How to Calculate Your Restaurant Labor Cost Percentage

How to Calculate Your Restaurant Labor Cost Percentage blog header

How much does it cost to keep your restaurant running? Of course you need to pay rent and purchase inventory, but one of the most critical things to think about is restaurant labor cost. In other words, how much does it cost to staff your restaurant and serve customers? And how do you calculate your restaurant labor cost percentage? Knowing the answers to these questions can help you see where you stand and give you insight into where you can improve in order to lower expenses and boost profits. In this post, we’ll walk you through what labor cost is, how to calculate labor cost, and provide some tips and tools you can use to decrease your labor cost percentage.

What is restaurant labor cost?

Restaurant labor costs are some of the highest expenses associated with running a restaurant. In general, restaurant labor cost refers to the expenses associated with staffing your restaurant. When considering restaurant labor cost, you must take into account every employee from the hostess to the servers, bussers, and cooks. Determine how much they are paid, and start there.

What is restaurant labor cost percentage?

Restaurant labor cost percentage is a bit different than just plan old restaurant labor cost. It figures labor costs as they relate to overall sales or operating expenses. In short, it is a more helpful metric than just a simple labor cost number. For instance, if your labor costs are very low, but your profits are also very low, that’s not ideal. This would be reflected in a labor cost percentage number that is higher. When you’re looking for a good labor cost percentage, lower is better. If for example your labor cost percentage is 50%, things probably aren’t going too well financially. 

How do you calculate restaurant labor cost percentage?

Wondering how to calculate labor cost? Many find it helpful to calculate labor cost as a percentage of sales or total operating costs. In general, to calculate restaurant labor cost percentage, you simply add up the cost of labor for a given period and divide it by total expenses or sales. That said, determining the specifics and calculating as a percentage of either operating costs or sales can be nuanced and difficult. Let’s review how to calculate labor cost in each way.

How do you calculate restaurant labor cost as a percentage of sales?

This is the most common way to calculate labor cost percentage. To make this calculation, you’ll need to know the cost of labor and also overall revenue. Remember that the cost of labor includes not just hourly wages, but also the wages of salaried employees, the cost of health insurance and other benefits, and any taxes. Once you sum all this up, the calculation becomes quite simple. 

Formula for restaurant labor cost as percentage of sales 

Total labor costs/total sales or revenue x 100 = restaurant labor cost as a percentage of sales

How do you calculate restaurant labor cost as a percentage of operating costs?

Calculating labor cost as a percentage of overall operating cost can help you see where your labor expenses stand in relation to your other expenses. This will help you get a good pulse on your overall operations and give you clarity on where you can improve. Operating expenses can be numerous. These costs include everything from rent and utilities to marketing, inventory, and food. Yet again, once you sum them up, the calculation becomes straightforward.

Formula for restaurant labor cost as percentage of operating costs

Total labor costs/total operating expenses x 100 = restaurant labor cost as a percentage of operating costs

Why is it important to calculate restaurant labor cost percentage?

Understanding your restaurant labor cost percentage gives you a much more accurate picture than just labor cost alone. Why? Because it relates labor cost to your overall costs and profits instead of isolating it. This helps you see the whole scope of your restaurant operations and determine the specific impact of labor costs on overall profits and effectiveness. 

What is a good restaurant labor cost percentage?

Your restaurant labor cost percentage can serve as a good barometer for how well your operation is running. Most restaurants strive to keep labor costs between 20% and 30% of gross revenue. Obviously, the lower your labor costs the better. That said, overworking your staff can backfire, leading to high turnover which could mean more money spent on training new employees or even hiring multiple employees to do the job of one who was highly proficient in multiple areas.

How can you lower your labor cost percentage?

This is easier said than done, but there are some helpful tips when it comes to lowering labor cost percentage. First, you’ll want to make sure you have the right number of employees. In general, your labor cost can suffer if you have too many employees for the amount of work. Take care to not overhire and to cut hours when things get slow. While cutting hours might seem harsh, you may need to make difficult decisions like that. The good news is that some employees may have other commitments like school during certain times of the year which might mean they would welcome the idea of having fewer hours. Get to know your staff and cut hours where you can.

In addition to not overstaffing, you should have a way to track time effectively. Failure to keep an accurate record of clock-in and clock-out can lead to lots of extra labor expenses. Even 10 minutes extra here or there when employees aren’t truly working can really add up. Invest in time tracking software and have policies about clocking in and out. Be sure to be flexible and accommodating, but be strict where needed. Consider giving praise, recognition, or non-cash incentives for those who are diligent in clocking in and clocking out on time.

What tools can help you calculate restaurant labor cost percentage and more?

Sure, a spreadsheet can be helpful for tracking everything, but having restaurant management software can be even better. With the right software solutions, it’s easy to find the data you need and make calculations and then improvements. We’re here to help with restaurant reporting and analytics tools that can help you keep a close eye on important metrics. If you’re looking to track time and attendance, we can also help you there. Or if you want to get a better handle on your purchasing, we have a solution for that too. 

Leveraging Technology to Manage Restaurant Labor Costs Whitepaper cover image

Leverage Technology to Manage Restaurant Labor Costs

Between increased costs, labor shortages, and socio-economic complexities - staying on top of labor costs is more important than ever for franchise owners.

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