The Ideal Restaurant Cost Percentages
Do you know what your ideal restaurant cost percentages are? Do you want to know the down and dirty numbers? Stay with me and I'll teach you what your ideal restaurant cost percentages should be.
I can take us down any number of paths, but before we go into key percentages like rent or comps, credit card rates and much, much more, what I want to do today is focus on the three key percentages:
- Prime cost
- Operating expenses
When you look at your business in this simplified way, you can quickly understand where your opportunities are.
Let's start with prime cost. To an old timer like me, prime cost is the combination of the controllable expenses in the control of management. It’s how you hire, fire, train, utilize your people, purchase product, utilize that product. The official breakdown of everything that management controls on a day-to-day basis is your total cost of goods sold and your total labor costs, including taxes, benefits and insurance. I won't go into great detail on prime cost as far as the calculation, other than make sure you read this article where I spend more time talking about the formula.
With your total cost of goods sold, plus our total labor costs, which includes the taxes, benefits insurance, when you’re measuring expenses, you measure against use divided by sales. Here is the important part: you must use gross sales in your calculations. Gross sales is the ring at the register before the discounts have been removed and not including sales tax. If you sell a $10 burger but only collect $5 because of a marketing promotion, $10 is gross sales. It is incredibly important to use the right numbers. That way, you’re measuring your management team off the right numbers.
When I first started coaching restaurants in, gosh, almost 20 years ago, in 2003, the experts said you were shooting for 65 percent prime cost if you were a full service restaurant, 60 percent if you were quick serve. But things have changed. Costs have done nothing but go up. Your profit margin has been disappearing. It's getting harder and harder to make money. Or is it? If you do at least $850,000 a year or more in sales, your prime cost target is 55 percent. Not 65. If you do under that number, it's much harder to make the money that I want you to make, but your key target is about a 60 percent prime cost.
I have members in my coaching programs that have a higher prime cost and members who have even lower prime cost, depending on where their sales are, their efficiencies and so on, but the best target for everyone to aim for is 55 percent prime cost if you want to turn a profit.
Next, you have operating expenses. While there's a long list of expenses that go into your operating expense, the target percentage is 25 percent of sales. I do have members who are higher and some that are just slightly lower, but 25 percent is really efficient and whether you can get to it depends on whether your occupancy rate is in the right place, or if you have a lot of loans. If you’re like many in the restaurant industry and the pandemic kicked your butt, you might have a stack of bills you kicked down the road, it is tougher to be that efficient. But like with prime cost, the more you can control those fixed expenses, the more you can bring down your efficiencies, and the closer you can get to 25 percent.
The last the big number is your profit margin percentage. The National Restaurant Association has released stats in the past to say that a typical restaurant makes five to eight cents on every dollar that comes in the door. I don't know about you, but I don’t know that it’s worth it to put my family's livelihood at risk and extend myself and work my ass off and do all these things for a nickel of every dollar that comes in. If you do about $750,000 or less in annual sales, you may have purchased a job. To be even more clear, if you have a $350,000 sandwich shop, or a $500,000 pizza place, you have bought a job. With those kinds of sales there's not enough money to pay for a full-time management team to make you money. That means you have to work the business (which I’m sure you’re doing if these are your sales). As you get to that $750,000 mark, you can start to add management. But odds are you're still leading the business. When you get to that $850,000 mark, it's much easier to pay for a full management team and still make money.
If you have that lower volume in sales, the target for your profit margin is about 10 percent profit and the lower your sales, that 10 percent profit may include your salary as the working manager.
When you start to hit that $1 million mark, you should start working towards a 15– 20 percent profit margin. That’s a not a nickel or eight cents, but 15–20 cents on every dollar that comes in when you put the right systems in place.
When you delegate the tasks to your management team, when you train them, and hold them accountable, you can actually not be in the business and have a 15–20 percent profit margin.
That's where your salary comes from. Working on your business, not in it. Now if you hit over $2 million, like the higher your sales are, the easier it is to make money. Why? Because of labor efficiencies. At some point in time, your sales are so high that your customers manage your efficiencies. Bring all your employees in at the same time and send them home at the same time and you will still have a low labor cost because you’re just so damn busy. Your fixed costs like rent and salaries and things like that, you don't pay more for them because the sales went up, so as a percentage, they shrink down, they drop. Volumes cure all ills.
When you get volumes like that it can truly be like minting money. I've seen it firsthand with my members over the years, going back to 2003. They are able to do it because they've implemented systems, they've trained their managers, and they hold them accountable. They lead their businesses,
The key to hitting these numbers is knowing your numbers. And the only way to know your numbers is to create your budget. This is so important that at my company we create budgets for all of our members. How can anybody help you with your plan for success if we don't know your numbers? Heck, how can you even help yourself if you don't know your numbers?
Make creating a budget your priority. I offer a ton of videos on the topic, either on YouTube or right here on my site. If you want a coach to mentor you and help you through the whole process so you can get to that nice profit margin, schedule a discovery call with me. We can discuss what membership looks like, and I can show you what happens when we do your budget for you.
If you would like to learn how to own a restaurant that doesn't depend on you being in it to be successful, watch this free video course that teaches you three key principles to running a successful restaurant. If you're ready right now to make some serious changes in your restaurant, you can also book a 60-minute call with me where we talk about your challenges and figure out exactly what is holding you back from having a restaurant that doesn’t depend on you being in it to be successful.
Be sure to visit my YouTube channel for more helpful restaurant management video tips.