How to Manage Your Restaurant Labor Cost Percentage

When you have a clear understanding of employee compensation and benefits costs, you can plan better for annual wage increases and additional headcount as your company grows. The cost of employee benefits, which can account for up to 30% of overall labor costs, is a significant expense as well.

If you want to learn more about labor costs and how they affect the bottom line of your business, this resource is an excellent place to find more information. Chron explains, “certain fast food restaurants can achieve labor costs as low as 25 percent,” but that doesn’t mean that labor costs can’t (or shouldn’t) run higher. Food moves faster, profit margins are higher, and the labor is fairly unspecialized which means it costs less to deploy. The Labor vs. Sales Report can help you compare your hourly labor costs with your net sales in a way that’s easy to understand and make decisions. You’ll be able to see labor costs by hour, date, and even location to better understand when your business is most profitable in comparison to how much your labor costs are at that time.

Are You Spending Too Much on Employee Labor? How to Calculate Cost of Labor Percentage

Your state’sDepartment of Revenuesite will have all of the information. The same goes for Social Security and Medicare withholding as a percentagebased on gross pay.

Calculating your labor costs by hours worked is a way to segment your staff into different operational groups, such as servers, bartenders, kitchen, and dish room employees. The point here is to quantify the cost how to figure out labor percentage per hour for each group. Reliable equipment allows you to process orders faster and more efficiently. Your employees will spend less time trying to get something to work and more time actually serving diners.

How to calculate labor percentage?

The formula for how to calculate labor cost is pretty straightforward. To find your labor cost percentage, divide your labor cost by gross sales and multiply by 100.

You can start with keeping track of staffing via your restaurant POS system, but after that point it’s all going to depend on the unique needs of your restaurant. Restaurateurs commonly aim to keep labor costs between 20% and 30% of gross revenue. However, a full-service, white-tablecloth restaurant will likely have a higher labor cost percentage than a casual dining restaurant, since they employ more staff to provide a higher level of service. Include overtime pay when coming up with worker pay for the period you’re calculating. Then determine the cost of payroll taxes and withholding. If you’re providing insurance and retirement benefits, add the monthly or annual cost of your benefits package. The impact that labor costs have on your business may be different depending on the industry you’re in.

Restaurant POS Buyer’s Guide

This is the total cost of Maria’s work for your business per year. The actual hours that Maria has worked for a year are 1984 hours. QuickBooks Time requires a computer or a device with a supported Internet browser and an Internet connection (a high-speed connection is recommended).

One of the most important is their prime cost, which is a metric ownership and investors look at to gauge a restaurant’s financial health. Think about your expenses for everything listed above and you’ll get closer to figuring out how much labor costs. And labor cost percentage is a hugely important metric to pay attention to.

Tips for smart planning with labour percentages

Remember to adhere to local fair labor laws if you decide to split shifts. In most places, you won’t be able to spontaneously tell an employee to leave in the middle of the day. Instead, you’ll need to schedule the “split” in the shift in advance in order for it to legally count as a split shift. First, determine your total revenue generated in the business or segment being analyzed. In this example problem, a business generated $50,000.00 worth of revenue in the last month. Most people get into the restaurant industry because they love to cook or because they have a flair for providing a unique dining experience.

We’ll also give you a few tips on lowering your labor costs while keeping your restaurant running at peak performance. Divide the labor cost by gross sales and multiply the result by 100. Suppose gross sales equal $500,000 and the labor cost totals $140,000.

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Kiosks can process orders and payments, which frees up your front-of-house staff to focus on hospitality. Another way to keep turnover to a minimum is to implement user-friendly technology that doesn’t frustrate or intimidate new staff.

• If you want to know the cost of each employee to your company, you can add the direct costs and indirect costs and see the yearly amount your company needs to cover.
• While you may pay more up front to purchase a commercial grade mixer, for example, if it cuts food prep time by half, it will allow you to reduce your labor costs.
• Reliable equipment allows you to process orders faster and more efficiently.
• An employee’s total salary and wages account for 68.3 percent of their total cost.
• Where possible, look into the reasons behind any obvious spikes or troughs, and make a note of any roving occasions like Mother’s Day or Easter.
• As you can see, even if you know exactly how to calculate labor cost formulas, doing it repeatedly for each employee, new hire, and promotion on every job is exhausting.

Start by calculating all of your employees’ salaries and the average hours expected of your hourly employees. Fixed costs are expenses that you can calculate with certainty, whereas variable costs may change depending on your needs over time. A good example of the difference between fixed and variable labor costs is the payment of wages for salaried workers and those with an hourly rate. If you’re paying someone a salary, you know exactly how much they’ll receive for the year, while the pay for hourly employees may be contingent upon on how many hours they work each week. The easiest way to calculate the cost driver is to divide the total overhead costs by the direct labor costs.

How to Staff a Restaurant with the Right Positions

The cost of direct labor would then be referring to wages, benefits, and any compensation you offer your direct labor. When calculating direct labor cost, the company must include every cost item incurred in keeping and hiring employees. In addition to what the company pays the employees, it must consider costs to retain employees, such as payroll tax contributions, insurance premiums, and benefits costs. As a percentage of sales, restaurant labor cost percentage is the amount spent on all labor-related costs compared to your gross sales in a specific time period. To calculate the labor burden, add each employee’s wages, payroll taxes, and benefits to an employer’s annual overhead costs . Then divide that total by the employer’s number of employees. Keep staff happy to reduce turnover and your labor cost percentage.

• The average restaurant spends $2,000 a year on employee POS training alone.
• That makes your total labor cost for the week $4,690.56 ($781.76 x 6 days a week).
• Prime cost includes labor cost, as well as the total cost of goods sold .
• Taxes include federal unemployment taxes, Social Security taxes, Medicare taxes, state unemployment taxes, and more.
• In the above example, if your total operating costs for the year were $600,000, then your labor cost was 25% of your total overhead.

Kitchen staff such as cooks and dishwashers are another natural group, as are management staff. You can also divide your staff by whether they’re paid by hourly wage or salary. To determine this figure, start with the time each employee can work. Remember, the calculation won’t be as simple as 40 hours per week, 52 weeks per year.

Watch Out for Premium Pay

Retirement and savings account for 5.4 percent of their total cost, according to the US Department of Labor’s June 2017 Employer Costs for Employee Compensation survey. Employers should also consider an employee’s overhead percentage when determining the employee’s pay. Variable labor costs are the extra servers you need for a busy Friday dinner shift. Or the extra line cook you need because of that big private party. Restaurant labor cost is one of the primary expenses in running a restaurant, along with overhead expenses. The amount a restaurant spends on labor affects many things.

Sit-down and casual restaurants, however, tend to have a higher labor cost percentage, given the fact it takes you an hour to serve a guest rather than a few minutes. While higher ticket amounts can counter that model slightly, restaurateurs helming businesses with these concepts should prepare to budget more for wages and related labor costs. Notice that quick service and fast casual restaurants’ labor https://online-accounting.net/ cost percentage is below 30%. This is because the business can usually get by with a dozen or fewer employees at their absolute busiest, and can serve multiple customers in a short period of time. “Whether a company uses a staffing firm or employs its own hiring department, keeping costs down or within a manageable range that meets budget is important to running a successful business,” says Aaron.