Restaurant Gross Profit and Prime Cost
Understand gross profit, prime cost and net profit in a restaurant, read a simple profit and loss statement, and find where margins leak every month.
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Key takeaways
- Gross profit is sales minus the cost of food and drink; prime cost adds labour to that cost.
- Prime cost is the part of the business you control week to week, so watch it before rent and fees.
- A percentage hides the money: always read profit in cash terms as well.
- Close the month with a one page profit and loss and three questions about the biggest changes.
In short: gross profit tells you what is left from sales after the food and drink you sold. Prime cost adds labour, so it shows the cost of making and serving the meal. Net profit is what remains after rent, energy, fees and everything else. If you can read these three layers, you can see where the money goes.
This is general education, not accounting advice; ask your accountant how to report in your country.
Many owners know their sales and their bank balance but not their margins. That is understandable, because restaurants are busy and the accounts arrive late. A simple monthly habit fixes it.
The layers of a restaurant's profit
Start with sales, excluding sales tax or VAT. Then peel off the costs in order.
- Cost of goods sold (COGS): the food and drink you used. See food cost percentage.
- Gross profit: sales minus COGS.
- Labour: wages, employer taxes and pension, holiday pay, training, plus a fair wage for working owners and managers.
- Prime cost: COGS plus labour.
- Overheads: rent, utilities, repairs, insurance, card fees, software, marketing, accounting and licences.
- Net profit before tax: what is left.
Some owners also separate occupancy cost (rent, rates, service charge) because the landlord decides it, not you.
A worked example
A made up month with round numbers.
| Line | Amount | % of sales |
|---|---|---|
| Sales (excluding tax) | 100,000 | 100% |
| Food and drink used (COGS) | 30,000 | 30% |
| Gross profit | 70,000 | 70% |
| Labour (all in) | 32,000 | 32% |
| Prime cost (COGS + labour) | 62,000 | 62% |
| Rent | 10,000 | 10% |
| Utilities | 4,500 | 4.5% |
| Card fees and software | 3,500 | 3.5% |
| Marketing | 2,000 | 2% |
| Repairs, insurance, admin and licences | 8,000 | 8% |
| Overheads | 28,000 | 28% |
| Net profit before tax | 10,000 | 10% |
Read it from the bottom. The restaurant makes 10,000 a month. Now ask: what happens if food cost rises by two points? That is 2,000 less, and net profit falls from 10% to 8%, a fifth of the profit gone. A small change in the biggest lines matters more than a big change in the small ones.
Why prime cost gets the attention
COGS and labour together are usually the two largest costs, and you decide them day by day: what you buy, how you portion, how many people you schedule. Rent is fixed by a lease; prime cost is not. In published restaurant guides, healthy prime costs are often quoted around 55% to 65% of sales, with different figures for quick service, cafes and fine dining. These are trade and vendor figures, not rules, so use them as a rough check and set your own target.
If your prime cost is too high for your overheads, you do not have a profit problem at the end of the month. You have a problem every shift.
Reading a percentage safely
Percentages are useful for comparison and dangerous for decisions.
- If you raise the price of a dish and sales stay the same, the percentage improves and the money improves.
- If you remove a cheap dish, the percentage can rise while the money rises too.
- If you cut staff, labour percentage falls, but ticket times and reviews may fall as well.
- A busy week with promotions can lower the percentage and still reduce cash.
Always read the money beside the percentage. Ask "how many pounds, dollars or dirhams did we keep?" and "what did we do differently?"
Where margins leak
Walk through these places in order.
- Prices out of date. Menu prices that have not followed costs. See how to price a menu.
- Recipes out of date. Plate costs from last year. See recipe costing.
- Waste and over portioning. See reduce food waste.
- Rota that does not follow demand. See labour cost and the rota.
- Discounts and comps that are not tracked.
- Fees: card processing, delivery platform commission and software. Platform commissions can be the biggest hidden cost of delivery. See stop paying delivery app commission.
- Energy and repairs that creep up. Quote and review contracts annually.
- Menu mix that has drifted to lower margin items. See menu engineering.
The monthly close in six steps
- Make sure all supplier invoices and payroll are in the right month.
- Take the closing stock count.
- Calculate COGS and labour.
- Fill in the one page profit and loss in the form above.
- Compare with last month and the same month last year.
- Write down the three biggest changes and one action for each.
An accountant or bookkeeper can produce the figures. The three questions are yours.
Use weekly numbers between the months
Do not wait for the accounts. Each week, check sales, labour hours and cost, and food usage if you count weekly. DineHarbor's reports show sales comparisons, top products and preparation times, and weekly numbers explains which to check. Matching those with stock counts from stock control gives an early warning.
Gross profit by channel
Not every sale earns the same. Dine in carries service cost. Collection saves service but adds packaging. Delivery adds driver or platform costs. Calculate the gross profit after channel costs for each, so you can see the real contribution. See takeaway and delivery profit.
Drinks usually have a higher gross margin than food, so a change in the drinks share of sales changes the overall margin even if nothing else changes. Track food and drink separately.
Break even in profit and loss terms
Break even sales are fixed costs divided by gross profit percentage. In the example, if "fixed" means overheads plus a base level of labour of 20,000, fixed costs are 48,000. Dividing by 70% gives break even sales of about 68,600 a month. The restaurant sold 100,000, so it had a cushion of about 31%. Know your own cushion; it tells you how much a slow month can hurt.
Common mistakes
- Ignoring owner labour. If you work 60 hours and draw nothing, the profit is overstated.
- Putting tax in the sales line. Always use sales excluding sales tax or VAT.
- Mixing months. An invoice for January goods paid in February belongs in January's cost.
- Looking only at the bank balance. Cash is not profit. See restaurant cash flow.
- Treating a lucky month as the new normal. Compare with the same month last year and the average of three months.
Setting your own targets
Work backwards. Decide the net profit you need, then see what that leaves for the costs above it.
Suppose you need 10% net profit to repay a loan and pay a fair return. Your overheads run at about 28% of sales at your current volume. That leaves 62% for prime cost. If food and drink sit at 30%, labour has to stay at or under 32%. Now you have a number for the head chef and the manager that comes from your own lease and your own loan, not from a blog.
Revisit the targets whenever a big cost changes: a rent review, a wage increase, a new platform fee or a new loan. Fixed costs rise in steps, so prime cost has to move with them or profit disappears.
Questions to ask your accountant
- Are my sales, cost of sales and labour recorded in the right month?
- Which costs are in overheads that could belong in cost of sales, such as packaging?
- How is owner or manager pay shown?
- Is depreciation, interest or tax in the net profit line?
- Can you give me a monthly one page report in the form of the table above?
A clear report format agreed once saves hours of explanation every month.
Ready to see your sales, products and preparation times in one place? Start the 30 day free trial with no card needed.
Questions and answers
What is a good profit margin for a restaurant?
Margins are thin and vary widely by concept, location and ownership of the premises. Instead of chasing a headline figure, work out the profit you need to repay borrowing and pay yourself, and test whether your numbers can reach it.
What is prime cost?
Prime cost is the cost of goods sold (food and drink) plus labour cost, usually shown as a percentage of sales. It is the largest and most controllable part of a restaurant's costs.
What is the difference between gross profit and net profit?
Gross profit is sales minus the direct cost of what you sold. Net profit is what remains after every other cost, including labour, rent, utilities, fees, interest and, depending on the report, tax.
Should labour include the owner's salary?
Include a fair wage for the work the owner does in the restaurant, even if you do not draw it every month. Otherwise your profit looks better than the business really is.
How often should I review my profit and loss?
Check prime cost weekly and the full profit and loss monthly. Quarterly is too late to correct a trend.
See it in DineHarbor
About the author
Editorial team
The DineHarbor team writes this blog for restaurant owners and managers. Every article is checked against the product before it is published, so what we describe is what the software does.
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