The restaurant business can be somewhat tricky for many restauranteurs looking to make a decent profit. With low-profit margins, it's essential to manage all overhead costs carefully. That means you have to consider your restaurant's labor cost percentage.
Regardless of the kind of restaurant or hotel you run, labor costs remain your most considerable expense, which is valid for all restaurants. Nonetheless, it's essential to learn ways to average your labor cost percentages.
Let’s explore some tricks and tips for optimizing and managing your expenses.
Before calculating the labor cost percentage, you should first consider the money you use on labor expenses, including taxes, benefits, wages, healthcare, and salaries. Here, if you want to get an accurate figure, you should first add all the labor costs at a specific time.
Evaluate the last month's expenses or do quarter or yearly calculations to check how much you paid your staff members. That said, it pays to be diligent when making these calculations, and it is better to have an overestimate.
For a specific period, calculate the total food sales. After that, divide these figures and convert them to a percentage by multiplying by 100. Let's use this example for clarity.
Suppose you review last month and find you spent $34,000 on labor: $27,000 in wages and salaries, plus $7,000 in employer payroll taxes, benefits, and workers' compensation. Over the same month the restaurant brought in $100,000 in total revenue, food and beverage combined.
Labor cost percentage = 34,000 ÷ 100,000 × 100 = 34%
Two details decide whether that number means anything.
The denominator is total revenue — not profit, and not food sales alone. Leaving the bar out inflates your labor percentage badly in any venue where drinks carry 30% of sales.
The numerator is fully loaded labor, not gross wages. Employer-side taxes, benefits, and workers' comp typically add 10% to 20% on top of payroll. Excluding them is the most common way an operator tells himself labor is under control when it isn't.
Why Labor Cost Percentage Is An Essential Metric
Since labor costs are the most crucial cost when running a successful restaurant, ensure you track this vital metric carefully. For instance, having few staff members on less busy nights can help your restaurant make a profit in the long run.
Bearing in mind the thin profit margins, minimizing labor costs can have an immediate impact on profitability. Labor is the fastest line to cut and the most expensive one to cut wrong. Hours come off a schedule in a minute. The consequences arrive over the following quarter, and the section further down puts a number on them.
If you cannot lower the food costs, it's still possible to keep your staff lean without sacrificing customer service. Closely monitor how well your staff work during shifts and make changes accordingly.
Why You Should Find A Decent Labor Cost Percentage
Do you know what labor cost percentage is suitable for a restaurant? Regrettably, there's no specific answer to this question. Restaurants are different with varying labor and salary needs. The old rule of thumb put labor at 30% of sales. That number now describes quick service, not the industry. Full-service operators run closer to a median of 36.5%, and the profitable ones hold around 34.2%. Find the benchmark for your format before you set a target, the table below has them.
Casual eateries like fast-food restaurants or over-the-counter cafes usually have low labor costs. On the other hand, fine-dining restaurants have higher labor costs because the staff has to provide exceptional customer service. Plus, fine dining personnel need specialized skills, talent, and experience in providing quality service. With that in mind, you should consider the kind of guests that your restaurant targets.
Labor Costs Average By Restaurant Kind
As mentioned earlier, different restaurants typically have varied labor needs and hence different labor costs. While labor costs are varied from one restaurant to the other, they can act as benchmarks to check if your restaurant hits the target mark. For instance, if you operate a fast food joint with high labor costs that hit almost 40% of the overall sales, you should consider making adjustments to lower the cost.
One important thing to do here is create a realistic target and use it as the benchmark to evaluate your restaurant's financial performance. As a suggestion, you can create a target to keep the labor cost percentage below 30%. Build that cost percentage monthly until you achieve your goals. After that, evaluate your results and make changes as needed.
You might notice that you often operate at 35% instead of 30%, which means you need to make adjustments to maintain decent profitability. As you can see, this delicate balancing act will help you to evaluate your overall costs properly.
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Full-service formats run roughly 4.8 percentage points above limited service. The median full-service operator is at 36.5% of sales; the ones turning a profit hold about 34.2%.
Two things this table cannot tell you. First, geography sets the floor: the same casual dining concept runs a different labor percentage in Chicago at a $17.05 minimum wage than in a state at the federal $7.25. Second, a percentage moves when sales move. A slow February pushes labor cost percentage up without anyone working an extra hour, which is why the number alone is a poor diagnosis.
Use these as ranges for evaluation rather than targets to hit. The benchmark that actually matters is the labor cost your concept can carry given your food cost, your check average, and your rent, and the only way to find it is to work backward from prime cost.
After you have calculated the labor cost percentage of your restaurant, start evaluating it to maintain a decent profit margin. Here are tips to help you keep the labor costs minimal.
1. Understand the Prime Costs
The labor cost percentage will not reveal the whole scenario when tracking your restaurant's monthly expenses. If you want to check if your restaurant has a healthy sales-to-cost ratio, it's essential to also understand the production costs for the products you sell.
The restaurant's prime cost factors the labor costs alongside all goods sold (COGS). But how do you calculate COGS? Here's an example;
First, start by adding your overall COGS. That will show you exactly how much money your restaurant is spending on ingredients and items to make the dishes you're selling.
After that, combine that figure with overall labor costs; you'll get the prime cost after that. Your total prime cost must be between 50-60% of the overall sales for profitability. So, keeping the prime costs below 60% can act as an excellent benchmark when creating your restaurant's COGS.
2. Split Labor Costs into Different Groups
Apart from calculating the restaurant's labor cost percentage, try splitting the labor costs into different groups. A straightforward way that you can use to divide the numbers to get extra insight is by using the standard restaurant options:
- Managers
- Kitchen staff (cooks, dishwashers, and chefs)
- Hosts, bartenders, and servers
Every hour you remove from a schedule saves money this week. Some of those hours cost more than they saved, and the bill arrives about a quarter later.
Restaurant turnover runs above 75% a year across the industry, and quick service regularly clears 100% — the average position turns over more than once in twelve months. Front-of-house sits at 41% annually, back-of-house at 43%, managers at 28%.
Cornell's Center for Hospitality Research puts the average cost of replacing a restaurant employee at $5,864, of which about $821 is training alone. Losing a non-GM manager costs $10,518. Losing a general manager costs $16,770. None of that appears as a line item on a P&L, which is exactly why it gets ignored.
Do the arithmetic on your own operation. A restaurant with 20 hourly staff at industry-average turnover replaces roughly 15 people a year. At $5,864 each, that is about $88,000 — a figure that in many operations exceeds the entire annual net profit.
The staff who leave first are the ones who can. Your best line cook has options; the guy who calls out twice a month does not. Cutting hours indiscriminately selects for exactly the wrong people to keep.
This does not mean labor is uncuttable. It means the cut has to be surgical: overtime, overlapping shifts at daypart handoffs, salaried managers scheduled through dead hours, and the gap between your sales forecast and the schedule you actually built. Those are cost. A short shift on a busy Friday is not a saving, it's a slower kitchen, a worse review, and a resignation letter in six weeks.
However, if your restaurant doesn't have clearly defined roles, you can split these costs in a way that makes financial sense. You can divide labor costs by analyzing the costs between salaried and hourly employees. That can help you control labor costs during certain days when your restaurant isn't too busy.
Remember that labor cost percentage solves one piece of the puzzle in managing your restaurant's budget. For that reason, you should understand your restaurant's labor costs and optimize them accordingly. Above all, take into account factors that can affect your sales to boost your overall profitability.
