Prime Cost for Bar Owners: The Tracking Mistake Killing Your Profits

Most bar owners track sales, watch labor, and check their inventory.

But very few step back and ask a simple question:

Are you actually tracking your prime cost the right way?

Prime cost, the combination of labor cost and cost of goods sold, is one of the most important numbers in your bar. But many operators calculate it incorrectly or rely on inaccurate inventory numbers.

In this episode, we break down how prime cost actually works, the mistakes bar owners often make when tracking it, and how to start using it as a real management tool.

Because when you understand your bar prime cost, you can see problems earlier, whether it’s overstaffing, waste, overpouring, or rising vendor prices.

If you're a bar owner, hospitality leader, or restaurant operator, this episode will help you better understand one of the most important metrics behind bar profitability.

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Transcript

Today on the Bar Business Podcast, learn how to manage your prime cost, discover a framework to make prime cost a guiding tool for your business, and master your largest expenses.

So lately on the podcast, we've been talking about a lot of non-financial topics, but we're going to turn back to those in the next few weeks. And I want to get started just by diving back in on prime cost. You know, I think for a lot of us, prime cost is something we think about on a regular basis. A lot of bar owners use prime cost to manage their managers, to give them bonuses, to help incentivize them. And prime cost really is one of those key metrics that we talk about a lot. But...

Around prime cost, there is honestly quite a lot of difference between one spot and the spot down the road. How it's calculated, what's included, and what we can do with that number because of what it contains. So when we look at prime cost.

Most of you are probably tracking it. I don't know if you're managing it though. And so we're to talk about how can we calculate it? What's the right? What's wrong? Where do we have some options? How do we benchmark it? And how do we use it?

And this is one of the things that I like to look at anytime I have a new client because PrimeCost really is a key to understanding the financial health of your bar.

So when it comes to prime cost and calculating it, quite frankly, there is no right answer. And we'll get into that in a second. But in general, prime cost is going to be the sum of your cost of goods sold and your labor cost.

That sounds pretty simple, right? Cost of goods sold plus labor costs. Why is there no right answer though? Because some bars include credit card fees. I do when I work with clients. That doesn't mean that not including them is wrong or including them is right. It's a choice. For some establishments, they're going to include paper goods. Now, should paper goods be in your cost of goods sold? Well, if you're a

college bar and on the weekend you only serve beverages in plastic cups because you don't want to break the glassware, then yes, it should be included.

But if you only are using plastic cups for special events or styrofoam cups, say, for to-go's, it probably shouldn't be.

But the big thing here is it's labor plus cost of goods sold. Now, there are two mistakes I see very, very often.

Either as the owner, you're including things like draws, which are distributions, not a salary, or you're excluding yourself altogether, even if you are taking a salary. If you are on payroll, you count towards prime cost. The second mistake that I see quite frequently is using your purchases instead of your cost of goods sold. And we've talked about this when we've talked about inventory multiple times, but...

Cost of Goods Sold is Beginning Inventory plus Purchases minus Ending Inventory. Beginning Inventory plus Purchases minus Ending Inventory. You want to actually only measure what you've used, not what you've purchased. And for a lot of us, especially if you don't have a complex inventory system and you're not tracking your inventory well, you're looking at purchases rather than actual Cost of Goods Sold.

If your inventory is sloppy, your cost of sold will never be correct. So you need to have a good inventory system to get that proper cost of goods sold to calculate out your prime cost. Now, like I said, because we can include or exclude different items here, this is going to look a little bit different, everyone, from one bar to the next. So how do we benchmark this properly?

Now, most conversations and even I will say, you know, it needs to stay under 65 % or, you know, depending on what's in it, we should be between 50 and 60%. Generally speaking, if we're including things like credit card fees, I'll say under 65. You know, it's 55 to 65, 50 to 65. Somewhere in that range is where we want to live. But when we just look at that metric, what we're not asking ourselves is

Is this a good prime cost for you, for your establishment, for your business? Because trust me, I've seen bars before where labor is significantly lower than you would expect it to be. We're not talking 30 % labor costs, we're talking 18%. Does that happen often? No. Is it possible? Absolutely. And if you're structurally set up,

to run a 52 % prime cost and you run a 58 % prime cost, you go, well, that's way under 60. I'm doing great. But maybe you're not, because you're actually structurally, you should be doing a 52 % prime cost. So you want to benchmark against where your own numbers should take you. Now, that can be hard to calculate sometimes. But if you have things like a lot of overtime, if you have over scheduling, if you have spoilage,

your prime cost is higher than it should be. So we can't just look at that prime cost number to benchmark it. Now.

volume also comes into play. And your level of service, what you're doing. So we've talked about this before, but when we look at something like cost of goods sold, if you're mostly selling well drinks, your cost of goods sold is going to be a lot lower than if you're mostly selling really high-end bourbon. And if you're selling really high-end bourbon, it's very possible that on most your products,

You're structurally set up not to have a 18 or 20 % liquor cost, but a 40 or 50 % liquor cost. Because a well drink that I have an 18 % cost on, maybe I'm making $4 as my gross margin, but a $50 bourbon that I'm selling with a 25 % cost, that's 50 % cost, I made $25. So the contribution margin versus contribution dollars conversation has to come into play here when we're looking at prime costs.

So all this is to say benchmarking prime cost is very difficult. And I would, yes, if you're over 65%, look at it. If you're over 60%, look at it. But look at it regardless, because it's not necessarily about benchmarking yourself against the guy down the street, as much as it is benchmarking today against where you were yesterday. Can I improve this? Can I optimize it?

Now, if you're doing prime cost properly, you know your sales, you know your labor. I mean, that comes straight out of your POS system. And if you're doing weekly inventory, you should know your weekly cost of goods sold. It's going to take some time to get those numbers on a weekly basis. But when you look at it every week, you actually have actionable data. When you look at it every 30 days, especially if you're waiting for your bookkeeper to turn around those P &Ls for you,

You might be looking at something that's three weeks stale, and that's not going to be actionable data. So here's what I would encourage you to do. Every Monday, pull your sales from your POS. Pull your labor cost from your payroll system. Do a quick spot check of your inventory. And from that, you can estimate your prime cost. Now, if you're lucky,

And you're doing a complete inventory every week, which you should be doing. that's, you know, you're doing that on Sunday night. Well, then this becomes really easy to do Monday morning. If you're doing your inventory on Wednesday, I would encourage you to pull your prime cost numbers on Thursday so you can look at that last seven day period. When I talk about using it as a weekly tool, don't be caught up in the days of the week, but look at when makes sense for your business to give you actually actionable data.

Now there are two things I would watch when you do this analysis. The first one is if you see a labor spike of more than 2%, I would dig into it. Look at, did I run high overtime? Was I overstaffed? Did I anticipate my weekend properly? Or did I have a gross over staffing and then I was slower than I thought I would be because of some weather event? The other thing I would look at is if my cost of sold spikes more than 2%.

That could be waste. That could be overpouring. That could be vendor pricing changes. That could be a lack of staff training.

But anytime I see a 2 % or greater increase week over week, I want to dig into that. I want to figure out why.

And just for you guys for this week, here's something I would encourage you to do. Pull your last four weeks of.

sales, pull your last four weeks of labor, calculate your prime cost for the last four weeks. Not a monthly number, but do each week separately. Look at which week was the worst. That week is going to tell you something. And then so I want you to dig in that week and figure out why was this my worst week. It could be weather, it could be events, it could be a road closure, it could be over staffing that week.

It could be any number of things, but I want you to drill down and figure out why was this a problem? Because once you know why that's a problem, then you can go and set up a system to make sure that that problem doesn't happen again.

So if you ran through the exercise, or if you run through that exercise, and the numbers make you a little nervous, get in touch. I love to help people with prime cost. But the bottom line here is know your prime cost, understand what it should be for your business, measure it weekly or at least on a very regular basis so that you can actually adjust to it in a time frame that's actionable.

and benchmark against yourself. You're competing with yourself always in this industry more than you're competing with the guy down the street.