Have you ever thought about how tracking sales, the right way, helps yield desired profits? If you have never considered this, you should! You may think that sales are sales, however, there is an important difference in gross sales and net sales. In conjunction, there is also an importance of using prime cost to implement effective pricing strategies which help produce your desired profits. Let’s dive into what prime costs really is, the differences between gross sales and net sales (including why this difference matters), and how these sales figures can be connected to prime costs.
WHAT IS PRIME COST
Prime cost is an important number to use when setting prices that will yield desired profits. Prime cost is the number you get when you come up with all total direct costs you have for manufacturing an item that will be sold. The direct costs you use include both costs of goods sold PLUS total labor costs including business/employer taxes, benefits, and insurance. These total direct costs may be fixed or variable, but it is important to note that indirect costs, such as utilities, manager salaries, and delivery costs, are not included in prime costs. By analyzing prime costs, a company can set prices that yield desired profits. By lowering prime costs, a company can increase its profit or undercut its competitors’ prices.
GROSS SALES VS. NET SALES
Gross Sales: In simple terms, gross sales can be actively viewed as a sale that you are ringing up at the register, before discounts, and not including sales tax. Sales tax collected does not count as a sale. For example, if you sell a sandwich for $10, and the customer presents a $5-off coupon, $10 would be the gross sale amount for this single transaction since you do not include any discounts or tax. The gross sale amount is essentially the base price.
Net Sales: Again, in simple terms, using the example above, net sales can be actively viewed as a sale that you are ringing up at the register (gross sale) and subtracting the discounts, not including sales tax. So, if you sell a sandwich for $10, and the customer presents a $5-off coupon, $5 would be the net sale amount for this single transaction ($10 gross sale minus the $5 discount).
The vast majority of POS (point of sale) systems label net sales as gross sales, which leads to confusion when understanding the differences between the two. If you look at your daily sales report from your POS system you will more than likely find that the column listed as gross sales has discounts already removed, which indicates that the number you are viewing for your daily sales is actually your net sales for that day, not your gross sales.
HOW DOES THIS RELATE TO MY BUSINESS?
As stated above, it is important to analyze prime cost when setting prices so that you can yield your desired profits. Additionally, if you are in the restaurant business and you use the wrong sales figure when looking at things like your food and pour costs, they may look too high. This could result in unnecessary changes to things like staffing, which could hurt your business more than help it.
Let’s go through a real-world example of why this information is important for your business:
You ask your chef, or kitchen manager, to create a recipe costing card for a dish that you want to come in at a 30% food cost, which you chose from your desired profit amount. He or she does exactly that and comes back to you with a dish that utilizes $3 in product/labor (prime cost) and decides you can sell this dish at a $10 menu price (gross sale). To confirm this dish does satisfy your desire for a 30% food cost you first divide the $3 cost by the $10 menu price, and then multiply by 100 to get your food cost percentage. In this case, the food cost percentage is indeed 30%.
Once this dish has made it to the menu you decide to get more customers in the door by running a BOGO free offer, which you decide will be for this dish only. This means that each dish, technically, will be sold at a 50% ($5) discount. However, the recipe costing card still requires the kitchen to use $3 in product/labor (prime cost). When calculating your food cost percentage again during this BOGO free special, you use net sales instead of gross sales. This makes your food cost percentage look like it has jumped up to 60%, which is DOUBLE what it was before. This is why it is so important that you are using gross sales instead of net sales.
Based off this analogy, if you were thinking of making staffing changes based off of this new 60% food cost, you may end up firing your chef or kitchen manager because of the food cost increase, which may be a big mistake. It would be unfair to measure their success off a food cost percentage that used net sales instead of gross sales, especially since it was not their call to run the BOGO free sale. Using gross sales, in conjunction with prime cost, is the only way to truly gauge your business’s efficiency as it relates to yielding your desired profits.
We hope we’ve provided you with valuable information about correctly tracking sales in conjunction with prime cost. If you are looking to streamline your operation even further, or have questions about what POS system would be best for your unique needs, feel free to give us a call at 210-926-5677 or schedule an onsite visit HERE. To stay up to date on the latest POS systems available, and industry news, please follow us on Facebook.