Prime cost or food cost, that is the question
Sometimes we can’t see the forest for the trees. There is so much emphasis on the importance of food cost in a food service business, that we sometimes miss the more important calculation of prime cost, the sum of labor and food which, in most cases, is equal to at least 70% of revenue. Keeping a vigilant watch over prime cost can mean the difference between success and failure.
Take, for instance, a quick service restaurant (QSR) that serves from a steam table on disposable plates. In that case, the human resources requirement is well below that of a fine dining establishment using fine dinnerware, and table service. Not only does the latter need servers, but dishwashers, and perhaps bussers, runners and a hostess as well. In that case, food cost in the fine dining establishment must necessarily be lower than the food cost of the QSR that will have considerably less payroll in order to reach the same level of profitability.
In the case of the QSR, the food cost could be as high as 40%, unheard of, right? But, what if the payroll expense is a mere 20 to 25%, given the fact that no dishwashers, servers or runners are required? The prime cost would be topped off at 65%, a desirable goal, one that would no doubt result in a hefty profit as long as the other expenses are not excessive. On the other hand, the fine dining establishment would have to maintain a much lower food cost for the same results.
I am often asked by students who are contemplating starting their own small business, whether it is a bakery, catering, QSR or fine dining restaurant, how much of their revenue should be allocated for payroll, rent, food and beverage cost and “other” expenses in order to be a profitable business? I always answer in terms of percentage of revenue as follows: prime cost 70%, rent 10% and other expenses 15%. If a food service can keep within these limits, what is left is 5% of revenue for profit. And in the food service business, 5% profit is darn good!
Buon Appetito e Buona Salute, Chef Angela Bell
Beyond the Bull (an “eat smart” kitchen)
233 W. Main St., Central, SC 29630
This story is part of our Small Business Corner, a peek into the life and trials of small business owners.