Labor costs. It’s one of the toughest calculations a restaurant owner needs to make — and the decisions you make in the process can guarantee success… or throw your establishment into chaos.
But restaurant labor cost forecasting isn’t like throwing a dart and hoping it lands. There’s a method to the madness that breaks down how much you should be spending on labor, what “counts” as a genuine labor cost, and then how to use your overall sales to forecast out how you’ll need to schedule at any given time.
And it all starts with your total sales.
How much of my total costs should be labor?
In the restaurant industry, ideal labor costs are determined by comparison to your total sales in a given period of time. A common recommendation for restaurateurs is to allocate around 60 percent of their total sales to food and labor, otherwise known as your “prime costs.” The more you spend on labor, the less you have to spend on food, and vice versa, so the general recommendation is not to exceed 30 percent of your total sales on either.
Management salaries should not exceed 10 percent of sales for either full service or quick serve. This amount is included in the 30 percent recommendation, leaving 20 percent of your total sales in a given period for non-managerial staff.
So, for instance, if your restaurant makes $10,000 in a given week in total sales, your labor costs (hourly, salaried, and management combined) should not be more than $3,000 (with another $3,000 allocated to food costs). Of the remaining $4,000 in sales, keep in mind how much goes to rent, utilities, equipment maintenance, upkeep of small wares, and — most critical of all — federal, state, and local taxes.
It’s small wonder why the average restaurateur only manages a profit margin somewhere between two and six percent.
What are the key drivers of my restaurant labor costs?
Central to your restaurant labor costs are hourly wages and salaries for your staff.
You likely pay different employees at different rates, depending on their role and length of service. Most servers will make below minimum wage (The federal government requires a wage of at least $2.13 per hour be paid to employees that receive at least $30 per month in tips. This may be higher in some states and local municipalities, however.).
But your cooks, dishwasher, bussers, hosts, and any other staff not receiving tips will be making at least minimum wage for your local area. To determine the cost of their labor on a weekly basis, multiply the number of hours worked by each individual’s hourly rate, and then add them all together.
x Number of hours worked in a week
= Weekly cost
If any of your hourly employees worked overtime — or you see a certain amount of overtime repeating on a weekly basis — be sure to add that up (at the higher hourly rate) as well.
Your managers are likely salaried, including the head chef or kitchen manager, so the weekly cost of their labor is determined by dividing their annual salary by 52 (the number of weeks in a year).
÷ 52 (weeks)
= Weekly cost
You can then add that total to the total of your hourly paid labor to get your base labor costs. Don’t forget to add in your own salary as an owner, too!
Unfortunately, that’s not all you have to consider when figuring out your total labor costs. The costs associated with any benefits you provide, such as health insurance, employer 401(k) contributions, or paid time off, have to be factored in as well. The base cost (not menu price) of meals you comp your employees is also a significant labor cost, as is laundering and replacing staff uniforms, if applicable.
How can I forecast restaurant labor costs?
Confidently forecasting your restaurant labor costs requires knowing two big things: the individual (per person) costs above, and a reasonable estimation of how your sales fluctuate on a daily, weekly, and monthly basis.
In other words, in order to forecast your front AND back of house labor costs, you need to be able to forecast your restaurant sales, too. There’s a really simple formula to forecasting baseline sales on a per shift or day basis for full service restaurants:
Number of tables
x Average seating per table
x Average ticket size (per person)
x Number of table turns
= Sales estimate
For instance, if your restaurant has 10 tables, with an average of 4 guests per table, who spend $20 per guest on average — and your staff can usually turn each table one time per shift (for a total of 2 seatings) — your calculation will be: 10 x 4 x 25 x 2 = $2,000.
Repeat this calculation for each shift, being really cognizant of how different a Friday night dinner shift may be from a Monday night shift, or how the breakfast crowd orders differently from the lunch crowd. Get as specific as your restaurant traffic demands. It will help you more accurately forecast your needs, saving you money in the long run.
Limited service restaurants without table turns need to rely on patterns of sales they see over a period of time in order to make accurate estimates. A good point-of-sale system should be able to provide this information in digestible fashion, but if you’re starting from scratch (or have not updated your POS), the formula gets simpler:
Number of transactions per shift
x Average ticket size (per transaction)
= Sales estimate
Once you have an accurate understanding of sales per shift, per day, and per week, you can start assessing your labor need. If a shift will make $2,000, and you want to assign 30% of your sales to labor, that’s $600 worth of labor to assign to that shift.
No more than one-third of that should be for managers ($200) and the other two-thirds applied to hourly or other salaried workers ($400).
What if my costs are too high?
If you find that your labor costs are too high compared to your weekly sales (i.e. over 30 percent on a regular basis), it’s probably time to take a hard look at your staffing. You may be scheduling too many employees per shift, or missing opportunities to control costs in three key areas: hiring, training, and career development opportunities.
In the meantime, ask your hourly staff to be sure they aren’t clocking in earlier than 15 minutes before their shift, and that they clock out when their shift is truly over, not 15 minutes later when they have all their stuff ready to leave. Paying a single employee for an extra 15 minutes probably doesn’t seem like much, but paying every one of your employees each for an extra 15 minutes every day can add up to hundreds of dollars very quickly.
Just be aware: some states require employers to pay hourly staff for time to “set up,” particularly when uniforms or other shift change procedures are required, as well as prohibit making employees clock out for breaks and meal time. Please consult your local laws and/or your attorney to get more detailed information.
Want to investigate other ways to keep your labor costs down? Download our free eBook on “How to Reduce Your Restaurant Labor Costs and Save Money” today:
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Rewards Network® does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.