Food Cost Formula to Find Target for Independent Restaurants

food cost prime cost Mar 30, 2021

What if I told you you were asking the wrong question when you're searching for the food cost formula to find your target for your independent restaurant? If you want to know where your food cost should be to make money, I want to teach you the right question to ask and the best way to answer it.

When it comes to finding the right food cost formula to find your restaurant’s target food cost, I bet you've watched a number of videos as you’ve searched. I’m willing to bet some of those videos probably talk about the standard food cost calculation – beginning inventory plus purchases, minus ending is use divided by sales is food cost. While that's an extremely important calculation, it’s not the right food cost formula to find your target food cost.

Maybe you've searched videos and you found out about ideal or theoretical food cost that is based on a nasty mathematical term called a weighted average. It says that based on accurate up-to-date recipe costing cards, your product mix from your POS system, what your customers actually purchase and if your kitchen operated perfectly, no waste, no theft, no spoilage, (a perfect restaurant which does not exist), what your food cost should be. It allows you to sell an anchor appetizer out of a box at a 38 percent food cost because you sell the living hell out of your hand cut French fries at 5 percent cost. Those are two very important numbers, they’re not the number you're looking for. While those are extremely important numbers, they don't answer the question you're asking.

What you should be asking is where should my prime cost be?

If you spend any time on my channel or reading my articles, you've heard the term prime cost before. But let's go through it in case this is the first time you’re hearing it, and I'll tell you how to use that prime cost to find your target food cost number.

Prime cost is total cost of goods sold, plus total labor costs, including taxes, benefits, insurance. These expenses used to be called controllable expenses controlled by management. In the old days, you'd hear experts talk about a 65 percent prime cost for a full-service restaurant or 60 percent for a quick-serve restaurant. But our world has changed, which has changed how we manage the margins:

  • The economy took a crap a decade ago.
  • COVID-19 and our prices keep going up.
  • Minimum wage keeps going up.
  • Third-party delivery is at a peak. n software packages.
  • Software packages are needed these days.

Your margins are depleting, getting stolen, robbed from you right in front of your eyes day after day after day. Those old numbers don't work anymore. For almost two decades, I've been teaching my members – if they do $850,000 a year or more in gross sales – to aim for a prime cost of 55 percent. If you do under $850,000, you’re going to start looking at 60 percent prime cost.

To know your true prime cost, you have to take inventories. If you don’t, which is not uncommon, instead of using inventory numbers, you're going to have to use your purchases divided by sales. You can only do that for a 12-month period to take the inventories out, not for a single month.

You have to understand your labor costs and what belongs in the labor cost. For example, as an owner, do you belong in there? Well, if you're a manager on duty, yes. Use your salary or an adjusted salary. Let’s say you pay yourself $75,000, but you'd pay a GM $50,000. Only the $50,000 goes into your prime cost. Because at some point in time, we're going to fire you. We're going to replace you with the general manager, and we need to account for that cost.

All your hourly people – but not including if you've got a bookkeeper, a marketing person, or a role that doesn’t affect the day-to-day running of the restaurant – belong in labor cost. Where is your location? What's your price point? What style of service do you have? What quality of product do you have? What are your core values? These are all factors that affect your prime cost as well.

If your number is 55 percent, do you simply divide food cost and labor cost by two and go with 23.5 percent? Nope, dividing in half is not better information than you had before. You could be in the south in a state that still has $2.13 an hour tip credit for minimum wage for servers. In this case, you could run a higher food cost, lower labor cost. You could be in the state of California or New York with a $15 minimum wage so your labor cost is high, which means you have to drive your food cost down.

It doesn't matter how you get there, but you must get to 55 percent. You can't use industry averages. You have to have your plan for success that suits your restaurant. And the best way to do that is to create your plan for success, also known as a budget, which is based on the right food cost formula to find target for independent restaurants.

If you want to learn more about budgeting, which is going to help you put together what your prime cost needs to be, which ultimately tells you where your food cost target needs to be, make sure you check out this article.

If you would like to learn how to own a restaurant that doesn't depend on you to be successful, watch this free video course that teaches you three key principles to running a successful restaurant.

Be sure to visit my YouTube channel for more helpful restaurant management video tips. 

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