Understanding Restaurant Labor Costs
If you’re a restaurant owner or manager, you know that labor costs are one of the biggest expenses in your budget. But what exactly are labor costs and why do they matter?
Labor costs refer to the amount of money you pay your employees, including wages, salaries, benefits, and payroll taxes. In the restaurant industry, labor costs generally account for about 30-35% of total expenses. This means that managing your labor costs is essential to maintaining a profitable business.
What is labor cost percentage?
Labor cost percentage is the amount of money you spend on wages and benefits as a percentage of your total sales. To calculate this percentage, divide your total labor costs by your total sales and multiply by 100.
For example, if your restaurant has $50,000 in total sales for the month and $15,000 in labor costs, your labor cost percentage would be 30%. This means that 30% of your total sales went towards paying your employees.
Why is it important to know your labor cost percentage?
Calculating your labor cost percentage is essential for several reasons:
- Budgeting: Knowing your labor cost percentage allows you to create an accurate budget, which can help you plan for future expenses and avoid overspending.
- Profitability: If your labor cost percentage is too high, you may not be making a profit or may be making less than you should be. Keeping track of this number can help you identify areas where you can cut costs and improve your profitability.
- Employee Management: Understanding your labor cost percentage can also help you manage your staff more effectively. If you notice that labor costs are too high, you may need to adjust your staffing levels or find ways to increase employee productivity.
Types of Restaurant Labor Costs
There are two main categories of restaurant labor costs: direct and indirect.
- Direct labor costs: These are the costs associated with the employees who directly contribute to the production of goods or services. In a restaurant, this includes chefs, cooks, servers, and bartenders. Direct labor costs are usually the largest expense for restaurants, as these employees are responsible for creating and serving the dishes that generate revenue.
- Indirect labor costs: Indirect labor costs include the expenses associated with employees who support the operation of the restaurant, but don’t directly produce goods or services. This includes managers, administrative staff, and maintenance workers.
How to Calculate Restaurant Labor Costs
Labor expenses typically account for a large portion of a restaurant’s total budget. If you’re struggling to calculate your restaurant’s labor costs, here are some helpful tips:
Step 1: Determine Your Total Labor Hours
The first step in calculating your restaurant’s labor costs is to determine how many hours your employees have worked. This includes not only servers and bartenders but also kitchen staff, managers, and any other team members that receive compensation.
Step 2: Calculate Wages and Benefits
Once you have determined the number of hours worked, it’s time to calculate wages and benefits. To do this, multiply the number of hours by each employee’s hourly wage rate. Don’t forget to include any additional benefits, such as healthcare or retirement contributions.
Step 3: Add Payroll Taxes and Workers’ Compensation Costs
In addition to wages and benefits, there are other labor-related costs to consider. These include payroll taxes, such as Social Security and Medicare, as well as workers’ compensation insurance. Be sure to factor these expenses into your overall labor cost calculations.
Step 4: Divide Total Labor Costs by Sales
Now that you have calculated your total labor costs, it’s time to put them into context. Divide your total labor costs by your restaurant’s sales for the same period. This will give you a labor cost percentage, which is an important metric for assessing the financial health of your business.
Step 5: Review and Adjust as Necessary
Finally, it’s essential to review your labor costs regularly and make adjustments as necessary. This might mean reducing staff hours during slow periods or reevaluating employee benefits to ensure you’re getting the best value for your money. By staying on top of your restaurant’s labor costs, you’ll be better equipped to run a successful business over the long term. In conclusion, managing labor costs is critical for any restaurant owner. By following these steps and regularly reviewing your labor expenses, you can keep your business running smoothly and maximize profits.
Managing Restaurant Labor Costs
Effective management of labor costs is essential to running a successful restaurant. Here are some tips for keeping your labor costs under control:
- Create an efficient schedule: Schedule your employees based on the expected demand for each shift. Be sure to consider employee availability, seasonal fluctuations in business, and special events that may affect demand.
- Cross-train employees: Cross-training your employees can help you manage labor costs by allowing you to schedule fewer workers while still maintaining the same level of service.
- Track your labor costs: Use a software system to track employee hours and labor costs. This will help you identify areas where you can cut costs and make adjustments to your staffing levels.
- Invest in training: Investing in training programs for your employees can help them become more efficient and productive, reducing the overall labor costs for your restaurant.
- Offer incentives: Offering incentives such as bonuses or paid time off can help motivate your employees to work harder, reducing the need for additional staff.
Schedule Employees for Split Shifts
Split shifts involve dividing an employee’s workday into two separate shifts with a break in between. For example, an employee might work from 11 am to 2 pm and then return to work from 5 pm to 9 pm. This allows you to cover peak hours without having to pay for staff during slower periods, which can significantly reduce your labor costs.
The Benefits of Split Shifts
- Cost Savings: By scheduling your employees for split shifts, you can reduce the number of hours they work and, therefore, the amount you pay them. This can help you save on labor costs without sacrificing the quality of your service.
- Flexibility: Split shifts also offer flexibility to both the employer and the employee. You can schedule your staff to work during peak hours, and they can use the rest of the day to attend to other personal or professional commitments.
- Employee Retention: Split shifts can also be an attractive option for employees who prefer more flexible working hours. This can help improve employee satisfaction and retention rates, which can ultimately benefit your business.
Considerations for Implementing Split Shifts
While split shifts can be a cost-effective solution for restaurants, there are some factors to consider before implementing this scheduling strategy. These include:
- Employee Availability: Not all employees may be able or willing to work split shifts. Make sure that you communicate the benefits and drawbacks of this scheduling strategy with your staff and only schedule those who are comfortable with it.
- Training: Split shifts require careful planning and coordination to ensure that there is enough staff during peak hours while also minimizing labor costs. Make sure to train your managers and supervisors on how to create effective schedules that meet your business needs.
- Time Tracking: Split shifts can make time tracking more complicated, especially if your restaurant uses a manual time tracking system. Consider using an automated time tracking solution that can help you accurately track employee hours and reduce errors.
Reducing Employee Turnover Labor Costs in the Restaurant Industry
High employee turnover rates can be a major challenge for restaurants. Not only does it require additional time and resources to constantly recruit and train new employees, but it also results in increased labor costs and decreased productivity. However, there are several strategies that restaurant owners and managers can implement to reduce employee turnover and ultimately save on labor costs.
1. Offer Competitive Wages and Benefits
One of the main reasons that employees leave their jobs is due to inadequate compensation. To prevent this, ensure that your restaurant offers competitive wages and benefits packages. Conduct research to determine what other restaurants in your area are paying their employees and adjust your wages accordingly. Additionally, consider offering benefits such as health insurance, paid time off, and retirement plans to make your restaurant a more attractive place to work.
2. Provide Opportunities for Growth and Development
Employees are more likely to stay with a company if they feel like they have opportunities for professional growth and development. Offer training programs, mentorships, and promotions to show your employees that you are invested in their success. Additionally, provide regular feedback and performance evaluations to help your employees identify areas for improvement and set goals for themselves.
3. Create a Positive Work Environment
The atmosphere of your restaurant can have a big impact on employee morale and job satisfaction. Encourage teamwork, provide clear communication, and recognize employees for their hard work and contributions. Creating a positive workplace culture can go a long way in retaining employees and reducing turnover.
4. Streamline Processes and Procedures
Inefficient or confusing processes can cause frustration and burnout for employees, leading to increased turnover. Evaluate your restaurant’s systems and procedures and look for ways to streamline and simplify them. This can help reduce stress and make it easier for employees to do their jobs effectively.
5. Utilize Technology
Technology can be a valuable tool in reducing employee turnover and labor costs. Use software and apps to automate processes such as scheduling and time tracking, which can save time and prevent errors. Additionally, consider implementing online training programs or virtual reality simulations to improve the efficiency and effectiveness of training.
The Bottom Line
Labor costs are a major expense for restaurants, but they can be managed effectively with careful planning and attention to detail. By creating an efficient schedule, cross-training employees, tracking labor costs, investing in training, and offering incentives, you can keep your labor costs under control and maintain a profitable business.
Good automation of time accounting, transparent system of calculation of KPI indicators, which are used in work and clear reporting not only simplifies work, but also creates the confidence of personnel in the reliability of the company in which they work.