telling indicator of how well the business is being run overall.
Since PC is such an important number, you may want your accountant or bookkeeper to modify your profit and loss to show the principal cost as your own item.