Full restaurant, empty register: food cost and prime cost explained

Restaurants go under while busy because what decides the health of the business is not revenue, it is two costs: food cost, meaning how much you spend on ingredients per dollar sold, and labor cost. Added together they are called prime cost and in a healthy restaurant they usually sit between 55 and 65 percent of revenue. Above that, you can fill the room every night and still end the month with no cash.

What food cost is and how to calculate it

Food cost is ingredient cost divided by revenue for the same period, as a percentage. The formula is simple and you can run it today with the data you already have.

The market reference usually sits between 28 and 35 percent, varying widely by type of operation. Steakhouses and seafood naturally run higher. Pizzerias and cafes run lower. What matters is not hitting a magazine number, it is tracking your own line month over month and understanding why it moved.

Why separating by category changes everything

When everything lands as a food purchase, you see food cost went from 30 to 34 percent and have no idea why. Split into protein, beverage, produce and disposables, the answer shows up immediately.

• Protein. Usually half the cost and where supplier price swings hurt most.
• Beverage. High margin and easy shrinkage, because it is the item that most often disappears unrecorded.
• Produce. Spoilage shows up here, and it is the clearest sign of badly sized purchasing.
• Disposables. Looks small, but with heavy delivery it becomes a real line item and nobody looks at it.

Prime cost, the number that decides

Prime cost is food cost plus labor cost, compared to revenue. Labor includes wages, overtime, payroll taxes and the portion of tips that runs through payroll.

The reason to look at both together is that they offset each other. A restaurant can have high food cost and lean labor, or the opposite, and both scenarios work. What does not work is the sum crossing the line, and the sum is exactly what almost nobody calculates.

Why the right number rarely exists

To calculate prime cost accurately you need three things that are usually scattered: reconciled real revenue, ingredient cost split by category, and labor cost for the same period. In practice, something else happens.

• Revenue comes from the point of sale, which shows gross sales, not what actually landed in the bank after card fees.
• Ingredient cost sits on the card statement, mixed with the electric bill and cleaning supplies.
• Labor is with the payroll provider, in a report nobody cross references with anything.
• Tips move through all three places and are treated as revenue in one and as a pass through in another.

Without bringing those three sources together in the books, prime cost is a guess. And guessing in a restaurant is expensive, because the margin is thin and the mistake only surfaces once cash has dried up.

What to do when the number crosses the line

If food cost went up

• Compare your main supplier's unit price over the last three months. Silent increases are common and nobody notices without history.
• Look at produce spoilage. Badly sized purchasing is the most frequent cause and the easiest to fix.
• Review the recipe cards for your best sellers. A portion that grew without anyone deciding is the classic leak.
• Check beverage control. It has the highest shrinkage and the highest margin, so every point lost there counts double.

If labor went up

• Split cost by shift and by weekday. There is almost always one specific shift that does not pay for its own schedule.
• Look at overtime. It is usually a symptom of bad scheduling, not of higher volume.
• Compare labor cost to the number of checks in the same shift, not to the whole month's revenue.