By David Scott Peters
For decades restaurants, pizzerias included, have been run with one key number in mind to ensure they have a chance of making money. That key number is called prime cost.
What is prime cost?
Prime cost is the sum of your total cost of goods sold, which includes both food cost and liquor (also known as pour cost), and total labor cost. In order to have an accurate prime cost number, you must be on an accrual accounting system. That’s a lesson for another day.
Let’s stick with the elements of prime cost. To accurately calculate your actual cost of goods sold — not including labor — you start with your beginning inventory, add to it your total purchases for that period (in this example, let’s say one month), then subtract your ending inventory. The sum product of this calculation will give you your total cost of goods sold (the total of all product you physically used or left your shelves during that month). You can quickly see that if you don’t follow this formula and instead show your total purchases as your cost of goods sold that you will NEVER have an accurate number to evaluate your business … and that’s how many pizzerias go wrong fast.
Now, while total labor cost sounds simple, and it really is, many pizzerias still calculate this number wrong. Total labor cost includes not only the total wages your employees have earned for that period (again, for this example we will use a month), but is also includes total taxes, benefits and any insurances paid (workers’ compensation and health insurance). Many pizzerias calculate only the total wages.
The ideal prime cost?
While I am not a trained economist, I am not a certified public accountant and I am not a statistician, what I am is a restaurant expert who works with hundreds of restaurant owners, including pizzeria owners. And what I can tell you is that if your pizzeria is doing at least $850,000 or more a year in sales, then the prime cost target should be 55 percent. The margins are just too tight to go any higher.
How to get to 55 percent
I know what you are thinking: “NO WAY! There is just no way I can achieve that target prime cost and still have anybody on the floor to serve the guests or in the kitchen cooking food, or without reducing the quality of the product I serve.”
The reality is there is a way, and I have members achieving it over and over again.
Prime cost is something I come back to again and again because it’s the magic number. It’s a core component of my teaching. But for the purposes of this article, let’s look at some sample labor strategies and systems you can use to get you closer to 55 percent.
- Budget Labor: Using our labor allotment system, members have seen a minimum reduction in labor cost of at least 1 percent and many as high as 10 percent. It’s much easier to hit a target when you have one, and it’s that much easier when you’ve spelled out for your managers how much money they are allowed to spend, how many FTEs (full-time equivalents) and how many hours they can schedule each and every scheduling period in order to stay within your budgeted targets.
- Tracking: Track labor on a daily basis to enable management to make small changes on a daily basis to stay on budget.
- Training: Implement a training system to reduce labor costs with lower turnover and increased sales to happy guests.
While the list goes on, these are actionable systems you can implement today, and as a result be on your way to a 55 percent prime cost. What is really incredible is these strategies work for any pizzeria, no matter what kind of service or food you serve.
I will dive more deeply into this topic during my seminar 7 Must-Dos to Reduce Labor Costs on Wed., March 9, at Pizza Expo.
David Scott Peters is speaker and trainer on business topics for independent restaurant owners, as well as the founder of TheRestaurantExpert.com. He will speak on two topics at Pizza Expo 2016: ways to reduce labor costs and the value of recipe costing cards for profitability.
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