Prime cost: the number that decides whether your restaurant makes money
If you could only look at one number every week, look at prime cost. It is food plus labor over revenue, and it explains much of what is left in the bank.
In this article
Prime cost is the indicator that fastest tells you whether your restaurant has a margin. It is not sophisticated accounting: it is the sum of what you spend on food and on labor, divided by what you sell. If that number goes out of range, the rest of the business ends up feeling it.
The advantage is that you can calculate it every week, with data you already have. The difficulty is that a good average can easily hide dishes, shifts or locations that lose money. That is why you should look at it methodically and dig into the detail when it moves.
What exactly is prime cost
Prime cost combines the two items that weigh most on the operation:
- Food cost: raw ingredients, beverages and everything consumed to produce what you sell.
- Labor cost: wages, payroll taxes, overtime, benefits and temporary staff.
The formula is:
Prime cost = (food cost + labor cost) ÷ revenue × 100
If you sold USD 60,000, spent USD 18,600 on food and USD 19,200 on labor, your prime cost is:
(18,600 + 19,200) ÷ 60,000 × 100 = 63%
That 63% means that of every USD 100 that comes in, 63 go to food and staff. With the remaining 37% you pay rent, utilities, marketing, taxes, debt and profit.
How to calculate real food cost
Do not use only the month's purchases. Food cost for a period is calculated like this:
Food cost = purchases + opening inventory − closing inventory
If you purchased 19,000, started with 2,000 and ended with 2,400, your cost is 18,600. The difference between buying and consuming matters: a large closing inventory can make the month look better than it is.
To keep the number comparable:
- Use the same period for revenue and purchases.
- Include beverages, not only food.
- Record comps and discounts separately.
- Count waste and staff consumption.
- Close inventory on the same day of the week.
What range is normal
For an independent full-service restaurant in LATAM, a benchmark range is 60–65%. But the concept governs:
- A high-volume pizzeria can run a lower food cost and a different labor cost.
- A fine-dining restaurant can accept a higher food cost if the average check and the perceived value support it.
- A location with a lot of delivery needs to look at commissions and packaging inside variable cost.
Do not copy another restaurant's target. Use the range to ask questions and set your own goal with your cost structure.
Example: where the margin goes
| Item | Amount | % of revenue |
|---|---|---|
| Revenue | USD 60,000 | 100% |
| Food cost | USD 18,600 | 31% |
| Labor cost | USD 19,200 | 32% |
| Prime cost | USD 37,800 | 63% |
| Rent | USD 6,000 | 10% |
| Other fixed costs | USD 8,000 | 13.3% |
| Approximate EBITDA | USD 8,200 | 13.7% |
If the target were 61%, the gap would be two points: USD 1,200 a month and USD 14,400 a year. That is how you turn a percentage into a decision.
The most expensive mistakes
1. Looking only at food cost
A food cost of 30% with a labor cost of 38% is still a prime cost of 68%. Food does not fix itself if the team is oversized or the shifts do not match demand.
2. Comparing months with different inventory
If one month you buy stock for two weeks and the next you do not, the percentage moves without the operation having changed. Close inventory and compare equivalent periods.
3. Cutting quality to cut the number
Changing a supplier can improve margin; changing the raw ingredients can destroy the value proposition. Before you cut, review yield, waste and portions.
4. Not separating the dishes that lose money
The 31% average can include a dish at 45% that sells heavily. Aggregate prime cost does not replace menu engineering.
5. Measuring once and never coming back
Prime cost changes with supplier prices, sales mix, schedules and staff. A monthly snapshot is not a control system.
A seven-day plan
- Day 1: gather revenue, purchases, opening and closing inventory, and payroll for the last closed month.
- Day 2: calculate total prime cost and split it into food and labor.
- Day 3: identify your three best-selling dishes and calculate their real food cost.
- Day 4: review the week's waste and the portions that are not being weighed.
- Day 5: compare shifts with revenue per hour; look for overtime and staffing peaks.
- Day 6: choose one lever: supplier, yield, price or shift.
- Day 7: define how you will measure the result and recalculate in 30 days.
How to use it with your team
Do not present the number as an accusation. Present it as a shared dashboard: “we are at 63%, we want to reach 61%, this week we try one action”. The kitchen team can contribute on waste and yield; the front of house, on sales mix and suggestions; administration, on purchases and payroll.
The weekly conversation should have three questions:
- What moved since last week?
- What moved it: price, volume, waste, mix or shifts?
- What action do we test before the next measurement?
Calculate your prime cost
If you want to move from theory to your own numbers, use the prime cost calculator. Enter revenue, purchases, inventory and staff; it returns the percentage, the gap and the annual impact.
For a complete read, combine it with the 360 Diagnostic and the menu pricing calculator. Prime cost tells you where you are; the other two help you decide what to move.
Frequently asked questions
Does prime cost include rent?
No. Prime cost covers food and labor. Rent and the other fixed costs are looked at afterward, when you calculate break-even and EBITDA.
Should I include discounts?
Discounts reduce net revenue. If you include them in the denominator, prime cost rises and reflects the real impact more accurately. What matters is being consistent month to month.
How often should I calculate it?
Every week if you have reliable data; at a minimum, once a month. Weekly comparison helps you catch deviations before they become a cash problem.
What should I do if my prime cost is 70%?
Do not cut everything at once. Separate food and labor, review the dishes that sell the most and the shifts with the most hours. Choose one lever with financial impact and measure again in 30 days.
