How to calculate prime cost (and bring it down)
Food plus fully loaded labor, as a share of sales, every week. The formula, a worked example, and what to do when it climbs.
Prime cost is cost of goods sold plus total labor, divided by net sales. They're the two lines a store controls day to day, and together they're usually the largest part of what a restaurant spends. Rent, royalties and insurance are set by contract; prime cost is set by the schedule and the line.
A commonly cited target for limited-service restaurants is at or under 60% of sales, with full-service often higher. Your brand's median is a better target than any rule of thumb, because menu and format move it.
The prime cost formula
- Cost of goods: beginning inventory + purchases − ending inventory, for food, beverage and paper.
- Total labor: hourly wages, manager salaries, payroll taxes and benefits. If you only have hourly wages from the POS, add salaries and an estimate for taxes and benefits, and label it an estimate.
- Prime cost % = (cost of goods + total labor) ÷ net sales.
| Net sales | $32,000 |
|---|---|
| Food and paper | $9,600 (30.0%) |
| Hourly wages | $6,700 |
| Manager salaries | $1,500 |
| Payroll taxes and benefits | $1,300 |
| Total labor | $9,500 (29.7%) |
| Prime cost | $19,100 (59.7%) |
Why weekly, not monthly
The P&L arrives weeks after the month closes. By then a prime cost that crept up two points has been spent four or five times. A weekly number catches it in the first week, when the fix is one schedule or one count.
Why franchisees feel it more
Royalties and ad fund contributions are usually charged on sales, not profit. At a 6% royalty and a 2% ad fund, the store above would pay $2,560 that week however the rest of the P&L went. Your own rates are in your franchise agreement and Item 6 of your FDD.
How to bring prime cost down
Check which half moved before changing anything.
- Food cost up: look at waste, portions, receiving and recipe costs. How to lower food cost.
- Labor up: look at the hours after each rush, overtime, and whether the schedule followed a sales drop. How to reduce labor cost.
- Both up with sales down: the schedule and prep pars are still set for last month's sales.
Where Franlever fits
Franlever reads hourly labor from your POS every day, adds food cost when an accounting or inventory system is connected, and compares each store with its own recent weeks.
Common questions
- What is a good prime cost percentage?
- A commonly cited target for limited-service restaurants is at or under 60% of sales; full-service often runs higher. Your brand's median for your format is the most useful comparison.
- Does prime cost include manager salaries?
- Yes. Prime cost uses total labor: hourly wages, salaries, payroll taxes and benefits.
General information for restaurant and franchise operators, not legal, tax, accounting or financial advice. Figures in examples are illustrations, not predictions or promises of results. Laws and platform policies change and differ by location, so check the current rules and talk to a qualified advisor about your situation.