Demystifying Prime Costs: Rethinking the 55% Rule for Bar Profitability

Ever wondered why your bar isn't hitting that golden 55% prime cost target? This week on the Bar Business Podcast, I reveal why this number isn't the be-all and end-all for every establishment. You'll learn how factors like location and occupancy costs can shift the goalposts, and why tailoring your approach is crucial for your bar's financial well-being. I'm not here to preach textbook strategies; we're diving into the real-world implications that make or break your bottom line.

Accounting can be a headache, but it's the lifeblood of your bar's success. As your host, Chris Schneider, I break down the nitty-gritty of prime cost management, showing you how to separate your expenses into crystal-clear categories for a laser-focused view of your financial health. From mastering the art of differentiating beverage costs to embracing tools and expertise that streamline your financial tracking, this episode is your ticket to data-driven decision-making that can dramatically improve your business. But wait, there's more! We're peeling back the layers on prime cost management within the hospitality sector, discussing everything from the intricacies of labor cost categorization to the complexities of third-party delivery service fees. 

#####
Welcome to the Bar Business Podcast, the ultimate resource for bar owners looking to elevate their businesses to the next level. Our podcast is packed with valuable insights, expert advice, and inspiring stories from successful bar owners and industry professionals. Tune in to learn everything from how to craft the perfect cocktail menu to how to manage your staff effectively. Our mission is to help you thrive in the competitive bar industry and achieve your business goals.

Special thank you to our benchmarking data partner Starfish. Starfish works with your bookkeeping software by using AI to help you make smart data-driven decisions and maximize your profits while giving you benchmarking data to understand how you compare to the industry at large.

For more information on how to spend less time working in your bar and more time working on your bar:
The Bar Business Podcast Website
Schedule a Strategy Session
Chris' Book 'How to Make Top-Shelf Profits in the Bar Business'
Bar Business Nation Facebook Group

Transcript

Announcer: 0:00

You're listening to the Bar Business Podcast where every week, your host, chris Schneider, brings you information, strategies and news on the bar industry, giving you the competitive edge you need to start working on your bar rather than in your bar.

Chris Schneider: 0:18

Hello and welcome to this week's edition of the Bar Business Podcast, your ultimate resource for bar owners. I'm your host, chris Schneider, and today we are going to be talking all about prime cost. Now, if you remember and listen to the episode, about a month ago, we talked about how to organize your P&L to help you make data-driven decisions, but I want to focus today's episode specifically on prime cost. We're going to rehash some of that conversation we had, but we're also going to add to it, because I think prime cost becomes one of those things that many bar owners judge a lot of their performance on, and you've heard me say plenty of times your prime cost needs to be 55% or less. Your prime cost needs to be 55% or less, but let's be honest, I'm talking averages. That's not always true for one and two. Prime cost isn't always as simple as it seems. There are things that impact your prime cost. There are issues that you will face that you don't have control over, that change your prime cost and because of that, there are a lot of bars out there that bonus their management on the basis of prime cost, and that's not always fair, if we're real honest here, because prime cost has a number of different things that can affect it. So I want to kind of go line by line through prime cost and talk about what's here and what can we actually change and adjust. Where do we have control and where do we not have control? And what does that mean when you're evaluating your prime cost? Because 55% is the generic goal but 55% is not true for everyone. So, like I said, we're going to go line by line through prime cost, we're going to talk about all those pieces and then we're going to talk about things to be careful with and then, towards the end, we're going to delve a little bit back into root cause analysis and problem solving and talk about ways to figure out issues in your prime cost.

Chris Schneider: 2:09

But this whole episode, if I'm real honest, is meant to undo, if you will, some of the things I've said. When I say prime cost should be 55%, because nine times out of 10, it should be 55% or less. But that has nothing to do with your unique situation. And the best example I've used this example before, but the best example I can give you that just describes this perfectly is that your other expenses will affect what your prime cost should be, and what do I mean by that. So if you look at your rent, if your rent's $25,000 a month, or if your rent's $5,000 a month, and let's say you do 2 million in revenue on both of those, well, one it's 12.5%, one it's 5%, and so how you do your prime cost, how you look at prime cost, is going to be different in both those scenarios.

Chris Schneider: 3:10

If your occupancy cost is way high, then your prime cost needs to be lower to hit the same profit percentage, same percentage of net profit. If your prime cost is high but your occupancy cost is low, you can get to the same spot. Occupancy cost is low, you can get to the same spot. It's less work. And, for that matter, if you're looking at a bar that's doing 20, 30, 40% on their bottom line, there's probably some other expenses outside of prime cost that are leading to that, but also they might have a terribly low prime cost. Maybe they can charge more because of where they're located.

Chris Schneider: 3:42

Something that I think a lot of us forget is that regional variances matter. So I can only charge so much in rural Indiana for a beer. In New York City you could probably charge twice as much for a Miller Lite as I can here, but then there are other places, say, some resort areas that you can charge in the middle for a beer, but your expenses aren't any higher than Indiana, and in those places you're going to be able to make a better prime cost because your market is allowing you to charge a premium price, because you're in a resort, tourism-based location, but your cost structure is still cheap because of where you're located. Now, those places are few and far between. Most of the world is not that way, but there are obviously outliers to everything, and so that's where I want to start with all this. There are outliers to everything, and whether or not your prime cost is 55% or 60% or 50% may not mean your bottom line is any different. So you just need to understand when we're talking accounting, when we're talking numbers, it's about you, your history, it's about your establishment, what your actual model is. That's going to dictate a lot of this, not what the industry averages are. But again, the reason I say 55% is because 55%, most of the time, is the correct number to be under, but you need to understand that that may be different for your situation.

Chris Schneider: 5:18

Now the other thing I want to get into a little bit before we go in here line by line. Is this idea of bonusing based on prime cost? And as we go line by line, we'll talk about different things that can affect line items in your prime cost. But when we tell our managers, hey, this needs to be under 55% or you don't get a bonus, are we doing them any service? Is that actually a reasonable data point? Because even if we're in a bar where our prime cost goal is 55%, we've structured everything to be 55% there's a good chance that we're 54%, 53%, 56% or 57% you know a couple percent one way or the other, depending upon things like product mix, the amount of training we're doing, depending on what the ownership is doing, depending on if we've given things away more than normal. So there are a lot of dependencies that influence prime cost that are not necessarily controlled by our managers.

Chris Schneider: 6:19

So if you're going to use prime cost as a KPI whether for bonuses or anything else if you're going to use that prime cost percentage as a KPI, you need to understand what it should be versus what it is theoretically or where you put it. And, like I said, as we go line item by line item, we'll discuss some of the things that can make changes there. But understand that even if we do all the math perfectly and you're structured at 55%, you could easily be a couple percentage points either way on prime cost and not have done anything wrong. Just be standard course of business and it does not actually represent a real problem. Which is why we're going to touch on root cause analysis again at the end, because that's how we determine if we have a problem. We may just determine that we don't have a problem or that our problem is not a managerial problem and therefore should not affect our manager's bonuses.

Chris Schneider: 7:16

So, with all that said, let's go through this prime cost line by line and I am going to cover a lot more ground in prime cost than what you probably have on your P&L. And there are two reasons for that. First of all, most P&Ls for most bars are not set up very well and that leads to not being able to make great decisions. And if you want somebody to look at your P&L, give you some recommendations and things, let me know. Go in the show notes below schedule a strategy session. I'd be happy to give that a look for you and to see where some of those problems lie for you and to make some recommendations to move forward.

Chris Schneider: 7:53

The other thing to keep in mind, and the other reason why we're going to be talking about a lot of things, is not everything that applies to prime cost that could be included in that prime cost. Cost of goods sold above the gross margin number in your books affects all bars and, like I said, we're going to go through line by line but real quick. An example that could be tobacco costs. Well, if you're not selling tobacco, you don't have tobacco costs. It has nothing to do with you. So we're going to talk about a lot more accounts than you probably have.

Chris Schneider: 8:27

But we're going to do this just to be absolutely complete, and I apologize if it gets a little bit boring as we just go through numbers and accounts and what they mean. But this is absolutely essential information for all bar owners to understand, especially if you're grading your team based upon these numbers and the outcome to these numbers. But even if you're not, it's essential to understand this because you cannot make your business better unless you understand where you're starting from. You can have great data, but if you don't understand the data, you cannot make data driven decisions that guide your business forward. So the first thing in prime cost to understand and we talked about this when we talked about P&Ls, but I want to go over this again is that generally your prime cost section of your P&L is the same of what you would have for cost of goods sold for other industries, except we're adding in additional items there to more capture our true operational prime costs.

Chris Schneider: 9:25

And so if you're using, say, quickbooks Online which I highly recommend, and if you need help there, feel free to hit me up as well but if you're using QuickBooks Online, you're going to see not prime cost, you're going to see cost goods sold and gross margin. Anytime you're dealing with a software you're going to see those, unless you're using Restaurant 365. But let's assume you're like most bars, you're using QuickBooks and so you're going to see cost of goods sold as a section and then gross margin. Think of cost of goods sold when you see it on a P&L as prime cost and think of that gross margin as your prime margin, or the margin of the money left after all the prime costs have been paid, which, again, nine times out of 10, most of the cases when we're talking about averages should be roughly 45% of your revenue left on that prime margin line because your prime cost is 55%. So with that said, the first section of your prime cost, I kind of break it into larger sections and then individual sections within that. The first section is going to be that cost of goods sold that you would normally see on a P&L.

Chris Schneider: 10:27

Now the big thing with cost of goods sold to remember, and where I see a lot of bookkeepers that don't know the industry go wrong, a lot of bookkeeping services that do bookkeeping across all industries kind of go wrong is you cannot just lump all your purchases into one category because that tells you nothing. And I think it's important to point out that beer cost is the cost of the beer that you purchased divided by the cost or the price of the beer that you sold. So it's revenue or, I'm sorry, cost divided by revenue. Same with food you need food cost the amount of money you spent, divided by food revenue, the amount of money you brought in. So if you're using one of these larger bookkeeping services or really any bookkeeper that's not specifically focused on hospitality, you run the risk of not being able to actually even know your food cost, your liquor cost, your beer cost, and a lot of times you'll see beer, liquor and wine all put together. Well, that's great, but I think we all know that, generally speaking, you're going to have a higher percentage on your wine, sometimes 10 points higher as far as cost percentage on your wine compared to your liquor and your cocktails. So it's really important that you break everything out. But everything in your cog section should have a matching revenue section. So if you're going to track bottled beer or bottled and canned beer revenue and draft beer revenue separately, you should be tracking bottled beer costs and can or bottled and canned beer costs, I should say, and draft beer costs separately.

Chris Schneider: 12:04

It's very important that your COGS your cost of goods sold in your prime cost section match what you have on for revenue, because if they don't, you will never be able to properly analyze your P&L and you're leaving data there that will help guide your business forward and instead you don't have that insight, you don't have that information, and that's not very helpful. Generally speaking, under COGS there's going to be for most bars, four or five categories there. Now that's going to be food cost. Maybe you separate out non-alcoholic beverage costs, like sodas drinks. Now you probably don't need to do it if we're just talking soda, because traditionally soda can be included in food costs.

Chris Schneider: 12:55

But it's important to think about. If you start offering a bunch of mocktails, if you start offering non-alcoholic spirits, non-alalcoholic beers, there may be a reason to separate out that non-alcoholic beverage segment from your other cocktails. You're using different materials, you're producing a different product, you're selling to a different market, and so that may be useful or not. That's your choice and, as I mentioned when we were talking about P&Ls in general about a month ago, you have to balance the amount of time it takes to produce your books, the difficulty of producing your books, with the amount of data you get. Obviously, the more granular you do your data, the more data you have to make decisions. But the more granular you do your data, the more time it takes. So one thing that you may want to consider is to hire someone, bring someone in that understands bar P&Ls really well. That can help you kind of optimize that and give you some tools to help speed up the process.

Chris Schneider: 13:56

Because I will tell you right now, a lot of people find bar bookkeeping to be very difficult. There's a lot of requirements there, but a lot of this can be streamlined. There are tools we can use and, for example, real quick. One of those tools could be using specific inventory forms that feed out the right information. One of those tools could be using account numbering on your P&L so that when your managers get an invoice, they can just write down some four-digit numbers and write an amount, and that way everything gets coded properly.

Chris Schneider: 14:30

The last thing you want to do and I will tell you this right now, you don't even want to do this. Say I was doing your books. You would not want to do this. The last thing you want to do is to hand a bookkeeper an invoice and expect them to know how to categorize it. Because I'll be real honest with you, they don't. They don't know what every liquor is named. They don't know what every food is named. And if you order something and the invoice gets read incorrectly and it gets categorized in the wrong spot, well, all that effort, all that detail that you're going for is not making a difference because, frankly, you've thrown it away.

Chris Schneider: 15:05

So again, for cost to get sold. Every category that we have in sales we want in cost. So, like I said, food costs, alcoholic or non-alcoholic beverage costs could be separate, could be in food costs. Then we have beer costs, wine costs and liquor costs. Now, with beer, wine and liquor. You may decide you want to divide that up and say draft beer versus bottling canned beer that could be a great idea. Or have um liquor in certain categories, or have your cocktails separate. You can do all of that.

Chris Schneider: 15:40

But I'm gonna be real honest here. I will, uh, be more than happy. Schedule a strategy session with me. We can look at your P&L and I'll give you a list of every possible account you could ever have. But generally speaking, food cost, beer cost, wine cost, liquor cost is going to be close enough and then if there's a problem, we can add more to it. But there's again a position here between level of detail and the amount of time it takes. And generally with those four categories, everything kind of washes out in a way that's very movable and usable and that gives you enough data to do some problem solving. And again, if you find a problem in the data, you can always add more to it. But I tend to like to err on the side of spending less time on our books and more time analyzing the books, because the value in good bookkeeping? Well, yeah, it helps you pay your taxes, yeah, it helps you talk to partners and know where you are. But the real value in good bookkeeping is watching trends, watching numbers and doing data analysis to figure out what the right move is moving forward.

Chris Schneider: 16:49

So now, after your food, beer, wine and liquor costs, you're probably also going to have in cost of goods sold, retail and merchandise costs. If you're selling t-shirts, if you're selling hoodies, if you're selling spices, if you're selling a hot sauce, whatever you're selling retail, that should be a separate line item. And if you're selling food retail not to go food but, like I said, a specially packaged sauce, a special spice blend, something like that that should be separate from the rest of your food. And the big reason to do this is most bars are not getting a 25% margin on their merchandise. Most of us get, you know, 50%. We're buying a t-shirt for 10 bucks, we're selling it for 20. Some of us are buying a t-shirt for 10 bucks, selling it for 15, just because we want people to be advertising and we see that as an okay deal. Hell, I've done it before, back in the day, where I bought a t-shirt for 10 bucks and sold it for 10 bucks just to get the advertising out there and get to get people wearing my logo on them. But that is an important line to include in, something that not everyone considers. That is part of your cost of goods sold. It should not be an expense down below because, again, our cost of goods sold and our revenue should match one for one and that way you're going to have the best data and the easiest time analyzing.

Chris Schneider: 18:06

Now, after we get through cost of goods sold, the next thing on our prime cost is going to be direct labor, and that's really important. Let me say that again Direct labor, not indirect labor. And the reason why it's direct labor is we're counting the labor that's actually used towards the production service of our guests. We're not counting labor that is not used directly towards the production of our food and the service of our guests. If it's not in that assembly line of putting the ingredients together, creating the final product, taking that product to the guests, doing sales with the guests, you know, closing the guests out. If it's not in that line, someone's job, it should not be included in direct labor.

Chris Schneider: 18:47

Now here's the thing that everybody forgets. That includes folks that are training. Your trainee server is not waiting tables, they're following a server around. That is that server they're following is direct labor, but that trainee is not. And so when you have trainees, that labor should go down in indirect labor in your expenses, not in direct labor in your prime cost. And this becomes hugely important because one of the things if we are bonusing people on prime costs which again a lot of folks do I'm not against it, but we have to be honest about the limitations there and understanding what the numbers mean.

Chris Schneider: 19:26

If I bring in five people to train because summer is my busy season, it's getting warm outside, summer is my busy season, it's getting warm outside, I am about to create, I'm about to open my patio, I am about to have all these more guests and so I need people, so I bring in five people to train them for three weeks before the season starts at, say, the end of May, because we're almost at the end of April, and I put those folks in direct labor. Guess what it's going to look like. It's going to look like my labor sucked for that period of time those folks were training. Those three weeks. The labor is going to be off the chart. It's going to skew the prime cost up, probably 5%, 10% and that's not really prime cost. Again, that's training. They aren't actually in that chain that's taking care of the guests. If they weren't there, nothing about the guest experience would be different. And so that needs to be an indirect labor in your expenses, not direct labor in your prime cost, and that is hugely, hugely important to remember. I see that mistake happen a lot and it's not really a mistake. I mean, either way works. But if you're going to put training in your prime cost, you have to be honest with yourself, understand that and then account for that variance. So it's easier just not to put it there in the first place.

Chris Schneider: 20:42

Now, within our direct labor, I like to break out hourly wages from management salary and hell, even sometimes break out front of house and back of house labor, and the reason is that makes it easier to track. Now, if you have a bar I had bars where I had one dude in the kitchen at a time no reason to hack my back of house labor separate from my front of house, because my cost in the kitchen was pretty much the same day to day, except for two or three nights a week when I'd have two guys in the kitchen. But if you have a bigger kitchen team, if you have two or three guys in the kitchen all the time. Tracking that labor separately can be great. Tracking front of house labor separately can be great. It lets you know where there are inefficiencies. It lets you find days that don't jive or months where your labor goes way up because maybe you fired a really good server. Now you have to have two on the floor instead of one. That's going to drive your labor costs up. But definitely break up at a minimum hourly wages from management salaries. And then we're going to have payroll taxes Now, something that, frankly, 80% of people get wrong, something that a lot of the bookkeeping programs get wrong.

Chris Schneider: 21:48

Quickbooks will get this wrong unless you adjust it. I believe Restaurant 365 will get this wrong as well. I haven't dealt with this issue with Restaurant 365. But payroll taxes are not are not I will say that again are not the same as the amount of money that you send to the government when it comes to your P&L. Payroll taxes are the employer portion of the payroll taxes only. So let's say you use ADP and paychecks and either ADP or paychecks they're really good about this stuff. They do a great job on payroll, but if you use either of them, you're going to see multiple withdrawals from your account around the time that you pay your payroll generally a few days before and what you will see is an amount that gets sent to the federal government, a tax amount that they take out. You will see the amount that goes on the checks, the salaries and wages, and you'll see a payroll processing fee.

Chris Schneider: 22:46

And so everybody wants to put payroll processing to payroll processing, payroll taxes to payroll taxes and the net check amount that you see to hourly wages, management salaries. Except there's one problem with that. What actually should be going to hourly wages and management salaries is not the net check, it's the gross check. So you need to go do an adjustment every time you have a payroll and take out of that tax amount. You can put the whole amount into your tax expense account. That's how I would normally do it. But then you need to make a journal entry to reduce the amount in your tax expense and increase the amount in your salary and hourly wages by the amount that was withheld from the employee's checks, and frequently that amount is larger than what the employer is paying to the federal government. So just remember that payroll tax is on a P&L. It's not the entirety of the check that you pay or the entirety of the amount withdrawn from your account that goes to the IRS, it's only the employer portion, and the other portion of that check, the stuff that's withheld from the employees, should be included in your wages or your salary accounts on your P&L.

Chris Schneider: 23:54

Now, after you get past your salaries, wages, your payroll taxes, then we get payroll processing right. So, like I said most, if you're using a processor, they're charging you something. That amount should be there on your P&L. And again, if we're talking direct and indirect labor, let's say your payroll processing is $100 and you have nine employees that are direct labor and one employee that's not $10 of that payroll processing should be down in indirect labor. Now, this does require a lot of journal entries, a lot of breaking things up. There are systems that I can show you on how to do this. It's really not that bad. It sounds worse than it is. Show you on how to do this. It's really not that bad. It sounds worse than it is. But you have got to break up the direct and indirect sections of your labor. You've got to break up your payroll taxes properly. Any piece of detail. We have to make sure those calculations are happening properly.

Chris Schneider: 24:45

Finally, what you're going to have in your direct labor section is employee benefits. So any benefits those employees that are doing the direct labor are getting should be there. So think things like employee meals. Are you doing a? Are you giving employees a discount or a meal every day? Or are you doing, say, a family meal, in which case maybe you don't include it in direct labor, maybe it just gets in cost, gets sold. You can go multiple ways on that Health insurance if you're providing it, vacation, sick time if you're providing it Bonuses, workman's comp insurance, 401ks if you're doing those Other employee benefits, other programs you're doing for your employees. So all of that should be included in your benefits. Essentially, if it's something that benefits an employee, it should be in the employee benefits, not in your costs.

Chris Schneider: 25:34

You need to understand what it's actually costing you to employ someone and that means you have to include all of those benefits, all of those costs, in your direct and indirect labor sections of your P&L, but on your cost of goods sold, on your prime cost. We're really talking directly. Now what are some other things that we should include? Merchant services fees. So merchant services fees, or credit card processing fees, if you will, are what it costs you to accept a credit card, and those fees should be in your prime cost, and we've talked about it before. When we've talked about pricing menus and how to determine what to charge for an item, you should calculate that into your prices as well. So it really shouldn't hurt your prime cost at all. It should be a net zero, more or less. But you need to include merchant services fees on your prime costs.

Chris Schneider: 26:24

Now we get to a fun one paper and plastic costs. So there are a bunch of different ways to look at paper and plastic and, generally speaking, if you're only doing to-go and paper and plastic is not part of your everyday thing, that cost should be an expense not included in your prime cost. Now let's say you're a beach bar and every single drink you pour goes in a plastic glass. That absolutely should be in your prime cost because it's the cost of creating that drink. That drink goes into a plastic cup every single time. That cup costs, I don't know, 15 cents, 20 cents, whatever it is that needs to be included in the cost of that drink. That needs to be included in your prime cost. You even need to consider that when you do your pricing, because that's another 15 cents that you're spending on every single drink. And that's one place where a lot of times paper and plastic costs are put down into expenses where they should be. If you're not doing it for every drink, but when you are doing it for every drink, it throws your numbers off. It makes it harder to analyze because you're not watching that number as closely. It's kind of hidden down with your other expenses and it can add up to a lot. You know, if a cup costs you 10 cents and you serve 500 drinks a day, that's 50 bucks a day. If you're only open 300 days, that's $15,000. So it's a big number that we're talking about for paper and plastic if you're doing that on a regular basis.

Chris Schneider: 27:58

Now, where this can get way more difficult, there's a guy I'm working with who has a bar that has some inside portions to it, has some outside portions to it. He's in an area that has great weather where people are going to spend most of the time outside most of the year. So some of his drinks are going to come in glass certain times a day. Certain areas of his establishment are going to use gas, but at night especially weekend nights when he's busy, when there's a lot of people around because he has all this outdoor space and he doesn't want people. He has gravel in areas and things. He doesn't want people, broken glass in gravel with people walking around in sandals, huge liability risk. He's going to switch to plastic.

Chris Schneider: 28:40

So in that case, would you include plastic glasses in cost of goods sold or in your expenses? And the answer is pick one. In theory, you could try to divide out the plastic glasses that are used as part of your service and the ones that are used just for the goes, but that's nobody's going to do that. That's a level of detail that is absolutely ridiculous to try to do as a bar owner. So probably include those. I would probably say include those in your cost of goods sold. But you can make an argument either way and I used this example before.

Chris Schneider: 29:12

But bookkeeping is kind of like driving from LA to New York. There's a thousand different roads you can take. There's all sorts of ways you can drive. Some are long and scenic, some are short and annoying. Some of them make you drive across Kansas, which no offense to anybody in Kansas, but I've done that drive a few times. It's not very fun. The point is there are different ways you can go here and it's all about what's going to work best for you and your business. So feel free to include or not include paper and plastic costs If you're using third-party delivery services.

Chris Schneider: 29:42

So if you're using Grubhub, doordash, whatever other service exists in your area Uber Eats those are things you should include in your cost of goods sold. And, for that matter, because, generally speaking, we know what revenue came in through, say, doordash we know what our food revenue is. In 90% of places people are not ordering a cocktail through DoorDash, so you can take that and break the revenue out for DoorDash and Grubhub as well, so you can see what's going to those folks. Now it gets a little complex because then we have to adjust food costs, but that can be done. But your fees that you're paying to them should go in your cost of goods sold. It's 30% in a lot of cases that you're paying to have someone deliver the food for you. You need to watch that cost like a freaking hawk, because frequently delivery sales are not as profitable as they should be, while delivering a product that's not as good as the food is in your bar. So it's really important to watch that to understand that number, and so I would always recommend breaking out third-party delivery service costs as a separate section under your prime cost and then going into each of those services independently and looking at okay, what did each of these services actually bring me as far as revenue is concerned?

Chris Schneider: 31:14

Comprehensive guide with 75 lessons covering crucial aspects like bar design, menu creation, team culture, marketing strategies and much more. Imagine having this wealth of wisdom at your fingertips. Whether you're a seasoned bar owner refining your craft or someone dreaming of stepping into the bar business, this book is your ultimate companion. You can grab a copy on Amazon and print ebook and audio book formats. The link is in the show notes below. Join the league of successful bar owners who found their blueprint to working less in their bar and more on their bar.

Chris Schneider: 31:45

Now, after that, within prime cost, there are some other costs of goods sold you may have. Let's say that you're running an event and you're selling tickets to that event and you're going to have a cover charge for that event. Maybe you have event costs that need to go there. Maybe I know a lot of people do this. I used to do this from time to time you have a room in your bar that you're renting out to the general public. Maybe it's while you're open, maybe it's while you're not, maybe it's community groups, business groups, networking groups, whomever that you're renting this room to private parties, all sorts of things. If there are costs associated with room rentals, room rental should be a separate line item in your revenue and a separate line item in your cost of goods sold or your prime cost. Rather, if you have revenue coming from jukeboxes, video games whether that's machines that you own or you have a company that owns the machines, they bring them in and you split revenue and a cost that you have associated could go there. Now if you do have a company that comes in and they are handling all that for you and you have no associated costs because you just get revenue, you don't need a cost section. You will need a revenue section, but you don't need a cost section. Now I had a situation when I owned one of the bars I owned, I own my pool tables, but not the video games. So I had pool tables and video games and jukebox all as one revenue section. But then my cost section really only reflected new felt for pool tables, pool balls, cues, those sorts of items the same as your video games or your pool, those line items and other cost of goods sold.

Chris Schneider: 33:15

Maybe you own an ATM. If you own your own ATM or you're splitting revenue on an ATM, maybe you need to include ATM costs. If you're in a state that allows gaming, so think pull tabs, think Keno, think video poker. You know we have a large range in the United States between bars that and really this is true around the world between bars that cannot have a single bet placed ever and zero gambling, to bars in Vegas that have, well, all the video poker, all the games, all the everything just on top of the bar. So if you're in a place where you're doing gaming, if you're doing pull tabs, if you're doing keynote, if you're doing anything like that, you need to have your costs associated with that on your prime costs. Again, this is our one-for-one matching of our revenue sections with our prime cost sections.

Chris Schneider: 34:07

If you sell tobacco, so whether you sell cigars, whether you sell cigarettes I don't know if there's any states you can sell or any places around the world you can sell weed and a bar that also sells booze. But if you could, if you're selling weed right, include that. Any smokable product, any tobacco product, anything that you're bringing revenue from in that regard needs to have an associated cost. And then, finally, the last thing that you see and you don't see this that often, but you see it from time to time maybe you have a vending machine in your bar with cigarettes, with snacks, with whatever that should be on there as well. If you're putting candy bars or bags of chips in a vending machine, the cost of what's going into that machine should be accounted for as well.

Chris Schneider: 34:46

Now think about those other COGS. None of those are going to follow our standard percentages. Think about the third-party delivery services. Those do not follow our standard percentages. And until we get to the third party delivery and the other cogs, yeah, 55% sounds pretty reasonable. Maybe, depending on paper and plastic costs, those should be accounted for in your revenue. So, yeah, 55% is reasonable. Now we start to add this other stuff in. Maybe it's not.

Chris Schneider: 35:13

I'll tell you right now. In Indiana I was doing, oh, about 10% of my business out of my bar. My revenue out of my bar was pull tab sales, pull tabs in Indiana. Between what you're spending for the box and what you're paying out, you make like 20%, 15%. I forget the exact number I was doing, but it was like 15%. So my cost on pull tabs was 85%. That was included in my cost of goods sold. That was included in my revenue. You think that threw off my prime cost? Of course it did.

Chris Schneider: 35:45

So this is where we're talking about areas where you now have to manipulate your understanding of prime cost. You have to understand what's the correct prime cost for you and while I understand that can be a daunting task, it's really just data analysis and it's not that hard and anyone can do it. I can show you the tools and everything to do it. Just schedule a strategy session in the show notes and we can go over that. But this is important to understand that you cannot just do or you cannot just expect that number to always be 55% when you have multiple variables coming in and all those variables are different for everyone. And again, if you're going to bonus your managers off a prime cost, if somebody comes in and buys 10 grand with a pull tabs this month and normally you only sell five grand at an 85% cost, another $5,000.

Chris Schneider: 36:37

So we're talking like another, not doing that math that quick in my head but say another 42.50 in cost. That's additional. That's now getting distributed among your liquor and food and beer. It's going to make that number look low your prime cost percentage or your prime margin. Rather, your prime cost percentage is going to look high, the margin on it's going to look low and it has nothing to do with anything other than the fact that you sold more pull tabs. So focus on that prime cost, get it right.

Chris Schneider: 37:01

But also understand that industry averages don't work for everyone and that if you're going to bonus your management off of it, look at what they can control. Look at where their input actually makes a difference, because nothing your managers can do is going to change the cost of your pull tabs. Nothing your managers can do is going to change the cost of your pull tabs. Nothing your managers can do is going to change what you make on video games. Nothing your managers can do is going to change what you make on a vending machine or off an ATM, and all of those things should be included in your prime cost.

Chris Schneider: 37:32

So be aware of that, be aware of what's going on and understand that this cost industry average should be 55% or less, but different things affect it. It is, quite frankly, in my opinion, one of the most useful, one of the most easy to understand and one of the best KPIs to use for your bar. But absolutely you have to understand what that cost should be for your bar. What is prime cost for your bar? What is the prime margin you should be getting for it? What is the prime cost percentage you should be looking for? And then you have to adjust, because 55% sounds good when I say it on a podcast but in reality that's an average and you're going to be somewhere between 50 and 60 probably, and maybe 50 is okay, maybe 50 is too high, but you have to understand that based on your numbers and your exact. So with that, folks, we'll wrap it up for today.

Chris Schneider: 38:24

Hopefully my ranting about prime costs and about bookkeeping was entertaining, but again, I know it's not the most interesting material, but it's some of the most important material for understanding your books and understanding how to make data-driven decisions. I did say we'd get into some root cause analysis and problem solving. Frankly, I've talked enough for today. But if you did enjoy the insights today, if you enjoyed the conversation, if you want to know more about bookkeeping, make sure to schedule a strategy session with me. We can look over the bookkeeping you have for your bar and see what's going on. If you enjoy the podcast in general, like subscribe and leave a review, and also make sure, go on Facebook, join our Bar Business Nation Facebook group. We have a great community there and there's more and more conversation going on every day. It's really wonderful to bring bar owners together and to be able to help each other. All those links are in the show notes below. Until next time, I hope you all have a great day and we will talk again later.

Announcer: 39:27

Thanks for listening to the Bar Business Podcast. Make sure to subscribe so you don't miss any future episodes. Check out our website at barbusinesspodcastcom and join our Bar Business Nation Facebook group for more strategies and tips.