Mastering Prime Costs: The Hospitality Industry's Secret to Boosting Profits

As a hospitality business owner, it’s crucial to keep track of your prime costs. This metric is one of the most important in the restaurant industry – yet surprisingly, not every accountant will report on it…

Prime costs are among the largest expenses in the restaurant business industry and keeping them in check can mean the difference between a successful venture and a constant struggle with slim margins. 

Here’s a straightforward guide on why prime costs are crucial, how to calculate your prime cost percentage, and strategies for keeping these costs at optimal levels for your business’s financial health.

What Are Prime Costs?

According to Investopedia, prime costs are the expenses “directly related to the materials and labour used in production.” In a nutshell, Prime Cost is the total of food costs and beverage costs costs plus labour costs, representing the essential direct costs involved in running a profitable business. More speciafically, it includes:

1. Cost of Goods Sold (COGS): COGS refers to the direct costs associated with producing your menu items. In a restaurant, this typically includes the cost of ingredients, beverages, and any other consumables required to prepare each menu item.

2. Labour Costs: Labour costs include all wages paid to hourly employees and salaried employees involved in the day-to-day operations, such as kitchen staff, servers, and bartenders. Labour costs are considered part of prime cost because they are essential to delivering the dining experience your guests expect. 

This is often referred to as the Prime Cost Ratio, and it’s the number you want to watch (like a hawk!). Prime Costs vary, unlike fixed overhead costs (like rent and utilities). This makes Prime Cost one of the most volatile costs to manage, as it fluctuates with menu item prices, sales volume, and employee wages.

Prime Costs vs. Overhead Costs

Prime Cost and overhead expenses are both essential but serve different roles in the restaurant industry. Prime Cost covers direct costs of running the restaurant, while overhead costs includes indirect costs like rent, utilities, and insurance. Together, they make up your total operating expenses.

Prime Cost, however, is more variable and directly tied to your sales mix. Keeping Prime Costs in check tends to have a bigger impact on financial health than managing overhead expenses alone.

How to Calculate Your Prime Cost Percentage

Calculating your prime cost percentage doesn’t require advanced accounting. Here’s the prime cost formula:

1. Total Food and Beverage Costs: Include all costs of ingredients and supplies for menu items. 

2. Total Labor Costs: Sum up wages for both salaried employees and hourly employees, along with any employee benefits like health insurance.

3. Divide by Total Sales: Take your prime cost and divide it by total sales for a chosen time period (typically weekly or monthly).

4. Multiply by 100 to get a percentage.

So, for example, let’s say a restaurant has food and beverage costs of €15,000, labour costs of €20,000, and total sales of €50,000. Using the prime cost formula:

Prime Cost Percentage = (€15,000 + €20,000) ÷ €55,000 x 100 = 63,6% 

Keeping an eye on your prime cost ratio gives you a snapshot of your business’s financial health and helps you spot controllable costs that can improve profitability.

What is the Ideal Cost Percentage for Restaurants?

According to Jim Laube, an expert in the restaurant industry, “the generally accepted rule of thumb says that prime cost should run no more than 65 per cent of total sales.”

This benchmark is widely used in full-service restaurants, where keeping prime costs around 65% or lower gives a healthy margin to cover other operating expenses. For bigger casual dining chains, it’s often possible to push prime costs down to around 60% without sacrificing quality – a move that can make a nice difference to profitability.

But when prime costs creep above 65%, that’s when the pressure starts. At 70% or higher, even a busy table service restaurant might feel the squeeze. Higher prime costs mean less breathing room for other expenses, making it harder to keep profits steady.

Quick-service restaurants (QSRs), on the other hand, typically aim for a tighter prime cost target, keeping it closer to 60% or less. QSRs often manage this through streamlined operations and quick turnover, which help bring costs down. Some high-volume QSR chains even hit prime costs as low as 50%, setting themselves up for impressive net margins in the 20-25% range, according to Laube. 

Prime Cost Pressure in Irish Hospitality

Our own report, Irish Food-Led Business By The Numbers 2024, highlights just how challenging it is to keep prime costs under control. With labour costs consuming over 40% of revenue and food costs still high, many Irish restaurants are struggling to stay within the ideal prime cost range of 60-65%. 

Tight margins mean there’s less flexibility to absorb rising expenses, making it essential for restaurant owners to closely monitor these costs to stay profitable.

Why Tracking Prime Cost is Essential for Financial Health

Prime Cost is that one number that quietly shows you if your restaurant’s running smoothly...or if it's time to tighten things up. Here’s why keeping it in check matters:

• Stronger Margins: Lower Prime Cost means better profit margins, plain and simple. With tight margins being the norm in the hospitality industry, every bit saved here helps, and sometimes it’s the difference between getting by and actually seeing some growth.

• Lean Operations: A lower Prime Cost often shows you’re running a tight ship. Cutting down on food waste, managing employee schedules efficiently – these are the things that keep costs under control and your restaurant on track.

• Planning Without the Guesswork: Knowing your Prime Cost means you have real numbers to base your decisions on. It helps you set prices, manage staffing levels, and keep food costs from creeping up, so you’re not constantly firefighting on costs.

• Flexibility with Rising Costs: Food and labour costs don’t stay put; they’re always shifting. By tracking Prime Cost regularly, you get a clearer picture, and it’s easier to adjust things to stay on top, whether it’s menu tweaks or rescheduling shifts.

6 Keys to Keeping Prime Cost Under Control

So, let’s get practical. Keeping Prime Cost steady is all about small moves that add up. Remember, it’s not about changing everything at once or pushing for instant results – take your time, adjust where you can, and let the numbers guide you (data can be your best friend!). Here are some practical tips:

1. Standardise Recipes and Portion Control 

Standardising recipes, menu engineering, and consistent portion sizes not only reduces food waste but also keeps each menu item consistently profitable. This makes sure that food costs stay in check while giving customers a uniform experience.

2. Use Smart Scheduling for Employees 

Avoid overtime and unnecessary hourly wages by using employee scheduling software, and labour reports. This ensures you have just the right number of staff on hand, minimising costs without compromising service quality.

3. Monitor Prime Cost Weekly

Checking Prime Cost weekly (instead of monthly) keeps you nimble. As industry expert Jim Laube points out, "operators who are serious about maximising profitability want to know their biggest, most volatile costs at the end of every week. (...) It’s very common for restaurants to see their prime cost go down by 2 per cent to 5 per cent of sales within the first few weeks of calculating these numbers weekly." Weekly tracking helps catch issues early so you can take action faster. 

4. Perform Regular Menu Analysis 

Every few months, review your menu items and make sure each is pulling its weight. If certain menu items’ costs are rising, adjust menu prices or portions to maintain profitability.

5. Negotiate with Suppliers 

Strong relationships with suppliers help you get the best deals on ingredients. Negotiating prices where possible keeps food costs down, improving your prime cost percentage without sacrificing quality.

6. Use Technology for Inventory and Labour Tracking

Technology streamlines inventory and labour tracking. Real-time inventory management software keeps tabs on food stock, reducing over-ordering and waste. Similarly, employee scheduling software simplifies payroll and ensures you’re accurately tracking labour costs.

Stay on Top of Prime Costs with Outmin’s Insights

Most accountants give you monthly or quarterly reports. By the time you see them, the costs are already set, and the chance to react has passed. With Outmin, you’re getting weekly prime cost insights plus daily cash flow insights. That means real-time control, week by week, with plenty of room to adjust and keep costs in check.

Our all-in-one accounting solution is built for the needs of the hospitality industry, combining expert support with advanced technology that saves you time and keeps you fully in the loop. From AI-driven bookkeeping to automated payroll, tax compliance, and expense tracking, Outmin takes the load off your team so you can stay focused on growth, not admin.

Want to see the difference timely insights can make? Outmin’s here to keep things clear, manageable, and focused on what really matters. Book a demo today!