Restaurant labor cost is often one of the highest costs of owning and operating a restaurant. While it’s imperative to pay your employees well, it’s also important for your bottom line to manage and calculate this cost.
The restaurant labor cost that businesses should aim for is generally between 29-33% of overall sales and income, with lower than 30% typically being the goal. But how do you calculate this cost, to begin with, and how do you know where you can potentially control this cost? This guide will help you calculate, manage, and determine the overall cost of labor for your restaurant.
- Key Cost Drivers
- Types of Costs
- Calculating Labor Costs
- Costs Per Venue
- 11 Management Strategies
- Why Managing Costs Matter
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Key Drivers For Restaurant Labor Costs
Before looking into how to calculate restaurant labor costs, it’s important to know what factors may increase these expenditures. Various key drivers can affect the restaurant labor percentage, such as:
- Employee Wages: This includes both salaried and hourly wages.
- Employee Benefits: Benefits, like healthcare and sick days, also factor into the overall costs.
- Payroll Taxes: Unemployment taxes and other taxes paid on wages, tips, and salaries.
- Overtime: Overtime leads to a higher hourly rate for those specific hours.
- Inefficient POS or Money Management Systems: Money management systems that require time spent fixing or leaving the premises to make deposits or get change.
Types of Restaurant Labor Costs
There are also two main types of restaurant labor costs. These include labor expenses which are a percentage of the total sales and labor costs which are a percentage of overall operating expenditures for your business. There is a distinction between the two in how this affects your bottom line for labor costs.
- Labor Costs As Percentage of Total Sales:. This is the most common method to determine labor costs. It’s a bit more simple and gives you a much broader picture of your entire business’ costs.
- Labor Costs As Percentage of Operating Costs: If you’re looking for a more detailed report of the costs it takes to run your business, then you can also look into the labor costs as a percentage of your restaurant’s operating expenses.
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How to Calculate Labor Costs Percentage
Now it’s time to calculate the labor costs for your restaurant. There is a labor cost formula that you can use to determine your overall expenses in labor and related costs.
Here’s a deeper look at how to determine your restaurant costs:
1. Determine Total Revenue Data
Total revenue is the amount of money that your restaurant makes from sales and services, and can be complicated to calculate manually. You need the total guests served, the average they spend, and then factor how many days or months you’re reviewing for total revenue.Fortunately, this calculation is often automatically completed and available in smart safes or POS systems.For this example, we’ll have our annual revenue be $125,000.
2. Calculate Total Labor Costs
Then, you will need to calculate the total amount of labor costs for the same period. This includes all of the money you pay for the factors listed above – wages, taxes, overtime, and more. Make sure you look into the estimated cost for any seasonal workers as well, depending on what type of restaurant you have and the general amount of turnover. In our example, we’ll say that total labor costs equals $40,000.
3. Divide Labor Costs by Revenue and Multiply By 100
Now, it’s time to take your labor cost and divide it by your overall revenue. In this case, we will use our example of $40,000/$125,000 = 0.32. After getting this number, we’ll multiply it by 100 to create the percentage, which comes out to 32%. So, depending on what kind of restaurant venue you have, this percentage is either right on the cusp of being too high or is in the perfectly normal range for what you should be spending on the restaurant labor cost.
Average Restaurant Labor Costs Per Venue
The venue of the restaurant, along with what type it is, can also impact overall labor costing percentages. This generally has to do with the types of services each type provides, if there is a higher need for materials due to licensing requirements, and if the restaurant needs to account for being able to offer more high-end experiences.
More specifically, however, the average restaurant labor cost percentage for each venue type is:
- Overall Average: Around 29-33%, as stated above.
- Quick-Serve Restaurant (QSR)/Fast Food: 25%, which is generally due to unspecialized labor and faster-moving food, which also means higher profit margins.
- Casual Dining: Often much higher, usually falling within the 30-40% range due to the higher price of menu and services.
- Fine Dining: These restaurants tend to fall within the 35-40% range.
- Standalone Bar or Nightclub: Standalone bars tend to be anywhere from 20-25%.
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11 Ways to Manage Restaurant Labor Costs
If you’re looking for ways to reduce restaurant labor costs without cutting headcount, there are various strategies you can implement for your restaurant. Depending on your needs, you can utilize multiple strategies to create a more productive and efficient restaurant without having high labor costs. The best ways to lower employee labor and operating costs can be broken down into 3 key categories.
Smart Scheduling and Labor Management
One of the best places to start looking for how to reduce restaurant labor costs is in the actual allocation and scheduling of your labor force. While it may seem easiest to simply schedule your employees for fewer hours, this isn’t always feasible. However, there are many creative and effective scheduling measures you can take instead.
Enforce Clock-In vs. Shift Start Rules
Many employees get to work early and clock in before their shift actually starts. Others may stay a few minutes after and clock out past when they should.
While you don’t want to dissuade employees from doing a good job, if the amount from these early or late clock-ins is an issue for your labor cost percentage, it may be time to enforce shift start rules. For example, you may tell employees that they need to clock in or out no more than two minutes from the start or end of their shifts.
Embrace Split Shifts
The restaurant industry has lowered its labor costs through split shifts as well. Split shifts are when you schedule an employee for one shift, have them clock out for an unpaid break, and then clock back in for a later shift. This one often requires willing employees, which can be harder for some restaurants and their staffing needs.
Cross-training your employees can help reduce labor costs for both busy and slow times. Training hosts and hostesses in serving or bartending, for example, can ensure that they can cover these positions when needed without having to hire more workers. This can also help when employees get sick or have family emergencies.
Increase Employee Retention
Ensuring that you have high employee retention can also help your restaurant’s labor costs. Constantly hiring and onboarding new employees is a large cost for restaurants, especially considering the industry’s high turnover rate. However, if you can keep your staff happy, this can reduce your labor expenses.
Solutions like offering paid time off or hiring referral rewards can add expenses despite their intent to lower costs. Instead, fostering a positive working environment can go a long way to keep employees invested. This can be done by supporting staff with a work-life balance where possible, creating policies that ensure a hostile work environment is not tolerated, and being open to continuous feedback and training.
Review Seasonal Hiring Processes
Many restaurants have seasonal times when they are busier and need more help. Ensure you review your seasonal hiring processes to determine if you’re hiring the right amount of added labor at the correct times. This can reduce potential over-hiring or under-hiring during peak seasons.
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Embrace Technology and Automation
Another category to look at when aiming to reduce labor costs is what type of technology and automation systems you have in place. While it may not seem like it will make a big difference, it can help in more ways than you know.
Digital Solutions to Manage Reporting
Many digital solutions out there can help minimize costs. For example, investing in a smart safe cash management from Integrated Cash Logistics provides a single point of contact for your business to order change, deposit money, and reduce time off-site. It also helps with ensuring that tills and any on-hand cash stays accurate for your needs.
Utilize Scheduling Tools
Scheduling software that integrates with your point-of-sale system can greatly reduce labor costs, as it takes the guesswork out of scheduling. This can help you forecast future needs, prevent you from overspending on labor during slow times, and also help employees keep better track of their hours and times.
Streamline Payroll Management
Many scheduling tools also offer payroll management benefits as well. This can ensure that there are fewer mistakes made when keeping track of everyone’s hours, benefits, and wages, as this can quickly become overwhelming even for the most seasoned manager.
There are also ways that you can reduce restaurant labor costs on the customer end. This includes offering them more efficient and strategized benefits for the time they spend at your restaurant.
Expand Order-Taking Opportunities
Depending on the type of restaurant you own, you can install technology like self-order stations, online ordering, and contactless payment options. These alternatives allow your workers to spend more time on other jobs while still increasing your bottom line.
Strategize Menu Engineering
Menu engineering allows you to continuously review and optimize what does and doesn’t sell well on your menu. By evaluating the profit each item makes, along with its popularity, you can then determine if certain items are worth keeping on there at all, or if high-performing seasonal offerings should be provided year-round.
Listen to Customer Feedback
Lastly, simply listening to your customers is valuable. If your customers have complained about long wait times at certain parts of the day, you may know that it’s time to hire more staff to cover those hours, or get creative with the staff you have. Customer feedback also lets your customers know that you’re valuing their wants and needs.
The Importance of Managing Restaurant Labor Costs
While any business needs to manage its labor costs, it’s especially relevant for restaurants and other food industry services. Restaurants have a higher turnover rate than most other businesses, at 72% annually across the industry. The continuous hiring and rehiring of employees often leads to higher labor costs in general, so finding ways to reduce that average labor cost is imperative for operating within your restaurant’s budget.
Beyond higher labor costs leading to lower profit margins, reducing these labor expenditures can also help your business invest more money into services and benefits for your employees and guests. This can lead to increased employee and guest retention and happiness in the long run, further helping reduce turnover.
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Lowering your restaurant labor costs doesn’t have to be an overwhelming process. By partnering with Integrated Cash Logistics and our CashSimple™ solutions, we can help you streamline your business and increase your overall bottom line.
Our technology provides real-time reporting, a single point of contact, and many other benefits that can help you save money where you need to. For more information about our cash capture technology or to schedule a demo of our services, get in touch with our team today. Simplifying how your business controls cash is one of the best ways to take control of your labor costs.