Hey there food-business owner! Do you sometimes feel like you’re working 100
hours a week, and then when you look at your checking account, you wonder why
there isn’t more money in there?
Well, let me tell you, you are not the only one. Most food people start running food
businesses because they have huge passion for food and serving people, but most
struggle to stay profitable. In this video series I’m sharing Habits of Highly Profitable
Food Businesses, and today’s video shows you how to create a simple report that
enables you and your team to laser focus on your profits. This report will become
your businesses’ guiding light, because it contains the ONE “magic number” that
can tell you everything about the health of your business and your finances. (Can
you believe that? A finance person telling you that you only have to look at ONE
number?) Well, it’s its true, and I can’t wait to tell you how it’s going to change the
way you manage your business. That magic number is called your Prime Cost.
I’m Mary Gassen owner of Launch Consulting. I’m an operations and finance expert
with a passion for restaurant owners, bakers, food-truckers, and all around “food
people.” I am no stranger to the challenges of owning an artisan food business,
because together with my husband Michael, I have owned the Noe Valley Bakery in
San Francisco for over 20 years. I believe that our cities are better places when they
are filled with independent, unique food businesses – the funkier the better! So, I
created Launch Consulting to teach those artisans how to make their businesses
profitable and strong, so they can thrive financially and fall in love with their
business again! Sound Good? If after this video you want to know more about how I
work with clients check me out on my website sflaunch.com.
This is going to be fun…
If your eyes glaze over looking at all the itty bitty numbers that your bookkeeper
provides to you, let me tell you that you are definitely not the only one. We all
struggle to stay awake while reading those reports – I swear there is a direct
relationship between the volume of detailed numbers on a report and alertness. I
want to help you create a report that is like a jolt of caffeine…one that focuses on the
most important numbers, so you can understand more of what is happening, be a
better food business owner, and ultimately more profitable. Calculating your Prime
Cost takes into account the four numbers that are the most important numbers on
your food business P&L.
The 4 numbers are: Revenues, Cost of Sales, Labor Cost and Prime Cost.
The first number is Revenues (also called Income or Sales) is the money that comes
into your company from its normal business activities - from the sale of your goods
or services. The second number is Cost of Sales (also called Cost of Goods Sold or
Direct Costs) and it accounts for the direct costs of making your products. This is
what you spend on food, wine, beer, coffee, flour, proteins, vegetables and other
ingredients and goods that you buy to make the things you sell to your customers.
The third number is Labor Cost and it is a HUGE expense in most food businesses.
For instance, in my business Noe Valley Bakery, a loaf of bread has simple
ingredients four, water, yeast and salt, so the cost of sales on our breads is low.
What causes the loaf of bread to be expensive is not the costs of sales, but the labor
needed to make and sell it. When you account for your labor costs, you should track
and include all of the costs associated with employing people - wages, payroll taxes,
employee health insurance and worker’s compensation insurance.
The fourth and most important number on this report that Highly Profitable Food
Business Owners track is called Prime Cost. I’m going to get a little “nerdy” on you
here, so hang with me — I promise that this simple calculation will change the way
you look at your financial reports. Prime Cost is your Cost of Sales plus your Labor
Cost. We take that figure, and find out what percentage of your total revenue those
combined figures represent. For example, let’s pretend your business is making
$10,000 a month in top line sales. Your Cost of Sales is $2,500 per month, and your
cost of labor is $4,000 per month. Those numbers together are $6,500, which is 65%
of $10,000. Your Prime Cost is 65%. Think of Prime Cost like this: it is how much it
is directly costing you to make the food you sell – the total of the ingredients and the
people. Ready for the big magic? The Prime Cost percentage you need to strive for
to have a consistently profitable food business is (drumroll please…) 65%. Let me
say that again: If you manage your business to 65% prime cost each month, you will
have a consistently profitable food business.
How easy is that!?
Now, you might be wondering how you implement this in your own business. If you
want to calculate this magic formula for your business, simply use the four numbers
and the formula I just taught you. You can write them in a notebook every month, or
if you want to be fancy, you use an excel spreadsheet. Every month when you get
your financial statement from your bookkeeper, I want you to calculate your Prime
Cost. Be sure to show the cost not only as a number, but also as a percentage of
revenue. This topic will have its own video someday, but for now— looking at your
numbers as a percentage of revenue is super important, because it allows you to
easily compare month over month. I won’t go into the details of that here. But just
know that it is one of the Habits of Highly Profitable Food Business Owners. By
looking at Prime Costs every month you are taking the most important numbers and
leaving out all the others in order to laser focus your team on what will give you a
healthy bottom line. You are “turning down the noise” on all of those numbers that
are on your financial statements and instead looking only at what makes the biggest
impact.
If you are with me on this journey of making your food business more profitable,
here’s your homework for this week: Pull out your P&L Report and calculate your
Prime Cost for the last 90 days (3 calculations). You can write it in a notebook or use
the handy-dandy Prime Cost Excel Spreadsheet that I have provided below for you
to download right now. Use your new Prime Cost numbers in your next manager’s
meeting. Also in that meeting, ask your team what ideas they have about how your
business can better manage those numbers. Do you need to raise prices, cut
ingredient costs or cut labor? This focus on 65% prime cost will be your secret
weapon that will insure that you will keep more of your hard-earned money in your
pocket.
When you are done with your homework, I want to hear from you! Let me know
what you accomplished, and if you’re feeling empowered and less fearful. Leave me
a comment below and let me know how focusing on Prime Cost has helped your
business. And, if you want to find out more about me and my services at Launch,
check out my website at sflaunch.com where I have a blog with lots of tips and tricks
to teach you how to be more profitable and fall in love with your food business all
over again.
That’s all for now…thanks for joining me. See you in a few days with the next great
habit!