Operating costs for restaurants can be rather high, and keeping costs under control can be difficult, particularly if you don’t have a good idea of your labor costs.
How much does it cost to keep your restaurant running?
Of course you need to pay rent, pay your payroll taxes, food costs and purchase other inventory, but one of the most critical things to think about is restaurant labor cost. In other words, how much does it cost to pay your house staff in 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?
No matter the type of restaurant, restaurant labor costs are some of the highest expenses associated with running a restaurant. Even if you can only pay them minimum wage, hourly employees, from servers to kitchen staff, can cost quite a bit of money to employ. These costs increase even more if overtime costs are frequently incurred because some employees work overtime hours.
In general, restaurant labor cost refers to the expenses associated with staffing your restaurant. When considering restaurant labor cost, you must take into account the labor hours worked by every employee from the hostess to the servers, bussers, and cooks. Determine how much they are paid, and start there.
What is the 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 helps you determine if you’re getting the most bang for your labor budget. It is a more helpful metric for measuring operational efficiency 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%, this suggests that the financial health of your restaurant business might be suspect.
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 to provide the right service level for the entire shift at all times of the year. You don’t want customer satisfaction to suffer because you don’t have enough staff on shift.
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 during slow times might seem harsh, you may need to make difficult decisions like that.
These cuts need to be smart and surgical to keep labor hours in check without damaging employee retention. 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, check in with them regularly, and cut hours where you can to avoid an elevated turnover rate.
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.
To keep your staff happy and avoid developing an unsavory company culture, be sure to be flexible and accommodating with employee schedules, but be strict where needed. Consider giving praise, recognition, non-cash incentives, and other intangible employee benefits to incentivize good employee performance. Those who are diligent in clocking in and clocking out on time should know their efforts are seen and appreciated. You need to keep employee hours in check, but you do not want employee morale to crater.
What tools can help you calculate restaurant labor cost percentage and more?
The restaurant industry is competitive for all types of restaurants. Margins are tight, payroll costs can be high, and so can the cost of food. You and your management team must keep track of restaurant operating costs, or they could significantly impact your whole operation.
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 to how you schedule your salaried and hourly staff. We’re here to help with restaurant reporting and analytics tools that can help you keep a close eye on important metrics.
Keep track of actual labor costs and labor cost percentage. Keep track of hours worked to avoid unauthorized overtime wages. Streamline the scheduling process and give your employees and managers access to easy-to-use scheduling tools. Ensure compliance with labor laws with labor reports.
We don’t just have labor and employee scheduling software. If you want to get a better handle on your purchasing, we have a solution for that too. We can also integrate with your existing accounting software, payroll software, and other enterprise software.
Whether it’s a chain of fast-food restaurants, casual dining establishments, or exquisite fine dining, we give restaurant operators the tools they need to keep their diners happy, their house personnel productive, and their fixed and variable costs in check.
We’d love to schedule a personalized demo to show how our award-winning software can make you a champion in the hospitality industry.
