Calculating the Labor Cost Percentage

Calculating the Labor Cost Percentage

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.

Calculating the Labor Cost Percentage

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.

Labor Cost Percentage

Suppose you analyze your expenditure over the past month and notice you spend $5,000 on salary costs and other wages. And, during that month, you also made $25,000 as profit from food sales.

Here's how you can do the calculation: 

The labor cost percentage = 5000/25000*100

The result is 20%

That means 20% of the gross revenue was used on staffing wages. But what does this mean, and why can it affect your restaurant's daily operations?

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. Additionally, it's the easiest metric to control. 

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. Restaurants must trim their labor costs to match 30% of overall sales as a rule of thumb. But, some restaurants may have a lower percentage—equally, it might be higher for others.

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.

Average Labor Costs by Restaurant Type

Tips To Help You Optimize Labor Costs 

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

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.

Track Several Metrics

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.

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