How Successful Restaurants Calculate & Optimize Restaurant Labor Cost

Few business segments are struggling more than the restaurant industry to adapt to rising labor costs. Even in markets where the legal minimum wage is $8 per hour, workers and elected officials are rallying to nearly double that standard to $15 per hour. Yet while that’s an extreme example of the changes afoot in the national labor market, even modest wage increases can have a profound impact on an operation’s profitability. Monitoring labor costs is more crucial than ever, but thankfully, back-office systems can automate and help lower labor costs. In this article, you’ll learn four ways successful restaurants use these tools to optimize their labor costs. But first, let’s answer a few specific questions like: what is labor cost percentage, and what is a good percentage of labor cost?

What is labor cost percentage?

Labor cost percentage is a metric that ties the cost of labor directly to revenue. When you calculate labor cost percentage, you determine how much money you spend on labor to bring in revenue. Most often, labor cost is calculated as a percentage of overall sales.

How do you calculate labor cost percentage?

Calculating restaurant labor cost percentage is pretty simple. Just take the total cost of labor over a desired period and divide it by the total sales from that same period. You can determine labor cost percentage per day, week, month, or even year with a simple formula. Here’s an example.

If your restaurant paid employees $4,000 in a week and brought in $10,000 in revenue, a labor cost percentage calculation would be as follows:

4,000/10,000=.4 x 100 = 40%

What is a good percentage of labor cost?

While it varies by industry, most restaurants consider a good percentage of labor cost to be somewhere in the operating range of 25% to 35%. Generally, the more lucrative the industry, the higher the labor costs. For instance, many fine dining establishments have a percentage of labor cost around 35%, while some quick service restaurants may average closer to 25%. 

How do you reduce your restaurant labor costs?

Wondering how to reduce labor costs in a restaurant? Here are some tips to save money and increase profits:

  • Verify time and attendance
  • Simplify predictive scheduling
  • Reduce overages with overtime alerts
  • Regularly calculate sales per labor hour

1. Verify time and attendance

Employees punching in for their late-arriving friends—a.k.a “Buddy clocking”—disappears when using a biometric (fingerprint) device to identify employees on premise. No more paying for employees who show up late or stay beyond their scheduled time. A digital system also ensures employee hours are recorded accurately. Not so long ago, managers added up employee time cards manually, creating opportunities for discrepancies. With a digital system like SynergySuite, time on the job working is tracked automatically and accurately to the second. Same for taking mandated breaks. Each time hourly staffers take a breather, that time is not only deducted automatically from their shift totals, it’s documented permanently.

2. Simplify predictive scheduling

Understaffing and overstaffing are equally damaging to profits. Guests who wait too long for service have a bad experience and don’t return, and having too many employees on hand for sales demand swells labor costs. A back-office system equipped with a predictive scheduling feature can almost eliminate staffing guesswork. These systems can tap into historical sales data from the POS and suggest staff scheduling based on forecasted sales. No more forgetting to staff up for special events or staff leanly when sales are historically slow.

3. Reduce overages with overtime alerts

Amid a busy shift, it’s nearly impossible to know which hourly staffers are approaching overtime. That challenge only increases for multi-unit operators. But with a back-office system tracking each staffer’s time on the clock, unnecessary overtime can be reduced and even eliminated with automated alerts. Properly programmed, a back-office system will send managers and owners real-time alerts with a text message or push notification, signaling specific employees are approaching overtime, greatly simplifying the decision to keep or cut staff. Receiving these through a cloud-based, back-office system also allows multi-unit area managers and owners to focus on labor problems at specific units and manage them remotely.

4. Regularly calculate sales per labor hour

Even when dining rooms are full, patrons may be lingering rather than spending money on food. This is another time when managers can struggle to decide whether to cut staff. Applying this to a sales-per-labor-hour metric gives clear details on whether the labor on hand is too much for the number of customers being served. A back-office system can track this information in real time, allowing managers to cut staff if too slow, or call in reinforcements if the pace of business becomes overwhelming. Multi-unit operators can monitor each manager’s labor allocation at all units and spot potential labor cost issues before they occur.

Using cloud-based, back-office technology to manage costs tightly virtually ensures profitability, even when sales are down. By verifying time and attendance, using predictive scheduling tools, responding to overtime alerts and applying the sales per labor hour metric, restaurant owners like you can avoid excessive labor costs and put more of their hard-earned money in the bank.

Request a personalized demo of the SynergySuite platform to learn more about how to reduce the labor costs of your restaurant by 4%.

Close Menu