How to Use Weekly Prime Cost Tracking in Your Restaurant

How to Use Weekly Prime Cost Tracking in Your Restaurant

by Joe Erickson

When it comes to financial tracking in your restaurant, your first notion is most likely focused on getting accurate and timely profit-and-loss statements.

And no wonder; it's an established fact that operators who routinely review monthly financial statements to control the cost of sales, labor and other operating expenses are more profitable than those who don't.

Along this same line of thinking, consider this: Operators who monitor their prime cost -- the combined cost of food, beverage and labor -- on a weekly basis, as opposed to just once a month, typically add anywhere from 2 to 5 percent or more to their bottom line.

The reason for this phenomenal improvement in bottom-line profits is simply this: Operators who use daily and weekly systems to control costs create a culture of cost awareness that permeates throughout their staff. As you share your weekly numbers with your management team, they learn to embrace their role as both leaders and financial stewards of the restaurant. Their attitude and actions are passed on to the staff.

For instance, cooks who understand food cost goals are less likely to waste product. Servers tend to be more aggressive with building check averages. And bartenders are more conscious of pour cost.

In table-service restaurants, the generally accepted rule says that prime cost should run no more than 65 percent of total sales. The most profitable operators are able to keep their prime cost between 55 and 60 percent or less, but for most table-service independents, achieving a prime cost of 60-65 percent of sales still provides the opportunity to achieve a healthy net income.

Profitability issues generally arise when prime cost exceeds 65 percent of sales and gets closer to 70 percent of sales. When this happens, it becomes increasingly difficult for nearly any table-service restaurant to earn an adequate profit on the bottom line.

In quick-service restaurants, the goal is to keep prime cost at 55-60 percent of total sales or less. When putting in place a weekly prime cost tracking system, five basic components are needed.

1. Sales -- preparing the daily sales report.
2. Purchasing -- logging all purchases.
3. Labor -- recording daily labor cost.
4. Inventory -- taking physical inventories and calculating value of product on hand.
5. Reporting -- preparing the weekly report.

But some operators argue that they just don't have enough time or management to track their numbers weekly. Others say they want their managers on the floor, not in the office. In my opinion neither of these arguments is justifiable. First, the time spent each day to track financial performance is minimal and doesn't require a bookkeeper to do it.

In a recent poll of subscribers,, a Web-based service that helps operators track financial performance, found that 94 percent of respondents spent less than 15 minutes per day to prepare a daily sales report and 80 percent spent less than 15 minutes per day recording purchases.

As for those who prefer that their manager's time is best spent on the guest, you'll get no argument from me; but the fact is this: If your managers can't find 15 minutes a day because your restaurant is just too busy, then business is surely good enough to pay a clerk to do the additional paperwork.

In fact, if your restaurant is booming with so much business, consider how many more dollars you'd put in the bank if you increased profits by just 2 percent. But enough about excuses; thousands of chain operators already know the importance of financial tracking. Facts are facts and the fact is that if you really want to improve your bottom line then you must adopt systems for doing so.

In this article we're going to discuss each of the five components of a prime cost tracking system. For each area, we'll explain the purpose and benefit while also guiding you to resources for accomplishing each.

Sales -- Preparing the Daily Sales Reports

The main function of the Daily Sales Report (DSR) is to record and properly categorize the sales and receipts to their respective general ledger accounts and to ensure that the collections of cash, charges and other receipts are in balance with the end-of-day closing reports from the POS (point-of-sale system) or cash register.

For many operators, preparation of a daily sales report is simplified because their POS has been programmed so that sales reports are consistent with cost-control objectives. The primary cost-control objective for any restaurant should be the ability to isolate cost-control problems to a specific area.

At the highest level, the three primary cost areas of concern for all restaurants are the cost of goods sold, labor and controllable operating expenses. However, these areas are too broad and must be broken down into smaller cost-control groups to more quickly identify when and where you may be experiencing cost inefficiencies.

Properly programming your POS is essential when breaking down the cost of goods sold into specific cost-control groups; the objective being the ability to measure the cost of goods for an area of sales. In other words, food cost is measured against food sales, liquor cost against liquor sales, etc. The recommended sales reporting categories needed to efficiently track cost of sales is as follows:

• Food Sales.
• Soft Beverage Sales.
• Liquor Sales.
• Draft Beer Sales.
• Bottle Beer Sales.
• Wine Sales.
• Merchandise Sales.

In addition to recording sales, the other function of the DSR is to make sure that all cash is accounted for. Once again, having a properly programmed POS helps to accomplish this. Ideally, your POS should be programmed so that all orders are sent to a printer or video monitor in the kitchen and bar. This, along with having a policy that nothing is to be prepared without a printed ticket, ensures that all sales are rung and gives you a point of reference for accountability.

Gaining the maximum effectiveness from your DSR entails a two-step process wherein the revenue (sales) side of the equation is generated at the cash register or POS level, and the settlement (receipts) side is based on actual receipts turned in. Ideally, revenues should always equal settlements; however, when there is a difference between the two it is commonly referred to as Cash Over and Short (Cash O/S) and should be expensed as such on the profit-and-loss statement. Cash overages and shortages typically occur because the amount of cash turned in did not equal the amount expected. This can happen when incorrect change is given; however, it can also be an indication of theft. Cash O/S can also occur when an incorrect amount has been reported on one or more of the revenue or settlement entries.

Most POS systems have built-in sales reports that give an accounting of recorded sales and receipts; however, all too often operators fail to reconcile their POS or register reports with actual cash and credit card deposits. A properly constructed DSR serves as the source document for posting to your accounting system. It also serves as a summary report of sales and receipts collected from server and cashier checkouts.

Not all DSR entries affect profit-and-loss calculations. In the example shown below, only the items in bold text will be used in preparing the weekly prime cost report. The other items are used to ensure all cash has been accounted for and for making the correct entries to the sales journal when posting to your accounting software.

Revenue Entries Settlement Entries
Food Sales Comps and Discounts
Soft Beverage Sales Cash Deposit
Liquor Sales Credit Card Deposits
Draft Beer Sales Gift Cards Redeemed
Wine Sales Charge Tips Paid
Merchandise Sales Cash Paidouts
Other Income
Gift Card Sales
Sales Tax
Charge Tips Collected
Payments on A/R
Customer Deposits

Bold text indicates values used on the weekly prime cost report.

Purchasing -- Record Purchases to a Log

The next step in financial tracking is to record each purchase and code it to its respective cost accounts. When separating purchases into general ledger cost account categories, many operators erroneously think this practice requires bookkeeping skills. The truth is if your managers or staff have simple math skills they will have no problem maintaining a simple purchase log like the one shown below.

Once orders have been received and checked, the invoice should be placed in a designated receiving bin or file folder until it is ready to be posted to the purchasing log. At a convenient time, such as between shifts or before opening, the manager or designated entry clerk should process the invoices.

The first step in processing the invoices is to separate the total amount of the invoice into its respective cost accounts. For most vendors, such as that of produce, seafood or dairy suppliers, the entire amount of the invoice is allocated to a single cost code account. However, many restaurants use a broadline distributor, meaning that a single invoice will be for multiple cost code categories. Fortunately, many broadline distributors separate the invoice into the various cost categories for you.

The recommended cost-of-sales categories you should track are, with a couple of exceptions, the same as that of the sales categories described earlier. Yet many operators have found that breaking food cost into multiple cost categories enables them to more easily zero-in on potential cost control issues. Although there is no set criterion for how to subcategorize food-and-beverage cost, the common categories are shown below.

  • Food Purchases
  • Bakery
  • Dairy
  • Grocery
  • Meat
  • Poultry
  • Produce
  • Seafood
  • Soft Beverage Purchases
  • Liquor Purchases
  • Liquor
  • Bar Consumables
  • Draft Beer Purchases
  • Bottle Beer Purchases
  • Wine Purchases
  • Merchandise Purchases
When a rise on food cost occurs, they can then see which food category the increase was in. For instance, let's assume that food cost spiked 4 percent one week. If an operator knows that the spike occurred to the meat category then he can focus his attention on the purchasing, inventory usage and waste records for just the meat products.

Labor -- Recording Daily Labor Cost

In my opinion, controlling labor cost on a daily, and even hourly, basis is the single most important practice of cost control. One of the greatest contributions that POS systems have given the restaurant industry is the ability to track time and attendance to control labor cost. Yet, I have talked with scores of restaurant owners who have yet to use the timekeeping function for tracking labor hours worked. If your restaurant falls into this category then I have just one question: What are you waiting for?

The great thing about using the time clock function on your POS is that the POS can provide valuable reports of sales and guest count per labor hour, labor cost percentage of sales and in some cases comparisons with scheduled hours. At the end of the payroll period reports can be printed with all the necessary information needed for payroll processing; and in some cases the data can be exported directly to your payroll processing service.

As for its role in preparing weekly financial reports, the POS can be used to run departmental labor cost reports in either daily or weekly summaries. These numbers are used during the preparation of the weekly prime cost report.

Inventory -- Take a Physical Inventory Every Week

The only proven method for computing accurate prime cost on a weekly basis is to take physical inventories every week. Many operators believe that what they spend on food-and-beverage purchases is their cost of sales. While this may be true in the long run, for weekly analysis it is inaccurate. The correct formula for calculating the cost-of-sales portion of prime cost is this:

Beginning Inventory + Purchases -
Ending Inventory = Cost of Sales

Operators who take inventories and calculate their cost of sales each week are far more profitable than those who don't -- taking anywhere from 2 to 10 percent more profit to the bottom line. The reasons are twofold:

First, by calculating the cost of sales weekly, operators can quickly identify cost fluctuation problems, giving them the opportunity to react immediately rather than wait an entire month -- and lose even more profit. Second, maintaining tight control on inventory levels ensures that your cash is in the bank and not on the shelf in the form of excess inventory -- or, even worse, susceptible to spoilage and waste.

Inventory counts should coincide with the last day of the reporting week. For most operations Sunday works best as the end of the reporting week. Inventory levels are typically at their lowest after the weekend. Counting the inventory also helps in preparing your order list for Monday. Inventory should be counted after the close of business on Sunday and before the restaurant opens on Monday.

Inventory Count Sheet

Inventory forms should be programmed in a manner that allows each inventory item to be grouped to a cost of sales subcategory (meats, seafood, produce, etc.) so that a total value of all the products within that subcategory can be calculated. For preparing the weekly prime cost report, only the total value of each subcategory is needed.

Reporting -- Preparing the Weekly Prime Cost Report

The weekly prime cost report is calculated from the totals recorded in the forms and reports listed above. The three main components of the report are sales, cost of sales and labor cost.

Sales. The weekly sales totals are derived by summarizing the net sales totals reported on the Daily Sales Reports (see chart below) recorded during the week. It's important to emphasize that net sales are sales after discounts have been deducted from the gross sales totals. I have seen where some operators record gross sales and then expense the full value of "comps" and discounts to other areas on the financial statement, such as marketing. The problem with doing it this way is that sales are overstated and therefore prime cost percentage is lower than it actually is. For more information on how to properly account for comps and discounts, see "Avoiding a Losing Deal: How to Account for Discounts and Comps," RS&G Archives.

Cost of Sales. Cost of sales is calculated by starting with the beginning inventory value for a specific category -- the beginning inventory value for the current period will be the same as the ending inventory value from the previous period -- then adding the purchases for the current period and subtracting the ending inventory value. Looking at the prime cost report shown, note that bottle beer cost is $1,956.15. That figure is the actual usage cost for the week. The chart below shows how this figure was calculated.

The beginning inventory value entered at the beginning of the week was derived by using the ending inventory value on 8/22/2010 of the previous week. The difference in beginning inventory and ending for the week was a net increase of $350. The bottle beer purchases for the week amounted to $2,306.15. Without taking into consideration the change in inventory value, the cost being reported would be equal to the purchases. It's easy to see just how much the change in inventory can affect the cost of sales.

Remember earlier when I addressed how the cost of goods should be measured against a specific area of sales?
start quote...After about six to eight weeks, a consistent cost trend becomes evident -- sometimes it's favorable, but more often than not there is work to be done to get prime cost to a level that can be profitable....end quote
The reason for doing this is so you can more readily spot cost control issues by looking at the change in cost percentage from one period to the next. Note that the beer cost percentage being reported is 35.2 percent. That figure is calculated by taking the actual usage cost for bottle beer ($1,956.15) and dividing it by the bottle beer sales of $5,559.50. Now consider this: If we remove the change in inventory from the calculation, then the cost percentage jumps to 41.5 percent. As inventory increases and decreases from one week to the next, that cost percentage could fluctuate greatly and make it impossible to know if you even have an actual cost control problem.

Now take a look at the food cost subcategories shown on the prime cost report. Note that overall food cost is reported at 21.7 percent and the budgeted percentage is 25.3 percent. There are a number of potential reasons for the difference such as sales mix, waste or even unrecorded purchases or sales. However, because we have used food subcategories, we see that there is a 1 percent difference in seafood and a 1.9 percent difference in soft beverage cost. These would be the areas to check first when trying to find the reason for the differences.

Labor Cost. When using the POS for tracking labor cost, preparation of the weekly prime cost report is much faster and efficient. The total wages, including overtime, should be reflected for both staff and management. Whereas management cost is pretty much a fixed amount, the cost for hourly staff can fluctuate greatly dependent upon staffing needs. Unlike that subcategorization in cost-of-sales calculations, labor cost percentages are always calculated as a percentage of total sales.

When computing prime cost, labor cost includes not only the wages,but all employee benefits as well. This includes payroll taxes, workers' comp and employee healthcare plans. However, to simplify the weekly preparation of the prime cost report, the accepted practice is to use an estimate when calculating the employee benefits total. For a full-service restaurant, employee benefits typically run about 20 percent to 22 percent of overall wages. For a limited-service restaurant where tipping is not significant, the ratio runs from about 16 to 20 percent.

Putting the Prime Cost Report to Good Use

One of the most common occurrences I see with those new to preparing a weekly prime cost report is that cost percentages fluctuate wildly during the first couple of weeks. Invariably the chief factor is inconsistent data entry. Maybe it's a forgotten invoice, an incorrect sales entry or an inaccurate inventory, but as the weeks go by, and the managers get accustomed to completing DSR and purchase logs on a daily basis, the weekly numbers get more consistent.

After about six to eight weeks, a consistent cost trend becomes evident -- sometimes it's favorable, but more often than not there is work to be done to get prime cost to a level that can be profitable. Whether that means an increase in menu prices, a change in suppliers or product, a reduction in staff size or a change in menu portions, you now have a tool to let you know when and how to react to rising costs -- no excuses.

-- Restaurant Startup & Growth

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