How to calculate prime cost (and bring it down)

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. A burger concept with a heavy beef cost and a lean crew can land in the same place as a sandwich shop with cheaper food and more prep labor.

The prime cost formula

Prime cost has two halves, and each has its own 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.
• Prime cost % = (cost of goods + total labor) ÷ net sales × 100.

Use net sales, after discounts, comps and refunds. Using gross sales makes prime cost look better than it is, and the gap grows in the weeks discounts run heavy.

The food line is $4,200 + $9,800 − $4,400 = $9,600. Total labor is $6,700 + $1,500 + $1,300 = $9,500. Add them and divide by $32,000 to get 59.7%.

Getting each half right

Cost of goods

The formula needs a count at the start and end of the week. Without a count, purchases alone swing with delivery days: a week with two truck drops looks expensive and the next looks cheap. If you can't count everything weekly, count the top 15 to 20 items by cost, which are most of the spend, and do a full count monthly.

Keep food, beverage and paper together for prime cost, but track them separately too. Paper often moves with delivery and takeout mix, not with the kitchen.

Count in units, not dollars, and price the count from current invoices. A count priced at old costs hides a supplier increase, and that increase is often the whole reason food cost moved.

Total labor

This is where most weekly prime cost figures go wrong. The labor number in the POS is hourly labor: hours times hourly rates. It doesn't include salaried managers, payroll taxes or benefits. At Castle Rock, hourly wages are $6,700, or 20.9% of sales. Fully loaded labor is $9,500, or 29.7%. Using the POS figure in prime cost would understate it by almost nine points.

If payroll for the week isn't available yet, build an estimate: hourly wages from the POS, plus each salaried manager's weekly salary, plus a payroll tax and benefit rate taken from your last few months of P&Ls. Label it an estimate and true it up when payroll closes. Watch overtime separately: it's paid at a higher rate, so a few overtime hours can move labor more than the same hours spread across the crew. Hourly vs P&L labor explained.

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. At Castle Rock, two points is $640 a week, so a month of drift costs around $2,500 to $3,200 before anyone sees it. A weekly number catches it in the first week, when the fix is one schedule or one count.

Weekly prime cost will bounce more than monthly. Inventory timing and pay periods move it. Look at the trend over four weeks before reacting to one, and compare each week with the store's own recent weeks rather than a fixed target.

What happens to prime cost when sales fall

Part of labor doesn't move with sales. Salaried managers are paid the same in a slow week, and the minimum crew needed to open safely doesn't shrink. So when sales drop and nothing else changes, prime cost rises even though nobody did anything wrong.

Nothing in the kitchen got worse, but prime cost moved from 59.7% to 63.0%. The fix here isn't portions or waste. It's the hourly schedule, which was still built for $32,000. Rebuilding it from a current forecast brings hourly wages back in line with sales, while the salaried part stays fixed. This is why it helps to read prime cost beside sales and orders, not on its own.

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. Add occupancy and other fixed costs, and a franchisee's room below the line is thin. Every point of prime cost is a much bigger share of what the owner keeps. Your own rates are in your franchise agreement and Item 6 of your FDD. How to make your store more profitable.

How to bring prime cost down

Check which half moved before changing anything. Cutting labor when the problem is food cost makes service worse and leaves the leak in place.

• 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.
• Both flat but prime cost up: check for a discount or comp spike, since that lowers net sales, the denominator.

A weekly prime cost checklist

1. Count the top items by cost at the same time each week, in units.
2. Total purchases from invoices received that week, not invoices paid.
3. Calculate cost of goods: beginning inventory plus purchases minus ending inventory.
4. Pull hourly wages from the POS and confirm no hourly employee is entered at $0.00.
5. Add salaried managers' weekly pay and an estimated tax and benefit rate.
6. Divide the total by net sales and record it beside the last four weeks.
7. If it rose, find which half moved and pick one fix for the coming week.
8. Check the same half next week before changing anything else.

Common mistakes

• Using POS hourly labor as total labor. It leaves out salaries, taxes and benefits, so prime cost looks several points better than it is.
• Using purchases without counts. Delivery timing makes the number swing for reasons that have nothing to do with the kitchen.
• Dividing by gross sales. Discounts and comps then disappear from the calculation.
• Reacting to one week. Look at four weeks and the store's own normal range.
• Comparing with a national figure instead of your brand's median for your format.
• Cutting labor to fix a food problem. Check which half moved first.

Where Franlever fits

Franlever reads hourly labor from your POS every day and labels it hourly labor, so it isn't mistaken for the fully loaded figure. It adds food cost when an accounting or inventory system is connected, and compares each store with its own recent weeks and with the brand's median. When something moves, AI COO puts one lever for that store in the morning brief and sends it to the store's GM. See the connections it uses.

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.