Priyanka Bhadani7/21/2022What are labor costs? Labor costs are the total wages paid to employees, including benefits, bonuses, and taxes. The cost of labor is one of the biggest expenses for businesses.
Restaurant management is complex. Owning and running a restaurant is a costly affair. It is not only because the restaurant industry is one of the most competitive businesses in the world, but because hordes of challenges accrue in a restaurant business.
In the restaurant business, managing people is much more than simply putting out orders or greeting guests on arrival and departure. At the heart of the business are the frontline staff responsible for handling customers day in and day out. Every member of staff counts, whether the chefs preparing food in the kitchen, managers managing staff in a restaurant, bussers and servers handling tables, and bartenders serving customers drinks. Each employee represents one cog in a very important machine. Better-trained employees mean better service for your customers, which can significantly increase your profits through increased sales not to mention happier customers mean fewer product returns or service complaints at the end of the day.
When it comes to a restaurant business, many factors affect the cost of running it. Fixed costs, which do not change with the company's activity, include rent, utilities, food and labor costs. To be certain, labor costs are the most expensive expenses a restaurant has so ensuring that you have good management and control over the expenses is crucial.
The labor cost for a restaurant is the amount of money it spends on its employees. It refers to all the expenses of maintaining a restaurant's workforce. For example, it typically includes wages, bonuses, payroll taxes, healthcare, training, and travel for service staff.
One can broadly break down the labor cost into two segments- direct labor and indirect labor. Direct labor is the wages for the employees who work directly with the food, such as chefs and line cooks. Indirect labor is the cost of the wages for the employees who do not work directly with the food, such as dishwashers, servers, and bussers.
It is important to manage these fixed expenses with tact and precision. Ultimately, how and where you spend your money determines how much you can minimize these costs. As it is, the United States Bureau of Labor Statistics suggests that restaurant wages have risen at more than twice the rate of inflation over the last five years, which has led to only an increase in labor costs.
It's important to calculate the total restaurant labor cost percentage as opposed to the total sales annually to get a correct picture of the profitability of your business.
What is the labor cost percentage? It is the portion of a restaurant's total revenue to pay employees vis-a-vis the total sales over a given period. It includes both salaried and hourly employees and the benefits they have to be paid.
Labor cost percentage is a method of determining the percentage of a restaurant's sales that it spends on staff payroll compared to its total sales. Knowing this figure shows you how much money your business is spending on labor compared to how much it makes in sales. Knowing your labor cost percentage is important as it can inform different business decisions and serve as a metric to measure profitability. Specifically, labor cost percentage can help you understand if your business is spending too much on staff payroll compared to other restaurants. With this insight, you may discover a thing or two that would give you more flexibility in hiring or rehiring additional help, which could help increase total sales. Knowing this figure can also be helpful for cash flow management; after you calculate your labor cost percentage, you may see the need to change or increase food prices to sustain your labor costs.
The average for most restaurants is between 15-35%, and in some cases, it can be as high as 70% of sales. It varies depending on the nature of your business, location, and the services you offer.
Due to the industry's heavy capital needs and competitive nature, maintaining profit margins while working within these margins is a challenge entrepreneurs face.
Many factors affect restaurant labor costs. The nature of a restaurant can influence your labor costs. For instance, fine dining restaurants typically have higher labor costs than fast food or quick-service restaurants. It is because fine dining establishments require a higher level of service, which means more staff members are needed.
The restaurant's location plays a great role in determining the labor cost percentage. For example, restaurants in major cities typically have higher labor costs than those in less populated areas because living and working in a major city is more expensive, so workers demand higher wages.
Another factor affecting the labor cost is the size of the restaurant. Smaller restaurants usually have lower labor costs than larger ones because they require fewer staff members to run effectively.
Then, it is important to consider the menu offerings. Restaurants that serve complex or time-consuming dishes usually have higher labor costs than those that serve simple fare; more kitchen staff are needed to prepare complex or artisanal dishes, and servers need more training to explain them properly to guests.
You don't want your restaurant's labor cost percentage to be too high or too low. If it's too high, you may not be able to afford your business anymore, and it could force you to close up shop. And if the labor in your business is too low, you will likely have a hard time keeping up with the demand of customers who wish to dine at your establishment, which will likely affect how often customers come. A good rule of thumb we leave you with on this matter is to ensure your labor cost is approximately 20% of your gross revenues. That is usually a good sign. It points out that things are right where they should be, but what works for one business may not necessarily work for another. Aim for a number in the same ballpark, and then go until you find what works best for you.
To calculate this figure, a restaurant needs to input three pieces of information-
1. A predetermined time period for your calculations
2. The total expense on labor during this specified time period
3. The total sales for the same period.
Once you have all of your figures, it's just an equation you need to follow to calculate the labor cost percentage.
Labor Cost Percentage = (Total labor cost per period / Total sales for the period) x 100.
There are many ways to cost-cut without spending too much money retraining your staff. But it's important to weigh the pros and cons of each as they will vary depending on the particular circumstances. Some options include automating jobs that do not need human involvement. Reducing working hours or recruiting new staff at lower wages is another option. Finally, creating employee schedules that effectively divide the resources into shifts is also a good method of reducing labor spends.
However, these methods could have a downside as they may negatively affect the quality or lead to customer dissatisfaction. Here, we discuss five ways that can potentially work in reducing labor costs without the need to spend a lot.
If you're creating a work schedule based on your gut instinct instead of data, you could be paying more for labor than necessary. An easy way to cut operating costs is simply using scheduling software. Efficient scheduling goes a long way in ensuring employee engagement and satisfaction. Do it well, and your employees will be extremely satisfied with the hours that are available within their schedules, the operating costs of the business will stay low, and you'll avoid running into costly problems. However, one scheduling mistake can snowball into complicated issues that cost less time and money than expected.
Instead of spending money and employee time on retraining them, upgrading your scheduling system is better. That will ensure that the right person is assigned the right job on the right shift. For instance, a chef with expertise in tossing breakfast menus may not be required during dinner, which may require extensive preparation. Similarly, a restaurant may not need a bartender during the first half of the day.
The best schedule for one restaurant might not work well for another. It will depend on the needs of business, as well as the demands of a particular establishment at any given time. Unfortunately, a common mistake made by many when designing their staff's shift schedule is using a pen and paper for this purpose.
If you want to invest wisely in your restaurant staffing and keep the labor costs in check, look no further than Zip Schedules. The cloud-based software solution helps track labor costs, reduces scheduling conflicts, helps in better team communication, monitors employees' availability, has robust cloud protection, provides flexibility in creating schedules, and tracks employee performance.
Many businesses think overtime is just an extra shift at the end of a busy day. But it's important to realize that over time can be quite costly as it can have huge ramifications on your total labor cost percentage. Some businesses use non-exempt staff for extra shifts, and then, when they've hit their hours limit, they bring exempt staff to pick up work that still needs completing.
It would mean that you're paying two different sets of employees for the same amount of work. It will cause your labor cost percentage to skyrocket quickly. So, it simply makes sense to let some employees go home instead.
Using scheduling software can help by alerting you when an additional shift is about to push one of your team members over their hours limit so you can come up with a better solution like assigning two people from the same department or one person from an entirely separate department to complete an important task.
When choosing a software solution, don't make a rushed decision. Look for solutions that integrate with other verticals in your operations, like the point of sale system, which can help you review your sales data to forecast labor needs accurately. For example, it could predict that you'll need to double up on staff on New Year's Eve, or you may require fewer employees on the day of Christmas when people usually have home-cooked meals. Staffing can rack up the costs. But a scheduling tool allows you to assess how many employees you need at any time. And if you have people who aren't being utilized at peak hours, consider cutting back on their number of hours or even letting them go completely.
Seasonality and special customer events are critical for a restaurant owner to handle. Consider weekends, holidays, and special occasions in your scheduling; use temporary staff on those occasions, so you're not over-staffing your restaurant during the week you don't need additional hands. It will help control payroll cost and ensure that your restaurant is run at its best capacity during the peak season.
There is a crippling labor shortage in the food service industry. It is an outcome of the more than two years of turmoil in the restaurant and hospitality industry caused by the Covid-19 pandemic.
Many restaurant staff reported increased abuse from customers and managers at the pandemic's beginning. The tips on which many restaurant labors depend also started depleting continually. With restaurants shutting down, many restaurant employees left in droves to look for better opportunities, possibly better shift schedules and good wages. In November 2021, 1 million of the 4.5 million Americans who quit their jobs were restaurant and hotel workers, per the Bureau of Labor Statistics.
Experts believe that staffing is going to be an issue affecting the industry. But it has also allowed the industry to redefine its hiring strategy, which will work in its favor.
With many restaurants, cafes and other eateries making use of technological advancements like a point of sale system, automated and mobile payments, drive-thrus, kitchen display systems and so on, there is a need for tech-savvy staff. As a result, hiring strategies must be redefined with people skilled in implementing technology. Yes, it may require augmented salaries and increased benefits, but the strategy will help in the longer run.
Big restaurant chains are adopting new strategies to include the younger generation in their operations. As a Buzzfeed report wrote, "polls show the Millenials feel they're spending more time in a typical day flipping back and forth between ithings. They use their cell phones as remote controls
Some restaurants are now hiring Gen Z as servers and lead staff. It's said that by incorporating technological solutions into their business management systems -- it's easy if Gen Z is recruited because they're so used to being on their phones and being familiar with modern technology.
Expanding the use of automated systems and machinery can help keep labor costs under control. For example, a digital menu board that is gradually becoming an important feature in restaurants, relieves restaurant staff of taking the customer through the menu and helping them with their selection. They can instead focus on other customer services, expedite order time, and increase efficiency.
The need for digital menu boards skyrocketed during the pandemic. Following the Covid-19 protocols, customers became more comfortable with these new devices. Restaurants soon realized they could scale back on in-person ordering and pump more money into better-equipped digital menu boards.
Similarly, an automated beverage dispensing system doesn't require additional labor, minimizes wastage and maximizes output. In addition, adopting equipment with advanced technology that consumes less energy and uses advanced sensors and cloud-based diagnostics is also one of the possible ways to deal with the other increasing prices.
We won't be overstating if we say that technology is replacing human labor in the restaurant business. Of course, human labor and interaction are still a big part of restaurant businesses. But there can be a significant reduction in labor cost percentage if the right technology is leveraged. Restaurant technology has significantly grown in recent years. Some of the fastest-growing restaurants understand the importance of technology online ordering, automatic billing, and online reservation are only some of the tech features that make restaurant operations convenient.
The tech-first approach is designed to keep the customer at the center of the entire experience. But by implementing technology, the restaurant reduces the number of staff involved in taking and processing orders.
However, for tech to provide a seamless experience, it is incredibly important for restaurants to get software solutions that easily integrate with other software systems in restaurant operations. For instance, an efficient point of sale system like Plum POS will allow you to accept payments for items sold, keep track of inventory, and record orders. With in-built data analytics features, you can crunch your sales data to make informed decisions for efficient scheduling. A point-of-sale system also integrates with the payment processing center and can be operated from any mobile device. Besides, these systems integrate with Kitchen Display Systems (KDS) to swiftly relay the order to the kitchen in-charge or the chef. It has helped eliminate the need for individual staff to manually take orders and run to the kitchen to process orders in time.
There are many efficient ways to reduce labor costs without burning a hole in your pocket. You must look around and keep upgrading your technology and updating your people management skills.
