Restaurant Labor Cost – (15+ Important Facts)
This article goes out to the folks in the restaurant business. The restaurant labor cost is an important number to keep in mind if you want to keep your business running smoothly and profitably.
Employees are the heartbeat of your restaurant. As a consequence, it is critical for every company owner in the food service sector to understand restaurant labor costs in order to prevent losing money while also putting a smile on the faces of your workers by paying fair wages. Even if accounting and finance aren’t your forte, keeping an eye on the labor cost % can help you make sound choices for your company. Alright, Let’s get right into the topic.
What is restaurant labor cost? It’s simply a percentage that shows how much a restaurant gets to spend on paying its employees based on the volume of business it brings in over a specific period. Understanding your labor cost percentage is crucial since it can influence various business decisions and act as a gauge of profitability.
In more detail, labor cost percentage might assist you in determining whether your company is paying employees a “regular” salary compared to comparable eateries. With this information, you realize that you’re overpaying for labor and need to cut prices. Or, you might discover that you have the freedom to bring on board or re-board more staff, which would benefit your company’s ability to boost overall sales.
How to Calculate Restaurant Labor Cost
One must simply divide the labor expense from the restaurant’s annual revenue to calculate the restaurant’s labor cost.
Calculating Restaurant Labor Cost by Hours Worked
Your workforce can be divided into many operating divisions, such as servers, bartenders, and kitchen and dishroom employees, by segmenting your labor costs based on hours spent. The goal is to calculate the price per hour for each group. For instance, let’s say that you employ five cooks who each work 40 hours a week and receive an average wage of $20. The average restaurant labor cost for the chefs at this establishment is $76.92 per hour worked after dividing by 52 to obtain a yearly average.
What is Labor Cost Percentage?
The next topic of discussion that may pop into your mind is “what is the labor cost percentage?” Right or not, this is the percentage of money spent on labor costs relative to the company’s overall income over a given period, which is known as the labor cost percentage. It is the sum that the business spends on bonuses and salaries.
This statistic gives a general idea of how much a business invests in its staff to produce each dollar of sales. The staff labour percentage indicates the effectiveness of a company’s compensation vs. performance system.
How to Calculate Restaurant Labor Cost Percentage
To calculate the restaurant labor cost percentage, one has to add the hourly rate of each employee to the total number of hours they will work in a year. This yields the labor cost per employee. A salaried employee’s labor cost equals their annual compensation divided by the number of hours they will serve in a year.
Where Should I Set the Labor Cost Percentage?
Usually, labor costs represent 20 to 35 percent of total sales. Suitable proportions vary from industry to industry. Manufacturing will often need to maintain an employee ratio under 30%. A service business may have an employee percentage of 50% or higher.
To achieve a favorable labor-to-sales ratio, you might decide whether or not to reduce labor expenditures. Efficient staff planning is essential in this situation. Fortunately, there is a system for extra hours that even issues an alert if costs rise too much.
How to Control Labor Costs with a Rising Minimum Wage
Creating different forms, researching and documenting the actions and performance of employees, figuring out the right amount to pay employees, and paying them on time are all parts of labor cost control. It also includes assessing and reporting labor costs to management for scheduling and decision-making.
What Factors into the Significance of the Restaurant’s Labor Cost?
It’s crucial to monitor this measure regularly because labor expenditures can easily be one of the most significant expenses for running a restaurant. Something as simple as scheduling an extra staff member on a slow night can make or break a restaurant’s ability to produce a profit.
Maintaining control of your labor costs can have an immediate and significant influence on your profitability, especially given the traditionally tight margins for most restaurants. Additionally, it’s frequently one of the most direct costs to manage. Although you might be unable to reduce the cost of food or your building leasing, you can control how many employees should be working at any given shift by keeping your team as lean as possible.
The Average Restaurant Labor Cost
The labor cost percent in your restaurant should be kept under 30%. Accordingly, your restaurant should spend no more than $3 on salaries, benefits, and payroll taxes for every $10 it makes. Your labor cost percentage shouldn’t be excessively high or low. Your business could not be financially viable if it is too high. Additionally, you might not have enough workers to meet demand if it’s too low.
Average Labor Costs by Restaurant Type
The average restaurant aims for a labor cost proportion of 25% to 35% of sales, but this target varies depending on the restaurant sector segment: 25%: quick service restaurants, which use less skilled labor and process customers more quickly. 25 to 30 percent: casual dining, depending on the menu and service techniques.
When Planning a Restaurant’s Budget, What Kind of Labor Cost Reduction Target Do You Think Is Fair?
Each restaurant is unique, and the typical food cost percentage ranges from 20 to 40%. Due to its reliance on high-quality foods, a steakhouse might have a food cost percentage of 38%, but a restaurant that employs less expensive ingredients, like bulk pasta, might be nearer to 25%.
What If the Price of Labor at the Restaurant Ends up Being Significantly More than You Anticipated?
It’s time to look closely at your employees if you notice that your labor costs are consistently higher than 30% of your weekly revenue. You might be scheduling too many employees per shift or skipping chances to reduce costs in three crucial areas: hiring, coaching, and career professional development incentives.
Additionally, inform the hourly workers to make sure they clock in and out at the proper times, not 15 minutes early or late, and at the end of their shift, not when they are prepared to leave their belongings.
How to Efficiently Manage and Control Labor Costs for Your Restaurant
The success of a restaurant depends on controlling the costs of the food and the labor. Food inventories should not be more than 28 to 30 percent of gross sales, and labor costs should be between 22 and 45 percent for a restaurant to remain viable. Your restaurant’s location and type will determine how much it will cost to run. It’s essential to take action when these costs increase without corresponding sales increases. Although it may seem like an easy answer to reduce the size of your crew or purchase lower-quality meals, this is not always the best option.
Staff Your Business Appropriately
By taking a portion of your previous or anticipated sales earnings, you can create a monthly budget for your staffing requirements. While your labor costs shouldn’t exceed 45% of your total expenses, many small restaurants strive to keep their prices under 20%. Instead of giving your staff a weekly plan, make flexible timetables to keep you under your spending limits. Any adjustments to your lists due to seasonality, marketing initiatives, or holidays should be noted. Don’t be hesitant to send some staff home on days when business suddenly slows down and the income generated might not cover your operational expenses.
Cross-train Your Related Job Staff.
You can increase productivity by providing your personnel with cross-training in related job activities. For instance, your prep cooks should be capable of operating the grill or saute station. Bussers should be able to run food to tables when service grows crowded, and hosts and servers should know how to perform one another’s jobs. Workers who have received cross-training may work different shifts more regularly. These requests should be closely monitored because they may force some staff to work a lot of overtime, which would quickly drain your budgeted finance.
Manage Waste and Spoilage at the Kitchen
Kitchen waste is frequently linked to rising food prices. The most frequent behaviors that result in food waste are incorrect food handling and preservation, inaccurate portion measurement errors, large-scale meal preparation ahead of time, and overstocking inventories. If you train and oversee your kitchen staff properly, paying careful attention to what ends up in the trash cans, you’ll be well on your way to reducing food costs.
Manage the Relationships with the Providers
Taking suppliers for granted is one of the most significant mistakes a restaurant owner can make regarding food expenses. Count and weigh food as it enters the building, regardless of how long you have worked there, to ensure you get what you paid for.
Discuss cost-cutting measures with your suppliers and let them know you’ll be requesting quotations from rival companies to secure the most incredible bargains for your company.
Request your suppliers to alert you when they have excessive stock they can sell you for a lower price so you can quickly make changes to your menu. Establish connections with nearby farmers since, without a middleman, their produce is sometimes more affordable and fresher.
Group Your Restaurant Labor Costs for Greater Clarity
By grouping employees, you can see which jobs are the most expensive. Put the front-of-the-house crew in one group, including the servers, hosts, and bartenders.
Another logical group includes managerial personnel and those employed in the kitchen, such as cooks and dishwashers. You can also separate your workers into those who are salaried and those who are paid an hourly wage.
Whenever your crew has been divided, you can analyze how much each team will cost you and see whether you can reduce labor costs by adjusting the number of employees you plan for each shift.
Understand Your Prime Cost with a Restaurant Labor Cost Formula
Cost of goods sold (COGS) and labor costs (LOC) are your primary expenses. What you spend to produce what you sell is known as “cost of goods sold.”
The majority of operational costs for a restaurant are its prime cost, which should ideally be no more than 60% of its overall sales. List all hourly pay, salaried labor, payroll tax, and benefits, then multiply the total by your labor costs to determine your prime cost.
Stop Wondering, “What Share of Restaurant Revenue Should Employees Receive?”
It can be helpful to calculate labor as a percentage of sales. However, calculating staff efficiency merely based on labor as a percentage of sales doesn’t provide you with enough information to pinpoint areas that need to be improved. Let’s imagine, for instance, that the company’s policy is for labor to represent 20% or less of sales. It is now operating at 27%..
This method of calculating labor costs also ignores holidays and other special occasions that can need more staff work. The most important thing to remember concerning restaurant labour costs is that they’re often only a symptom of more significant problems. Instead of hurrying to cut labor expenses, try to identify the root of the issue and address it instead of applying a band-aid solution like lower labor costs.
How can you efficiently reduce restaurant wage costs?
By obtaining information from the POS software, you may evaluate the performance of your workers and determine how efficient they are. Without having to make layoffs, increasing employee productivity will enable them to contribute more to the company. One high restaurant cost that drains a business empty is personnel costs. As a result, you must evaluate every part of your restaurant business and take the necessary action to manage labor costs properly.
Save on Restaurant Labor Costs With Training and Thoughtful Scheduling
Use labor scheduling and time and attendance tools to guarantee you have complete visibility and can spot which staff might work overtime before it’s too late. If you combine the system with a quick review of how your team begins their shifts, these methods can also reveal whether your staff tend to arrive at work early or to procrastinate before starting their changes. Try transforming your data into visual analyses, such as charts, that can help you swiftly analyze numerous sets of data at once and, most importantly, help you spot outliers.
How POS Can Help Manage Restaurant Labor Costs
You require restaurant point-of-sale tools to make managing your workforce and labor costs much more accessible. The capacity of a restaurant POS system to manage delivery is one of its most vital characteristics. The last thing you want to do when you’re working long hours in your restaurant is spend more time correcting clock outs, reviewing tons of checks, and working out labor cost percentages.
FAQS
How do restaurants calculate labor?
The total of each employee’s gross wages plus any additional costs paid per staff makes up the labor cost. Payroll taxes, benefits, insurance, paid time off, food, and equipment or supplies are a few additional costs. And that’s how restaurants calculate labor. If you want further explanation. Let’s take an instance.
If the restaurant paid its staff $300,000 per year and made $1,000,000 in sales per year, $300,000 would be divided by $1,000,000 to get 0.3, then multiplied by To calculate the percentage, take the annual salary cost ($300,000 in this case) and divide it by the annual revenue amount ($1,000,000 in this case) to obtain the fraction (0.3), and then multiply it by 100. The total amount shown there is the amount spent on employees at your eatery. This last figure is the labor cost % for your restaurant.
How do restaurants control labor costs?
Given that full-service and fine-dining establishments focus more on service, a casual restaurant will likely have cheaper labor costs than other establishments. Table service: Due to the need for more workers to provide table service, restaurants with this option have higher labor costs.
What percentage should payroll be for a restaurant?
The percentage in which payroll should be for a restaurant ought to be between 20% and 30% of gross sales. As soon as you’ve divided your employees into teams, you can analyze how much each unit will cost you and see whether you can reduce labor costs by adjusting the number of staff members you plan for each shift.
What’s the average profit margin for a restaurant?
When viewed as a sector, the typical or average restaurant profit margin is about 3-5%. However, it can vary substantially from 0 to 15%. The “normal” restaurant profit margin for your company is not predetermined. Nevertheless, as is the case with many other aspects of the restaurant business.
Conclusion
Decreasing employees, hours, or prices are not necessarily the best method to lower restaurant labor costs. You may work more intelligently and run your restaurant business more successfully by utilizing the appropriate payroll and team management tools, closely monitoring the essential operating expenses, and then examining trends.
Jeff Smith is a Restaurant Consultant with over 20 years of hospitality experience ranging from server to owner and general manager. He focuses on Restaurant POS technology as well as restaurant marketing. Make sure to check out our world famous restaurant resources page for a comprehensive offering of hand picked resources and tools to help your business. You can also check out some of our other restaurant business articles.