Editor’s Note: This post was originally published in February 2017 and has been revamped and updated for accuracy and comprehensiveness.
As a restaurant owner, you know very well that managing your expenses can be a real headache. It doesn’t take long for high food or restaurant labor costs to start eating away at your bottom line. Fortunately, Xendoo is here to help. Aside from fixed expenses like rent and insurance, food cost and labor cost are the two most significant expense categories that an owner will wrestle with daily. We’ve already shown you how to manage your food costs, so let’s take a look at some tips for managing restaurant labor costs efficiently.
What Is Restaurant Labor Cost?
It’s a given that without your cooks, servers, bartenders, and hosts, your restaurant is nothing more than a grocery store with tables. Hiring the right team to give your restaurant legs and make it go is essential. But bringing on that team entails some restaurant labor costs because you have to pay them. Your restaurant labor costs are the ratio of what you spend on payroll during the month to your gross sales for the month. Restaurant labor cost is almost always expressed as a percentage.
If you have Xendoo’s bookkeeping for restaurants, all the figures you need should be at your fingertips. For example, if your gross sales for the month are $100,000 and you spend $25,000 on payroll, that means your restaurant labor cost for that month is 25%. Unlike food cost, there is no set labor percentage at which you should be running because labor varies widely in different segments and markets. But generally speaking, your restaurant labor cost should be between 25% and 35%.
Break Down Your Payroll by Category
Servers are paid very differently than cooks or managers, so it’s often helpful to break payroll down into groups so you can see exactly which restaurant labor costs the most. Staff should be cross-trained to give you the flexibility to shift things around when you need to cut some costs. For example, front-of-house staff may offer some accessible opportunities to trim things down a little.
Depending on your current labor laws you can cross-train staff for certain roles. If your hostess is making $8 per hour and servers are making $2.13 per hour, maybe you could try staffing an extra server during slower times and make that person responsible for greeting guests who walk in. The same goes for bartenders, who are typically paid more than servers. If your servers are properly cross-trained, they should be able to fill in as a bartender during slow times. They don’t have to be experts in everything, just good enough to carry a little extra water when things are slow.
Calculate Restaurant Labor Cost Daily
Naturally, you will want to study your restaurant labor costs on your monthly P&L along with other expenses like filing taxes, but it’s also helpful to look at it daily. If something is amiss, you don’t want to let it go unchecked for a whole month, do you? It’s easier to manage it day-to-day when your memory is fresh about what happened that may have affected your labor. Run an end-of-day report and give it a quick once over to compare sales to payroll and adjust the next day’s schedule accordingly if you need to.
Use Smart Forecasting
Many modern point of sale (POS) systems offer features to help you analyze your sales patterns by day and hour and create forecasts to help you schedule staff very accurately. If your system doesn’t offer these features, it might be worthwhile to consider upgrading. If you need to do forecasting by hand, sit down and compare the upcoming week to the same week last year and factor in any changes in the market. For instance, if you did $20,000 in sales the same week the previous year but you’ve been averaging 10% more year over year, then you would forecast sales of $22,000. Multiply that number by your target food cost, and then you know what your payroll budget is for the upcoming week.
Beware Turnover Cost
The restaurant industry is notorious for having a ridiculously high staff turnover rate. As an owner, you need to understand both obvious and hidden costs to employee turnover. The obvious restaurant labor cost is training time. You have to pay an employee to shadow another employee during training, essentially doubling the restaurant labor cost of that position for that period. That can spike your labor cost in a big way, but there are also more subtle restaurant labor costs associated with turnover.
A new, inexperienced employee will make mistakes that a more seasoned employee might not make, and those mistakes come with a price tag. Whether it’s unnecessary food waste, a customer refund, or a lost sale, it’s a cost that eats into your bottom line. So you should consider whether, in some cases, it might be advantageous to pay just a little bit more than the market average to keep those experienced employees and avoid turnover costs.
Xendoo is here to help you keep your restaurant’s bottom line as healthy as possible, and by using these strategies, you can keep those pesky restaurant labor costs in line. Be sure to check out Xendoo’s full suite of services for restaurants to find other ways Xendoo can help boost your profits.