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Understanding Prime Cost — The Simplest Way to Give Yourself a Raise

 

Who doesn’t love making money? If you are an entrepreneur like me, making money is a key motivator for your businesses and the work you put into them. It’s not that you don’t love the services you offer or the clients you have, but at the end of the day, we all have an economic need that we must fulfill and let’s face it: making money is fun. Plus, the more we fill the money cup, the more good we can do and difference we can make so it really is win-win.

Often times when we think about making money we conceptualize it in only one way. More money comes from more revenues. But here’s a secret that the most savvy business owners know. Increased revenue isn’t the only way to make more money. Keeping more of the money you already bring in is the easiest way to give yourself a raise without increasing costs or volume.

In most industries the way to keep more of your current revenues is to meticulously monitor and tend to your prime cost. Prime cost is simply the addition of your two key controllable costs, labor and cost of goods. What you’re shooting for is to keep these controllable costs around 55% of your total revenues.

Most independent restaurants sit around 60%, the chains get it between 50-55%. For my restaurants we sit at 53% and are darn proud of it, because every percentage point you shave off here means tens of thousands of dollars added to your profits. So how do you chip away at prime cost? Here are the top three strategies we use in our restaurant business that get us the best results.

  1. Measure it. You have to know where you are in order to get started. We’ve found that just by knowing, sharing, and monitoring our prime cost, everyone on our staff becomes mindful and interested, and starts working towards getting it to a desirable number.
  2. State a goal. Figure out what’s realistic for you to achieve and then set the goal to get there. What would it mean if you could shave off 5% of your prime costs? Christmas bonuses? New equipment? A family vacation? Make the results something you and your team want to work towards so that everyone is motivated and ready to pitch in.
  3. Get creative. Don’t just ‘cut labor‘ and hurt your customer experience at the same time. Can you stagger start and end times? Could you schedule someone for just the rush rather than a whole shift? Is on-call something you can consider? In terms of cost of goods, look at the inventory you’re sitting on and ask yourself, will everything be used in the next seven days? If the answer is no, then you’re letting money sit on your shelves. Don’t let big sales on items fool you into buying a six-month supply of something — keep your money in your bank account where it can work for you! Can you renegotiate your terms with vendors? Often times just bringing up to a vendor that you are considering switching will jolt them into giving you better terms and pricing.

Whatever your industry, knowing your prime cost is crucial to your business’s success and to you getting paid what you’re worth! Give yourself a raise and start monitoring prime cost today.

Related: The P&L Statement Is Your Report Card: How To Get an ‘A’

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