Let’s look at a café or restaurant.

In hospitality, the following are critical to success;

  • Location
  • Concept
  • Capitalisation

These are one-off planned decisions, so we will assume you have researched the business model, have a clear path for sustainable profit and deliver a consistent customer experience.

Following that plan, the key to managing your success is through prime costs.

As a café or restaurant owner 90% of controllable costs will usually lie in just three areas;

  • Food
  • Beverage
  • Payroll

Failure to control prime costs can lead an otherwise bustling well-capitalised café to closure.

So how should we view prime costs? We combine and benchmark.

Accountants are great with detail and sorting through numbers. They check and code to the rightful place, producing a profit & loss report and balance sheet.

Only through reconciliation of these numbers can business advisers guide decision-making. Ideally illustrating how to lift profit and improve equity.

However, accounting statements provide overwhelming detail, and in my experience, the business owner can fail to see the forest for the trees. It is why we pare it all back to prime costs.

By leveraging cloud accounting we can benchmark prime costs weekly using our customer’s daily reconciliation through Xero and reporting through Futrli.

Rules of thumb tell us quick service restaurants should keep prime costs within 60% of sales and prime costs for full-service restaurants should be within 65% of sales.

While food, beverage, and payroll are benchmarked and reviewed individually with their own rules of thumb, monitoring these combined costs against sales is a key to success.

And the result of managing prime costs for our café or restaurant owner?

Let’s aim for a 5% reduction in prime costs for our café or restaurant owner by up selling, starting a customer loyalty programme, scheduling staff efficiently, recipe costing and bundling high gross profit items – to name a few ideas.

Here are some numbers to illustrate;

Sales $1,000,000
Prime Cost $670,000 67%
Net Income $50,000 5%

 

Sales $1,000,000
Prime Cost $620,000 62%
Net Income $100,000 10%

Without an additional dollar of sales, a 5% reduction in prime costs against sales raised our net income 100%.

Could you achieve a 5% reduction in prime costs using the few strategies listed?

Now for the sniff test, are these numbers feasible? If you implement the right business strategies, yes. And just to double check, we do see well-managed cafés and restaurants that produce a shareholder return at 10% of sales.

So, what are your prime costs? And do they matter? Other than a café or restaurant owner this analogy cannot serve as proof, benchmarking your experience will.

Written by René Artz, Business Development Manager at Mathieson Chartered Accountants located in Canterbury, New Zealand.
Mathieson’s are tax and Xero specialists who guide and support Agribusiness, Hospitality, and Trade owners by removing stress. They keep business safe, help grow sales, increase cash flow, boost profit, and plan for succession.

Mathieson Chartered Accountants expertly link what you do, to financial results; providing money, time and mind freedom through specialised, applied solutions.