In this post, we’ll dig more into what labour percentage should your restaurant run and discover how to calculate labour ratios to improve your cash flow.
For many young people, working at a restaurant can be the start of their careers, and those who remain in the field look forward to successful futures. That’s why restaurant jobs range from entry-level waitresses to five-star chefs.
But, when it comes to employee compensation, how much is too much? And how do you know what labour cost levels will lead to business profitability?
Stay tuned to know more!
What percentage should labour be in a restaurant?
The cost of labour is one of the most significant expenses for a company. About 30% of the revenue gets spent on labour in a typical restaurant. However, this varies from restaurant to restaurant. That’s why we have the estimated percentages for labour costs to help you realise how much should be present in your restaurant.
BDO estimates the following percentages averages for labour costs:
- Quick Serve Restaurants: 31.6% Labour Cost
- Fast Casual Restaurants: 28.8% Labour Cost
- Casual Restaurants: 34% Labour Cost
- Upscale Casual Restaurants: 31% Labour Cost
- Pizza Restaurants: 30.01% Labour Cost
- Total Average Restaurant Labour Costs: 31.6%
How do you calculate labour cost percentage?
To avoid wasting money, keep a close eye on your finances with minimal profit margins because many expenses are set in stone and unavoidable. Hence, you'll want to focus on cutting costs where you can.
Wages are one component of labour costs, but there are others. You need to add together the following items to identify your labour costs:
- Wages for salaried workers
- Wages paid on an hourly basis to employees
- Pay for extra hours worked
- Taxes on employee wages
- Insurance for health care
- Days off from work that are compensated
- Over a predetermined time, such as a week, month, or year, you sum up these costs to get your actual labour costs.
How is labour calculated in a restaurant?
In this part, you’ll discover how is labour calculated in a restaurant. We’ll tackle labour expenses, operational costs, and many more. Scroll down for more.
Labour expenses as a percentage of total revenue
For the most part, this is how labour costs are expressed as a percentage of total costs. Since your revenue will cover your labour costs, you must have an excellent labour-to-revenue proportion. For example, expenses like rent and marketing must be covered with the money left over.
Adding up all the above expenditures is how you keep track of your monthly labour costs. The next step is, to sum up all your sales before you make any deductions. You now know how much money you're making each month. Once you've got both, you may calculate your percentage by dividing your labour costs by income.
Total revenue minus labour costs equals labour cost as a share of the revenue
For instance: $4,000 divided by $15,000 equals a percentage of 26.67 percent.
Operational costs as a percentage of labour costs
Some expenses, as previously mentioned, are unavoidable. When you look at labour expenditures as a percentage of total costs, with this one, you can see where your money is going and where you may cut costs.
To begin, add up all your labour expenses using the methods described above for your future catering services, for example. The next step is to total up your expenditures. Don't forget to include everything from rent and electricity to marketing and software subscriptions to meal costs and uniforms. Finally, divide your labour costs by your overall costs.
Labour costs divided by total operating costs equal labour cost as a percentage of total operating costs
For instance, $4000 divided by $12,000 equals a percentage of 33%.
Electricity and restaurant equipment are two examples of fixed expenditures that can be accounted for with this technique. You'll also be able to determine a reasonable percentage for every spending.
How to achieve a good percentage of labour cost?
Your restaurant's labour costs should be controlled if they are out of control. Even if your expenditures are healthy now, cutting them will allow you to increase your advertising budget or invest in new machinery.
Organise your employees into teams.
Your employees have diverse responsibilities according to their job titles; hence their hourly earnings differ. You can examine how much each group of employees costs you by splitting them into similar groups.
As an illustration, you'll be able to compare your kitchen crew's average cost per 8-hour shift against your hosts and waiters. To help you with this one, try using rostering software to make rostering smoother.
Cost-cutting will reveal which groups have been the most costly. While it's never fun to fire people, this procedure can help you identify the budget savings that will have the most significant impact.
Ordinarily, you'll find one or two waiters and hosts in the front of the restaurant, along with some prep cooks and dishwashers. A manager will be in charge of everything from overseeing operations to dealing with customer service issues and anything else that comes up.
When you have a busy night, this crew may only cost you 20% of what you make that night. An unproductive shift like this can cost up to 50% of your earnings on a slow morning.
You can minimise the number of workers on a shift without sacrificing efficiency by cross-training your staff. On slow days, transferring a manager's duties to a hostess saves a lot of money in labour expenditures. The expense of scheduling a manager for an entire shift will be cheaper than paying this person a few extra dollars an hour in these scenarios.
In the same way, hostesses can be taught to serve meals. Your host can keep you running even if a server fails to show up or has to leave early. After that, the manager can take over as host, saving you the trouble of bringing in extra staff.
Encourage good work and attendance by offering rewards.
Callouts and no-shows might impact operating costs. If an employee fails to show up, you'll have to bring in a replacement. In addition to wasting time, it also irritates workers.
You can terminate staff for not showing up, but it won't deter future absenteeism. To do this, you should promote good behaviour and encourage employees to show up for work.
You can, for example, reward workers with a bonus if they arrive on time or early for all shifts over a specified pay period.
Similarly, you can specify the criteria for receiving a pay increase. Setting reasonable goals increases productivity and encourages hard work by rewarding employees and tracking their time efficiently with reliable software.
Reduce the number of people who leave.
Employees prefer to feel appreciated, which goes hand in hand with the above reason. If your employees don't think their work is worth what they get paid, they'll look for another employment. They may even choose another restaurant if they are uneasy or disappointed at work.
It's costly to interview and integrate new staff, especially if background checks, uniforms, and government-mandated permits are involved. Reducing your turnover can save you a lot of money in the long run.
Turnover can be reduced by making employees feel appreciated and part of the team. One of the most effective methods to express gratitude is rewarding and recognising your employees.
When a worker goes above and beyond the call of duty, praise them, no matter how tiny the gesture may be. Recognise everyone's efforts, even if they are as simple as organising the supply closet or vacuuming the floors without being asked.
Of course, none of this will work if you don't pay market rates. Your staff are working for you to make a profit. Using an award interpretation app to easily keep track of your employees’ awards and pay rates will help you stay on top and ensure they're receiving the correct pay rates — they’ll appreciate it!
Photo by: RosterElf
Takeaway: Utilize the appropriate tools and resources
If you want to increase sales, you need to spend money on marketing, and the same goes for increasing operational efficiency. In this case, a staff management system is an essential tool.
- Save up to 4% on Labour Costs
- Drive Employee Accountability
- Reduce Employee Time Theft
- Roster by Skillset
- Manage payroll by keeping track of employee work hours
- Create cost analysis reports by compiling data
If you’re ready to get started and reduce your restaurant's labour cost, you can sign up for a free 30-day trial here.