Understanding Prime Cost: 3 Ways to Use it in Your Business Today

Most business owners and managers I talk to have one thing in common. 

They HATE working with numbers.

And that makes sense to me. For food and beverage, especially, numbers are a very analytical aspect of a very creative enterprise. Many passionate business owners in the F&B industry go into business because they love to create, cook, and provide a space to nourish people. 

Numbers feel like the antithesis of that ethos. 

But the truth is, we live and die by the numbers in any industry, F&B most especially. Taking time to understand their importance and how they can help you create more time to do the work you're passionate about is a worthy endeavor.

I want to talk about one specific number that I find exceedingly helpful, Prime Cost.

Prime Cost is the percentage, relative to your revenue, of your combined raw materials and labor costs. 

To find Prime Cost, take what you spend on raw materials and what you spend on labor, add them together, then figure out what percentage of your revenue this number represents.

So what makes Prime Cost such an effective measurement? 

In most businesses there are only two expenses over which you have a large margin of control. Those are raw materials and labor. In other words, you can control how much you spend on materials, how many people you employ, and how many hours you pay those people to be on the clock. 

Everything else is pretty static. 

For this reason, Prime Cost is often one of a business owner's most valuable measurements and pricing tools. 

Here are three concrete ways that calculating and knowing your Prime Cost will help you take control of your business:

1. Prime Cost helps you price your goods effectively. The Prime Cost equation will help you to set a price for your products that works for your business purposes, be they profit, establishing a loss-leader, undercutting competition, etc... Knowing your Prime Cost puts you in control of your revenue, your profit, and, most importantly, your strategy. 

2. Prime Cost acts as a barometer for your business health. It's easy to track how financially healthy your business is by simply entering a few numbers into the Prime Cost equation in a spreadsheet and getting a percentage that makes sense and acts as a great measurement of financial health. This can be done for individual products or for your entire range of products. The effect, and utility, is the same. 

3. Prime Cost let's you track your financial health over a medium-long term time frame. I find that, many times, declining financial health creeps rather than sprints. If you're keeping track of your Prime Cost over time, it's easy to spot trends and identify and correct problems before they get out of hand. 

Prime Cost is just one of myriad equations and measurements that can be useful to business owners in establishing strategy and tracking financial health. However, I find that it's one of the most important and easiest to learn to use. 

If you're not using Prime Cost today, give it a shot.

If you have more questions about it, shoot me an email. I'd love to talk with you more about your business and your strategy.