Restaurant Profit and Prime Cost: How to Read Your Numbers

After food, labor and the other costs of running the restaurant, what is left for the month, and which line explains it? Owners and managers ask it at month end, when a cost line looks off, or before deciding on a price, a schedule or a lease.

You need one period and the amounts of each cost for that period, defined the same way every time. You get gross profit, prime cost, an estimated operating profit and a margin for each. The point of the guide is to keep the figures apart: they answer different questions.

Everything is arithmetic on typed figures. The restaurant below is invented and none of its percentages is an average, a benchmark or a target. To run your own month, use the Restaurant Profit Calculator; for the threshold side of the same costs, the break-even guide.

Eight terms, each shown in the month of Example 1. The percentages are shares of revenue.

Cash flow is a different thing again. Loan principal, equipment purchases, owner draws, inventory changes and the timing of payments move cash without appearing in any of the profit lines above, so a month can show a profit and still leave the bank account short.

Accounting definitions of prime cost vary from one restaurant to another, so this site states its own and applies it everywhere, in the calculators and in this guide:

• Prime cost = food cost + labor cost. Both for the same period, as typed.
• Owner pay is not in prime cost unless you put it in labor cost. If you type it on its own line, the calculator keeps it out of prime cost and shows a second line, “prime cost including owner pay”. Example 2 shows both.
• Revenue is net sales, before sales tax you collect and before tips. Putting either in revenue makes every percentage of sales look smaller (or the profit look larger, see the mix-ups).
• Decide the borders once. Do beverages count as food? Do paper goods and packaging? Do payroll taxes and benefits count as labor? Any consistent answer works; a different answer each month makes months incomparable.

No percentage is presented here as good or bad. The only fair reference for a prime cost percentage is your own earlier periods, built the same way.

A fictional restaurant, one month, invented figures: it is not a typical restaurant and none of the percentages is a target.

Read it from the top. Food and labor together are $42,160, or 68.0% of revenue: that is the prime cost, and it already takes more than two thirds of each sales dollar. Gross profit is $41,540 (67.0%), the figure before any labor or rent. After the $12,400 of other operating expenses, $7,440 is left: an estimated operating profit of 12.0%. Enter the same six lines in the Restaurant Profit Calculator and it shows the same figures, with prime cost on its own line.

Notice what the table does not say. It does not say whether 68.0% is high or low for this restaurant, because that depends on its concept, its prices and how each cost was defined. It also stops at operating profit: depreciation, interest and taxes come next, in Example 3.

If the owner works in the restaurant, that work has a cost. Suppose $5,000 for the month is typed on its own line, not inside labor cost. The convention keeps it out of prime cost and shows both views:

Prime cost “including owner pay” rises from 68.0% to 76.1%, and the operating profit falls from $7,440 to $2,440. Nothing about the restaurant changed: only whether a cost it already had was written down. Owner draws are not an expense; they are a way of taking out what is left.

Operating profit is before depreciation and amortization, interest and income taxes. Suppose that month also carries $1,800 of depreciation and amortization, $600 of interest and $900 of income taxes, all typed in by you (the calculator estimates none of them):

Net profit is $4,140 (6.7%). If a bank, an investor or your accountant asks for “operating profit”, check which definition they mean: the figure here is a management estimate from your entries, closer to a figure before depreciation than to an operating income line on a tax return. It is not an official accounting figure.

The same month under four assumptions. Each cost line has to be classed first: here food moves fully with sales, 40% of labor moves with sales (the rest is fixed hours), and rent, utilities, marketing and other expenses stay fixed. These classes are choices, not facts; the Profit Studio asks you to make them.

A 10% rise in sales lifts operating profit by $3,286, from $7,440 to $10,726: about 44.2% more, because the fixed lines do not grow. A 10% fall removes $3,286, the same share the other way. A 4% rise in the food cost line alone, with sales unchanged, costs $818.40 and takes the margin from 12.0% to 10.7%. This is arithmetic on your own classes: it predicts no guest count, price or supplier cost, and it does not check that the room or the team can handle more sales.

Mixing periods

Take Example 1 and type the rent as $1,550, one week’s worth, next to monthly sales and monthly costs. The operating profit becomes $12,090 (19.5%) instead of $7,440 (12.0%): 7.5 points of margin that do not exist. Every amount must cover the same period.

Counting sales tax as revenue

If the month’s revenue is typed with an illustrative 8% sales tax included, $66,960 instead of $62,000, the same expenses leave $12,400 (18.5%). The tax belongs to the government, not to the restaurant, so the extra $4,960 is not income. Tips are treated the same way in this site’s convention: they are not part of revenue. How tips and sales tax are treated for accounting or tax purposes depends on your situation, so ask your accountant.

• Start with prime cost. Food and labor are the two lines most tied to how the restaurant runs day to day. Look at them together (68.0%) and separately (33.0% and 35.0%): a rise in one can hide a fall in the other.
• Look at what is fixed. In the scenario table, +10% in sales gave a much larger rise in profit because rent, utilities and part of labor did not move. The same leverage works downward.
• Zoom in on the line that moved. If labor looks off, the Labor Cost Calculator separates gross wages, employer costs, overtime and sales per labor hour. If food looks off, start with the Food Cost Guide.
• Ask what sales you need. The Break-Even Calculator turns the same costs into a sales threshold; the break-even guide explains how.
• Compare with yourself. One month is a snapshot. Compare months built with the same definitions, and write the definitions down.

• Operating profit here counts only the lines you entered. A cost you leave out is counted as $0, so the result can be higher than the real one.
• It is a management estimate from your own entries, not an official accounting figure or a financial statement.
• It covers one period: a snapshot, not a trend.
• The scenarios depend on the class you give each cost (fixed, variable, partly variable). They are arithmetic, not forecasts, and they do not check capacity.
• There is no industry average behind any figure in this guide, and none is claimed.
• It is not tax, legal or accounting advice. Your accountant knows which costs belong in which line for your business and your tax filing.

The definitions are the ones the Restaurant Profit Calculator uses: revenue is net sales, prime cost is food plus labor with owner pay kept apart, operating profit is revenue minus the operating expenses entered and comes before depreciation and amortization, interest and income taxes. These are conventions of this site: other books, banks and accountants may define the lines differently.

The restaurant, its lines and every amount are invented for teaching: they are not data from a real restaurant and not benchmarks. Every figure of the examples was recomputed with independent exact arithmetic and compared with the Profit engine on the same inputs and classes. This guide cites no external statistics and states no industry percentage. Rules on tips, sales tax and deductions depend on your situation: ask your accountant or the relevant tax authority.

Related: the Restaurant Break-Even Guide and the Food Cost Guide.