Labor costs are one of the major concerns that restaurants have, where the others are equipment, utilities, food, and a POS system. Among all expenses, a restaurant manager has to track, labor costs are the most important, and the most challenging to control. Labor is part of your prime cost, which is a key performance indicator that helps determine your profitability. Accordingly, it is essential to know how to control them so that your bottom line can benefit greatly.
In this article, we provide you with a complete guide to controlling your restaurant labor cost.
What is Restaurant Labor Cost?
Labor costs are more than just employees’ wages and salaries; labor cost includes all labor-related categories:
- Staff wages and salaries
- Payroll taxes
- Health care
- Vacation and sick leaves
How to calculate Restaurant Labor Costs Percentage?
You can make use of the labor cost percentage to understand how much money you spend on labor to produce revenue. You can calculate it in many ways:
- Labor cost as a percentage of total sales: Total Labor Cost/Total Sales
- Labor cost as a percentage of operating costs: Total Labor Cost/Total Operating Costs
Here, we will show you how to calculate labor costs as a percentage of total sales, using sales and cost data for the same period. If you want to calculate it as a percentage of operating costs, you can substitute sales with operating costs. Operating costs include all the monthly running costs like utilities, rent, and food.
The steps of calculating labor cost as a percentage of total sales:
Step 1: Collect all the data about your total revenue:
These data can be collected from income statements or POS sales reports.
Step 2: Calculate your total labor costs
Add up the amount your restaurant spent on the above categories like wages, salaries, bonuses, and overtime.
Step 3: Divide labor cost by revenue
Divide the resulting number in step2 by your total sales for the year.
Step 4: Multiply the number from step3 by 100
Finally, to get your percentage, multiply the number in Step 3 by 100.
- Let Sales = $600,000 for the year
- Let your total labor costs for the year = $180,000
- 180,000 ÷ 600,000 = 0.3
- Labor cost percentage = 0.3 × 100 = 30%
What Percentage Should Labor Cost Be In A Restaurant?
Restaurants may target a percentage of 20 to 30% of sales. This percentage varies according to the type of restaurant. According to the average restaurant labor cost percentages for Q4 of 2017, here are some statistics:
- Quick service: 29.4%
- Fast-casual: 28.9%
- Casual: 33.2%
- Upscale casual: 30.4%
- Pizza: 31.3%
Identify where your restaurant stands on the labor cost scale by checking out your competitors and seeing how you compare.
How could you lower your restaurant labor cost?
1. Smart Scheduling:
Scheduling is one of the most time-consuming and tedious operations in a restaurant, however, you need to spend some quality time with the schedule.
Smart scheduling can help you minimize staffing costs and maintain guest expectations.
Use these three tips for effective scheduling:
a. Scheduling according to sales forecast:
Never copy and paste your schedules. Alternatively, you shall carefully schedule your employees according to the sales forecast. Incorporate on-call shifts so that you could be able to cut or call off scheduling staff if guests do not rise as expected and ensure staff availability during peak times.
b. Look back to plan ahead:
To anticipate staff needs for the current year, you can forecast sales and guest counts using numbers from similar periods the previous year such as Eid al-Adha, Valentine’s Day, and Christmas.
c. Invest in the Right Employee Scheduling Tool:
Creating and managing schedules in Excel may cost you much more time creating and moving between schedules and tracking and managing schedule changes. Not to mention the probability of making mistakes when comparing actual and scheduled labor, risking customer service quality by over or understaffing.
Alternatively, you can invest in an employee-scheduling tool, which can help you in:
- Creating schedules in no time.
- Scheduling the right amount of employees for every shift.
- Tracking and cutting down labor costs by analyzing labor reports.
2. Reduce employee turnover and boost employee retention:
Losing an employee costs far more than hiring and retaining great employees so take the time to invest in keeping your staff comfortable. Since every time an employee leaves, you have to invest time, money and resources into finding and training a new employee.
Accordingly, make sure to provide your staff with better growth opportunities, introduce employee loyalty programs, improve work culture, offer them proper onboarding and ongoing training. Moreover, you shall recognize excellence and provide rewards for those who have excellent performance and make the most sales. Consider conducting exit interviews to find out why an employee leaves to have vital insights into what might be increasing your turnover.
3. Invest in automation and digital solutions:
POS systems are not the only solution that offers the advantage of automation. You can install a self-pour beverage tap system so that you would provide your customers with a new, refreshingly convenient experience and reduce labor costs at the same time. Since you will not need a bartender to take every order as customers can serve themselves.
Make use of features like Automatic Billing, Online Ordering, Table Reservation, which have greatly eliminated the need for human interference. You may also install a Kitchen Display System (KDS) that automatically accepts the order from the POS instead of printing the Kitchen Order Ticket (KOT) and then manually taking the order to the kitchen.
You can also replace inefficient equipment with high-tech cooking equipment such as combi-ovens, automatic food mixers, sous vide immersion circulators, accelerated cooking countertop ovens, and programmable fryers.
4. Invest in a biometric attendance system:
Punching the clock might be a good way to monitor employees’ attendance. However, you may face two problems:
- Employees might clock in a few minutes before their shift starts and hang around for a few minutes after their shift ends.
- “Buddy punching,” where one employee punches the clock on behalf of another to cover up lateness or absence.
Well, you can solve the former by having a conversation with your employees about being more precise. Whereas, “buddy punching” can be solved by investing in a biometric time clock system that requires employees to swap fingerprints.
5. Employ Part-Time Help:
Why do engaging part-time employees make a lot of sense?
- Part-time hires usually charge an hourly rate that is lower than for permanent employees.
- The entitlement of permanent staff regarding statutory benefits is a much more significant financial commitment.
Temporary labor force can take care of unskilled and general chores resulting in reducing the burden on professional and permanent staff. It is a good idea to hire seasonal workers to cater to the periodic footfall in your restaurant. Consider hiring them on a contractual basis for a few months.
6. Reconsider Operating Hours:
You may feel it is better to stay open as long as possible to increase the chances of more customers coming in, but this might harm your business instead of benefit it. Therefore, it is advisable to take a step back and determine whether your operating hours are increasing your labor costs and review how busy your restaurant is on certain days and during specific times of the week
Adjusting your hours of operation, opening lately some days or close early on other days, may help you cut down labor costs by reducing the time your staff spends doing nothing during slow periods at the beginning or end of service and you can concentrate on your peak periods.
7. Streamline operations:
Audit your current operations including time-clocking, inventory management, and employee scheduling to identify any optimization opportunities that will improve efficiency.
Everything and everyone in your restaurant depends on the operations you have in place. You shall establish standard operating procedures and then formalize those procedures by creating restaurant checklists to ensure that those procedures are adhered to.
Here are three ways to streamline restaurant operations:
- Rethink your menu:
The compact menu requires more staff members to execute.
- Resection your floor chart:
Restaurants might over staffing just to cover sections that are underused because of inefficient floor charts. Do not schedule someone to cover a station from 6-12 pm, when it does not get busy until 10 pm. Servers could share a section until 10 pm perform other duties.
- Review policies:
Have a clear policy regarding when employees can clock in, clock out, take breaks, and do side work. You can also monitor staff compliance by utilizing a POS system that logs employee hours.