By the Numbers: How Do Your Labor Costs Stack Up?

Controlling your labor costs is one of the most important elements of running a restaurant—a metric you need to keep track of all the time. Because for many restaurants, labor is the highest restaurant cost every day. According to Chron, a small business blog, labor issues can vary widely, from as little as 28% of total revenue for small, fast-service restaurants to as much as 40% for higher-end restaurants who provide more detailed and personal services.¹

What to include in labor costs

Often, we think of labor costs as just the hourly wages paid to employees. But there are additional costs you need to include to get a true understanding of your labor costs. Here are elements you need to be sure to include:

• Hourly wages
• Salaried wages
• Overtime
• Social Security taxes
• Bonuses
• Health and disability insurance
• Sick, vacation and holiday pay
• Other benefits, such as tuition reimbursement
• Training expenses
• Employee acquisition costs such as help wanted advertising

Anything labor related is what you want to capture and track. And keep in mind, retaining employees helps keep the labor costs down as well—no advertising costs, no training costs when employees stay with you longer.

Next step: Analysis

The tried-and-true method many folks use is looking at labor as a percentage of revenue. Since both these metrics reflect the volume of business you are doing, they make sense to use. More business, more revenue and more labor costs. Including fixed costs like rent or other facility costs doesn't give you as good a look at the costs you can more easily control.

Quickly, here are the steps to looking at how much you pay your employees versus the sales they make:

1. Add up your labor cost. Include all the elements of labor throughout the year, or whatever time period you want to analyze.
2. Add up your revenue—just the entire amount of money you have taken in, not including any sales taxes or other deductions.
3. Divide labor costs by revenue. For instance, if your restaurant paid its employees $250,000, and you had $750,000 in revenue, you would divide $250,000 by $750,000 to get .33, or 33%.
4. 33% is your labor cost as a percentage of revenue.

You can do this by week, month, year, or even by a day, as long as you can capture the labor costs and revenue for that day.

Ready to take it to a higher level?

You may already have your own methods for gathering and analyzing your labor costs, but in today's world, you can take advantage of some free online tools to give you even more insight.

There are dozens of systems you can check out to see if one can work to help you maximize your profit while assuring you have the right staff in place to serve your customers. Financesonline.com provides a look at the top 20 systems…that's right, top 20, because there are dozens more, making it complicated to wade through all the details.²

These systems offer cash management as a primary feature, but many offer the kind of support you can use every day to make sure you have the right staff in place, not too many, not too few, for peak and slow times.

So, taking a look at these systems, check out which features could take your restaurant to the next level of profitability:

• Back-office reporting and analytics of "key performance indicators" such as sales, food costs, labor costs, on-site and off-site traffic, stocks and supplies and kitchen processes
• Planning and scheduling staff
• Cash management including helping you move to a chip-compliant system to reduce fraud
• Table management, including splitting checks
• Inventory management
• Marketing and loyalty programs
• Emailing and texting receipts

Here's one that can give you a quick peak at your current metrics. Check out this free Excel spreadsheet you can download from Toast, an online restaurant management system.³ Tools like this can help you determine where you can trim labor costs while maintaining service levels.

Greater control of labor costs = Greater profits for your restaurant

With about a third of your costs in labor, it makes sense to assure you only have on the hand the staff you need, when you need them, to generate revenue. Getting your arms around the numbers is an important first step to improving profitability.

¹ https://smallbusiness.chron.com/percentage-should-restaurant-spend-payroll-24851.html
² https://financesonline.com/20-best-pos-systems-for-restaurants-comparison-of-solutions/
³ https://pos.toasttab.com/restaurant-management/restaurant-numbers-metrics-calculator