Restaurant Prime Cost: How To Calculate and Optimize for Profit

When I see restaurant owners struggling with overspending and tough decisions, it often comes down to ignoring prime cost. It’s the single largest expense you’ll face, and it directly impacts your profits. I’ve been helping restaurants grow and I know that prime cost is a major obstacle. 

If you keep a close eye on your restaurant costs, you can quickly find out where you're losing money. Once you have a handle on it, you can make smarter decisions that save you money, improve your margins and keep things running smoothly.

The lower you can keep it (without sacrificing quality or service), the more profit you’ll be able to make. 

Working with numbers and formulas can be tricky, but I’m here to help. I’ll explain everything you need to know about prime cost, including how to keep it low so you can make bigger profits.

What exactly is a restaurant’s prime cost? 

Prime cost helps you cut through the noise and see how much money your restaurant is making or losing. It's made up of the cost of the food and drinks you sell and the cost of paying your workers. 

In other words, it’s the combination of the cost of goods sold (COGS) and labor costs—the total amount you spend on wages, payroll taxes and employee benefits.

But why should you care? Well, prime cost has the power to:

1. Raise your profit margins
2. Increase your sales 
3. Help you stay competitive in the industry

Since these are the most significant costs in running a restaurant, understanding and managing them is crucial to controlling your overall expenses and improving profitability.

Once you have those numbers, you can calculate your prime cost as a percentage of your total sales. This will give you a good idea of the “true” cost of individual menu items and how profitable it is to serve your meny as a whole. 

If you want to learn more about food costs, check out my video below: 

How to calculate restaurant prime cost 

As I mentioned above, there are two metrics that you need to calculate your restaurant’s prime cost: COGS and labor costs. Here’s what the formula looks: 

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Before we calculate this, I’ll show you quick steps to find your COGS and your labor costs. 

1. Calculate your costs of goods sold (COGS) 

To begin, you’ll want to find your COGS. Your COGS is all the direct costs of the dishes and drinks you include on your menu.  

This includes things like: 

• Ingredients
• Beverages
• Packaging supplies

But it does not include: 

• Rent 
• Utilities
• Marketing efforts 

In other words, COGS is the cost of everything you need to get food and drinks from your kitchen to your customers. It looks at how much food and drinks you have at the start (your inventory) and how much more you buy within a timeframe.

Here’s what the COGS formula looks like: 

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To find your inventory costs and purchase history, I recommend pulling your restaurant analytics from your POS system.

Let’s see this formula in action for one month: 

Landini’s, an Italian restaurant, started the month with $8,000 worth of ingredients and supplies in inventory. Throughout the month, they purchased an additional $6,000 worth of food, drink and packaging. 

At the end of the month, they took inventory and found they had $5,000 worth of supplies left

To find COGS, Landini’s would use this formula: 

So, Landini’s spent $9,000 on food, beverages and supplies for the month, which is their COGS. 

The next step in finding your restaurant’s prime cost is to look at your labor costs, which I’ll talk through in step two. 

2. Look at your labor costs 

Labor costs include the wage you pay your employees—from the chefs who toss the dough to the employees who take customers' orders. Labor costs also include: 

• Payroll taxes
• Overtime
• Employee benefits like health insurance

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Let’s continue with the example I mentioned earlier. 

Imagine Landini’s pays its staff $12,000 in wages for the month. In addition to that, they spend $1,500 on payroll taxes and another $500 on employee benefits. Here’s how the labor costs break down:

So, Landini’s total labor cost for the month is $14,000.

3. Combine COGS and labor costs 

Now, we’re ready to combine COGS and labor cost totals to come up with our prime cost. 

Landini’s would find their prime cost by adding up the COGS and labor costs:

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With a prime cost of $23,000, Landini’s can now see how much it costs to operate the core functions of their business each month. 

If you do this calculation and see that your prime cost is high—don’t worry! I’ll show you some straightforward tips that can help you keep this number as low as possible—because prime cost can act as a slow killer for your restaurant.  

6 tips to keep prime cost in a healthy place 

Keeping your prime cost as low as makes sense for your restaurant helps you get the most profits, stay competitive and run your restaurant well. Keep reading because I’ll cover my favorite tips to keep this cost low. 

1. See what’s eating up your revenue and set a budget for your prime cost 

First off, if you’ve noticed that your prime cost is high, I recommend setting a budget based on where you want it to be. As I mentioned earlier, you want to keep your prime cost around 60% of your revenue. Again, this will probably need to be higher if you’re a fine-dining restaurant and lower if you’re more of a fast-casual place.  

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To help you stick to this budget, you also need to take a thorough look at how much you’re spending on food and labor. Knowing this will give you a better idea of where you need to trim back on spending. 

Let’s say your prime cost is at 70% one quarter instead of the 60% you budgeted for. You can then assume that your labor costs and food costs are a bit higher than previous quarters. With this information, you’ll know how much you’ll need to cut back on spending to stay within your prime cost budget. 

Now, I’ll show you how to keep your food costs and labor costs down. 

2. Prioritize online sales to reduce labor costs  

Labor costs directly affect your prime food costs, so it’s the first area I like to look at and see if I can make spending more efficient. Restaurants with high labor costs usually have more staff than they need and don’t schedule them effectively.  

To avoid this, I’d highly consider prioritizing online ordering. With an online ordering system, you can cut back on your labor costs in several ways: 

• Reduces the needed staff: Online ordering can help you have fewer workers. Customers can order online, so you don’t need as many people to take orders or answer the phone. Encourage more customers to order through your website by offering discounts in return. 
• Allows for cross-training: You can teach your employees to also take online orders. This means you need fewer workers, which saves you money.
• Helps handle busy hours: Automated online ordering can help you handle a rush better and limit costly human errors. And, it helps you limit the need for overtime, which can get expensive.
• Provides restaurant analytics: Online ordering can help you see what’s popular on your menu. This helps you make food that people want and saves on labor costs tied to making too much of anything.

I love Owner.com’s online ordering system because it’s the best for increasing online sales. 

I know I’m biased, but our tool helps you turn more website visitors into customers. It suggests extra items to buy, which increases your average check size. This also cuts down on the work your staff has to do. And there are no commission fees that you’d have to spend using a third-party app.

My friends at Aburaya switched to Owner from third-party apps and boosted their online sales by $25,000 per month!

3. Make your menu simple but effective 

Making your menu items and menu pricing more profitable can be a sure way to reduce food costs if they’re a little too high. Here are a few ways I’d do this: 

• Sell things that make you the most money: Stop selling dishes that aren’t popular or are too expensive. This’ll help you save money and make your kitchen work more efficiently.
• Have fewer things on your menu: Limiting your menu limits the number of ingredients you need. Fewer ingredients mean lower inventory costs, reduced spoilage, and more manageable food purchasing. I’ll talk more about inventory management in the next section. 
• Purchase in bulk: With a smaller set of ingredients, you can buy in bulk, reducing the per-unit cost of goods. Also, keep your menu consistent. This helps you make the right amount of food, which stops food from going bad and saves on food costs.
• Reuse ingredients in other dishes: One of my favorite strategies is to creatively reuse ingredients across multiple menu items. This not only minimizes waste but also maximizes the value of what you purchase. For example, if you’re using fresh herbs in one dish, consider incorporating them into a sauce or garnish for another. 

4. Keep a close eye on your inventory 

Keeping a close eye on your inventory is a great way to keep food costs in check. Tracking what’s coming in and out of your restaurant can help prevent buying too much and food waste.

The best thing to do in this situation is perform regular inventory checks. Regular inventory checks help you stay on top of your food supply and ensure you aren’t carrying excess stock. 

This leads to less spoilage and prevents you from wasting cash on unused inventory. In fact, food spoilage and waste are typically four to 10% for restaurants, so it’s important to keep this in check.

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Tracking inventory is time-consuming, but inventory tracking tools can make this a whole lot easier. These tools can automate the process and help you clearly see what’s being used, what needs to be restocked, and how much you’re spending on everything. 

I’d also highly recommend training your staff around food portion and waste control. When you empower your team with this knowledge, it can help you run a much more efficient business and significantly lower costs that come from waste. 

5. Forecast your sales  

One of the best ways to keep your prime cost in check is to get a handle on forecasting your sales. Trust me, when you know what to expect, it’s a lot easier to plan for staffing and inventory. Here’s how I’d recommend approaching it:

• Cut down on overtime: You may have been there—those surprise rushes that turn into longer shifts and balloon your payroll. By knowing when you’re busiest, you can schedule just the right amount of people and cut down on expensive overtime. The more you stay ahead of it, the less scrambling you’ll do later.
• Use your POS data: Your POS system is a goldmine of information. It doesn’t just take orders; it tracks trends. Look at your sales data from the last few months and pinpoint your peak hours. That way, you can prepare the right amount of food and bring in the right number of staff, so you’re not wasting cash on labor or ingredients you don’t need.
• Get smart with scheduling: Once you understand those sales patterns, it’s all about fine-tuning your schedule. You’ll avoid the headache of overstaffing during slow periods and having to call people at the last minute when it’s busy. Smart scheduling based on what you know is coming will keep your labor costs in line.

When you forecast sales regularly, you’re not just making life easier—you’re also making your restaurant more profitable. It’s all about planning ahead to reduce that sneaky prime cost.

6. Look at your costs regularly  

Here’s a quick tip that can save you a lot of money in the long run: review your costs constantly. I know it can feel tedious, but catching small issues early keeps them from becoming big problems. Here’s my advice:

• Review your spending often: Make a habit of looking at your costs weekly or monthly. It doesn’t have to take long, but just knowing where your money is going helps you stay on top of things. You’ll spot where you’re overspending and can make adjustments right away.
• Keep an eye on your reports: Don’t let any costs slip through the cracks. Whether it’s labor, food, or something else, staying on top of your reports helps you catch anything out of the ordinary before it gets out of hand.
• Double-check your invoices: It’s so easy for mistakes to sneak into vendor invoices. I always recommend double-checking your bills for errors, especially if you notice your costs creeping up.
• Be ready to switch vendors or buy in bulk: If certain costs are rising, don’t be afraid to shop around. Sometimes, switching vendors or buying in bulk can make a huge difference in what you’re paying. Saving on even small things adds up over time. You can also negotiate with your vendors to get the best deals. 

By reviewing your costs regularly, you’re setting yourself up to keep your prime cost under control. And the best part? You’ll catch potential problems before they start eating into your profits.

Manage your prime cost to watch your profits thrive

At the end of the day, keeping your prime cost low is one of the best ways to maximize your profits and keep your restaurant thriving. Whether setting clear goals, tightening your labor costs, streamlining your menu or tracking your inventory, every small step you take adds up. The key is staying proactive and regularly reviewing where your money is going.

And it doesn’t have to be overwhelming; managing your prime cost can become second nature if you have the right systems in place.

Want to make it even easier? Schedule a free demo, and I’ll show you how Owner’s tools can help you streamline everything—from cutting costs to boosting online sales—so you can focus on what really matters: growing your business.