No matter what type of restaurant you run, your menu, labor, and operational costs have all changed.
Now, more than ever, all operators should be keeping a close eye on these costs in order to remain profitable. And we are here to help. In this quick guide, we break down how to approach food and labor costs, and we’ve also included several resources that can support you in organizing and calculating your various expenditures. Our calculator worksheet will provide a quick snapshot of costs, along with some brief questions to keep you on track, while the free, downloadable Restaurant Profitability Cost Calculator from our partners at Craftable will help you in keeping costs manageable.
Keep Food Costs Down
Your menu offerings have most likely changed. This means you will need to reevaluate your food costs to ensure you maintain a profit.
- Cross-utilize products on your menu. The more an item is used across your menu, the less time it spends as dead money on your shelves.
- With to-go being a major part of the new normal, include the cost of disposable to-go items in the recipe cost and selling price.
- To help overall costs, add the delivery fee of outside companies to all menu items.
- Monitor commodity pricing volatility, especially for center of the plate raw proteins, in weekly market trends. Talk to your sales associate for insights on market price trends and potential supply challenges.
- Review food costs weekly and be sure to apply food cost percentage yields. Learn how to do this.
- Using market trend information, set your menu price at the highest possible projected price on that item. This will help cover any market increases while still allowing for profit.
Consider the Following in your Calculations:
Value of opening inventory. ($4000) Cost of Purchases. ($10,000) Closing Inventory Value. ($6000) Sales Revenue ($15,000)
Example: 4000 plus 10,000 = 14,000 minus 6000 = $8000 (Usage Amount)
Usage Amount (8000) divided by Sales Revenue (15,000) = Cost of Goods Sold (Food Cost) 53%
Keep Labor Costs Down
Labor cost as a base is driven by restaurant sales. When you are busy, labor cost is always good. When you are not busy it becomes a concern. In general, labor cost should be 20% to 30% of gross revenue. (White tablecloth operations will always be higher because of staffing needs for higher level of service.)
Labor Cost Considerations:
- Recognize at the beginning you will need less people in the kitchen to produce food because of dining room limitations and consumer concerns to dine out.
- Limiting menu items requires fewer people to prep and prepare than a traditional menu.
- Reduce labor, decrease prep time, and increase consistency by switching to pre-portioned burgers, steaks, fish, or pre-cut vegetables. This will also help with cross-contamination by minimizing the number of touch points.
- Use pre-made sauces and desserts to lower prep time and cost.
- If you have not already done so, divide and track your labor costs in groups. This can alert you to areas that need to be addressed and adjusted. Some examples of these groups could be the following:
- Salaried employees
- Hourly Employees
- Bartenders Managers
- Line Cooks
- Prep Cooks
- To-Go Drivers (May be a new labor cost.)
Know your Prime Cost
This is the sum of your labor cost, plus the cost of goods sold. This will determine the cost to create each food and beverage item on your menu. 60% or less of total sales is ideal. To calculate:
- List all hourly wages
- Salaried labor
- Payroll Taxes
- Cost of Goods Sold (C.O.G.S.)
- Total sales
Example for a Week:
COST OF GOODS SOLD: Starting inventory = $15,000 + Purchases $3000 = $18,000 - Ending Inventory $9000 = $9000 (C.O.G.S.)
LABOR: Employee Wages + Taxes + Benefits + Insurance = $6000 (Total Labor Cost)
PRIME COST: (C.O.G.S.) $9000 + (Total Labor Cost) $6000 = $15,000 (Prime Cost)
PRIME COST % : (Prime Cost) $15,000 / (Total Sales) $27,000 = 55.5 %
Additional Resources:Calculating Food Cost
Restaurant Profitability Cost Calculator