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Understanding Labor Cost Percentage in Restaurants

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As a follow up to our overview of labor metrics, in this post we delve deeper into labor cost percentage. We cover how to calculate it and explain why it’s important for hospitality businesses. Because profit margins can be thin, especially during the pandemic, restaurant owners need to have a firm handle on the cost of their labor force. Miscalculated labor expenses can severely disrupt a restaurant’s cash flow. Thus, it is important for a business to be as accurate as they can when predicting labor needs.

Calculating labor cost percentage is not as simple as sitting down with a calculator or even a spreadsheet. Your labor costs are fluid and can change rapidly from one day or week to the next. You may not even have the luxury of waiting until after a payroll period to run these computations. With that in mind, you benefit the most by taking advantage of a labor management platform that handles both sales and attendance data. We’ll get to that later, but for now: what is labor cost percentage, and how do you calculate it?

The Formula for Labor Cost Percentage

If you’re new to the industry or unfamiliar with common labor metrics, you may be wondering how to make this calculation. Outwardly, it’s pretty simple: you take the total labor costs over a given time and divide them by the gross sales made during that same period. Then, to get the percentage, multiply the result by 100. A lower number means a more efficient and profitable labor force. A higher percentage means you’re spending more on labor.

While the formula may not seem complicated, getting the pieces together can be somewhat difficult. The first thing you need to do is to gather your restaurant’s accounting information, including gross sales. You can do this on a daily or weekly basis. You should have a system in place that tracks your restaurant’s sales each day or perhaps even in real-time.

The next step is to compute the cost of your labor. It is important to realize that your labor cost is not just the hourly rate for your workers. In any industry, straight wages can be just a fraction of expenses incurred by employees. However, focusing on wages is an easy place to start and can give you a rough estimate of your labor cost percentage. Ideally, though, you should be including things like overtime pay, compensation for meal and rest penalties, and paid time off, as well.

Labor Costs Can Include Many Things

As noted above, labor costs often include additional payments like compliance pay, PTO, and even bonuses paid out to workers. You also need to consider the cost of benefits. For many businesses, providing health or other insurance to workers makes up a significant portion of labor expenses.

For the most accurate calculation, be sure that you obtain a full accounting of everything that you spend to employ your workers, including all fringe benefits. This also includes your share of employment taxes that you pay to the government, including payroll and Social Security. Even vacation pay and sick days go into the calculation since they are factors that eat into your bottom line.

How Are Your Labor Dollars Being Spent?

The total labor cost percentage you see will tell you a lot but not the entire story. As a restaurant owner, you need to understand where your labor dollars are really being spent. This means that you should also consider making individual calculations based on different categories that are meaningful to your business. In a restaurant context, that could include categories for cooks, hosts, servers, and managers. Or you could compare front of house with back of house.

There are actually a couple of different formulas to use for calculating labor cost percentage. You can use the formula given above, or you can use labor as a percentage of operating costs. In the latter case, you would take every cost of doing business and add it up. This includes everything from your food costs to rent and marketing. You would then divide your total labor cost by that number. 

Whatever method you use, the important part is that you are consistent. For example, you don’t want to compare your labor costs based on sales one month to your labor costs based on operating costs the next month.

Controlling Your Labor Costs

When it comes to your labor costs, it is important to keep them under control as best you can. The average restaurant has a labor cost percentage between 20%-35%. If your numbers exceed this range, your restaurant may be spending too much on labor.

This is why you need a smart labor management system, particularly one that can integrate your labor and sales. As a restaurant owner, you need a real-time snapshot of how business is going. There are ways to cut your costs without necessarily eliminating staff. It just means that you need to manage your hourly employees and their shifts as efficiently as possible. You can do this by forecasting your sales. When you have a good idea of what your sales will be like, you can schedule the right amount of staff.

TimeForge can help you get the best handle on your labor cost percentage and labor metrics. Our labor management system is designed to provide you with accurate snapshots and reports for scheduling, attendance, HR, and sales, all organized within a central user friendly dashboard.

Our scheduling system can warn you in advance if you’re in danger of approaching an understaffing or overstaffing situation. It can also auto-generate schedules for you based on your predicted sales and available staff. Finally, our attendance system automatically calculates and includes overtime, compliance pay, and other types of compensation.

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