Prime cost: the one number that decides whether a café survives

If I could only see one ratio from a café's accounts, it would be prime cost.

Prime cost is food and drink cost plus total labour cost, divided by sales. It captures the two biggest controllable costs in the business, and it is the number that most directly shows whether the venue makes money.

The thresholds

The scorecard uses these bands, and they match how I read venues:

• Under 65%. There is room for rent, overheads and a real profit.
• 65 to 70%. Workable, but there is little slack.
• Over 70%. A slow quarter can push the business into a loss.

The reason is simple. Rent, utilities, insurance, card fees, repairs and marketing still have to come out of what is left. At 70% prime cost you have 30 cents in each dollar for all of that and a profit.

The two halves

Cost of goods. Food and drink typically run at 28 to 32% of sales in a well-run café. Higher points to waste, discounting, theft or weak pricing. A figure much lower than that usually means the numbers are off, for example if stock isn't being counted properly.

Wages. A healthy range is roughly 30 to 35% of sales. Over 40% is a red flag in the scorecard.

When you measure wages, count everything: base pay, penalty rates, superannuation, workers compensation and any other payroll on-costs. And include a market wage for the owner if they are working the business without pay. See the owner add-back for why that matters.

A worked example

Sales of $100 look like this:

• Food and drink: $31
• Wages including on-costs: $36
• Prime cost: $67, or 67%

That leaves $33. Rent at 12% takes $12, and other overheads at 10% take $10. The owner is left with $11, an 11% margin.

Now suppose wages creep up to 40% because of a tighter labour market. Prime cost is 71%, and the margin falls to 7%. Two small changes, and the profit has dropped by a third.

Where the seller's version breaks

A single annual prime cost figure can hide a lot. Ask for it by month.

• A venue that runs at 62% most months and 78% in winter has a seasonal problem you need to price in.
• A figure that is suspiciously low may mean cash wages or unrecorded stock.
• A recent improvement just before the sale may mean the seller cut hours, delayed ordering or ran down stock to flatter the numbers. Ask what changed, and whether it will hold under a new owner.

Weekend and public holiday trade is also more expensive under the hospitality award, so a venue that does most of its trade on weekends will carry heavier wages than the same revenue spread across the week. Check the roster against the trading pattern.

What to ask

• Show me prime cost by month for the last year. Which months were worst, and why?
• Can I see supplier invoices and stocktake figures for the last 12 months?
• Who is on the roster, and what is each person paid, including penalty rates and on-costs?

A venue with a prime cost problem can sometimes be fixed. That is a reason to negotiate on price. It is not a reason to pay full price and hope.