The cost of labor is a significant expense for a restaurant. If you don’t keep track of your labor expenditures, you’ll find that they are reducing your profit margin. Labor expenses vary throughout the year and swing between busy holiday seasons and dry periods, making it complicated.
If your restaurant’s labor expenses are not optimized, you may run out of servers during a sudden roll in guests, which might lead to lengthy wait times or a poor turnover rate, and you may have to pay personnel to wait tables when business is low.
A long-term strategy for managing and lowering labor expenditures is essential for restaurateurs. This should incorporate a data-driven and tech-enabled human resource strategy.
In this guide on restaurant labor costs, we will look at strategies you may employ to cut and manage labor expenses at your restaurant. As a first step, let’s expound on labor expenses.
What is the labor cost for restaurants?
A restaurant’s money on its staff is referred to as labor costs. It would be best first to comprehend what your labor costs include before you can discover how to lower labor costs at your business.
Employee pay, overtime, health benefits, bonuses, hiring, training, and additional benefits like housing and travel are the main elements on this list. These expenses are included in the prime cost, the total labor, and the cost of items sold.
Restaurants frequently use prime costs to gauge their operational effectiveness. Since high labor expenses result in high prime costs, indicating that the restaurant is underperforming and not making enough money.
What is the typical cost of restaurant labor for various restaurants?
Labor cost for restaurants should typically not exceed 30% of their total sales. The size and kind of the restaurant, among other variables, have a substantial impact on how this figure differs from one restaurant to the next.
Compared to full-service or fine-dining establishments, casual eateries are more likely to have higher personnel costs since they focus more on customer care. Here is a brief comparison of the average labor cost percentages across several restaurant categories.
Table service restaurants have more significant labor expenses since the service calls for more workers. The labor expense for table service is 30% to 40%.
Due to the lack of emphasis on service and the majority of quick and casual restaurants being self-serve, labor costs are often lower, at roughly 25% of total sales.
A fine-dining restaurant’s labor expenses might increase to 40% because more personnel is needed to deliver the higher quality of service that customers are willing to pay more for.
How do you calculate labor costs for restaurant percentages?
The entire cost incurred for each employee over a specific period must be included to determine your labor expenses. The overall number doesn’t represent much when taken alone, but it becomes more meaningful when expressed as a percentage.
Using the labor cost percentage, you may determine how much you spend on labor to generate income. By dividing the overall labor expense by the total revenue, one may compute the restaurant labor expense as a percentage.
For example, suppose you want to figure out the labor cost percentage for a restaurant for a year. In that case, you must first calculate the total income for that year, before taxes and other deductions, divide it by the labor cost for restaurant for that year, then multiply the result by 100 to get the percentage.
Additionally, by using similar procedures but substituting total operating costs for total revenue, you may estimate labor costs as a proportion of your restaurant’s total operating expenses.
It’s crucial to monitor and manage your labor cost for restaurant to raise overall profitability since the more excellent your labor costs, the lower your net profit will be.
How do we minimize the labor cost for restaurants?
Reduced profits and staff margins may force you to take extreme steps, such as reducing financial incentives or even lay-off employees. But it shouldn’t be that way. Here are some suggestions for lowering labor expenditures that you may apply to lower labor costs for restaurants.
Keep an eye on your labor expenses
Since labor expenses might account for 40% of your sales, keeping track of them under control is imperative. Monitoring labor expenditures regularly enable restaurants to determine when the costs are becoming unaffordable.
This enables restaurant operators to identify the issues behind the rise in labor expenses and act swiftly to optimize and lower them.
Develop a suitable payment structure
You may routinely assess your earnings and wage levels and cut the expenses that keep you above the industry standard. It would be best if you only take action following an open dialogue with the affected employees; otherwise, it might result in a high employee turnover rate.
Convert any pension or retirement plans you may have into profit-sharing schemes. It is possible to hire temporary or part-time labor on a complete commission-based compensation system.
Use part-time labor
Most part-time hires are paid hourly, which is less than what is paid to permanent employees. This is why hiring part-time workers is a great idea. By assigning unskilled and general tasks to such a temporary workforce, a restaurant may lighten the workload of its professional and permanent personnel.
Certain days of the year are busier than the other, more leisurely ones. It’s a good idea to employ seasonal personnel at your restaurant to handle the frequent footfall. Since you may only recruit them temporarily for a few months, this is a terrific way for restaurants to save labor costs.
Spend money on design, equipment, and automation
Even while technology hasn’t wholly automated restaurant operations, there isn’t much need for work from humans anymore. The requirement for human intervention has considerably decreased due to features like automatic invoicing and online ordering.
There is no longer a need to print the Kitchen Order Ticket and manually carry the order to the kitchen, thanks to solutions like the Kitchen Display System, which immediately accepts the order from the POS. Technology has significantly decreased human work, which also aids in reducing the cost of labor in restaurants.
Enhance and monitor staff productivity
It can be challenging to gauge and improve worker productivity in the restaurant industry. Nevertheless, you may still achieve so by giving each team a set of objectives and setting the key performing indicators for your employees.
By obtaining information from the POS software, you may evaluate the performance of your workers and determine how efficient they are. An incredible strategy to lower restaurant labor expenses without laying off staff is to increase employee productivity so they can contribute more to the company.
One individual is taught to undertake many roles and tasks thanks to cross-training. It guarantees that you have a workforce that can multitask and contributes to expanding the staff’s professional competencies. Cross-training improves productivity and offers chances for team building at the organizational level.
Spend money on hiring
Investment in hiring extends much beyond financial resources, and you must put in the process your time and efforts. Keep your needs in mind while you evaluate job profiles. Remember that hiring the incorrect candidate for the position might result in higher attrition rates and more recruiting and training expenses.
Examine and plan
The restaurant industry is dynamic and mainly impacted by the seasons and special events. You may schedule your full-time staff, hire part-timers, and arrange your food budget based on the number of customers you expect on the weekends, holidays, and festive seasons. This will help you keep your payroll costs under control.
Invest in portable Point on Sale systems (POS)
Restaurant automation and mobile POS are fantastic for cutting down on labor expenditures in your establishment’ thus resolving various business problems.
Author credit: By Travelarz – Own work, CC BY-SA 3.0 pl, https://commons.wikimedia.org/w/index.php?curid=36707709
Mobile POS makes it possible for lines to move more quickly and tables to turn, which increases revenue and lowers labor expenses for your restaurant.
There are no set clock-out times because serving hours are flexible. Thus, you must regularly check the working hours of your staff. Your POS should enable you to create a report that breaks down the number of hours each employee worked, the number of shifts they worked, and the money they earned for those hours, considering their various tasks.
Restaurant labor is a significant expense that can be challenging to control. It would be best to deal with rising wages, restaurant management, and other costs.
The good news is understanding your labor expenses, calculating them, keeping an eye on your labor cost percentages, and, most importantly, putting the correct plans into action, such as using the right staff scheduling tool and regaining control.