Article by Steven Buckley, Demand Media
If you are running a restaurant or food service business, you understand that the most important costs under your control are food (including beverages) and labor costs -- together, known in the industry as prime costs. Being able to compare these costs -- in a percentage format -- against typical scenarios of other restaurant businesses is helpful in the management of your business.
Calculating Prime Cost
Though percentages of food and labor vary, it is the combination of the two that determines your success or failure.
PRIME COST = the grand total of your total cost of goods sold, which includes both food cost, beverage cost and liquor (also known as pour cost), and total labor cost.
Costs Vary Widely by Type of Restaurant
Both food and labor costs vary with the type of food service operation. As a rule, luxury restaurants will have higher food and labor cost percentages than casual dining or fast-food restaurants. The product sales mix, quality of food and service, pricing and hours of operation will impact your food and labor cost percentages. Furthermore, state minimum wage differentials and differences in tip credit allowances (toward minimum wage) affect the labor cost percentage. The extent of beverages sales -- as part of the food mix -- has a considerable impact on total food cost percentages.
How Food & Labor Costs are Calculated
Food and labor costs are calculated as a percentage of the total volume of sales. If a restaurant does $20,000 per week and the total cost of food and beverages is $7,000 for that week, then the food cost is considered 35%. If, at the same restaurant, labor (including payroll taxes and benefits) equal $5,000 for the week, then the labor cost is 25%. Total prime costs are 60% in this example.
What are the Ranges?
Certain fast food restaurants can achieve labor cost as low as 25%, while table service restaurants are more likely to see labor in the 30% to 35% range. Food costs (including beverages) for the restaurant industry run typically from the 25% to 38% range, depending upon the style of restaurant and the mix of sales.
Look at Prime Costs to Determine Success
In order to make money in the restaurant business, prime costs should generally be in the 60% to 65% range. How that breaks down between food and labor is less important than achieving a prime cost maximum that produces a satisfactory profit. So if one of the prime costs is in the higher range, the other prime cost must be in the lower range to achieve profitability. Remember it is the combination of food and labor that creates the bottom line.