Find out How to Calculate Restaurant Labor Cost Percentage

Calculating Labor Cost Percentage

Labor costs are the highest cost a restaurant incurs. This makes labor cost percentage an important metric to calculate and track. With total labor costs comprising 30-35% of the restaurant revenue, calculating them accurately is critical in ensuring you are not making unnecessary losses. This article will explain this concept in more details;

  • What are restaurant labor costs?
  • How to calculate restaurant labor cost percentage?
  • What is the ideal restaurant labor cost percentage?
  • Ways of lowering labor costs in a restaurant. 

What are restaurant labor costs?

Restaurant labor costs are the total dollar amount that your business spends on labor. This includes the pay made to both hourly wages and salaried workers, employee benefits, and taxes. This amount has a direct impact on prime cost, which is a key metric used in examining the efficiency of the restaurant. Other expenses that form part of labor costs include health care, payroll taxes, overtime, bonuses, sick and vacation days.

Restaurant Labor Cost

How do you calculate restaurant labor cost percentage?

Anything in a restaurant classified as labor-related is considered when calculating restaurant labor cost percentage. Although there are several ways of calculating labor costs percentage, an effective approach is basing the calculation on hours worked. You can easily determine your restaurant labor costs after a shift. You can then use this data to make future predictions and schedule your staff accordingly. You can calculate labor costs percentage using the following methods:

Percentage of Sales

One of the approaches used to calculate restaurant labor cost percentage is basing it on the restaurant’s total sales:

Restaurant Labor Cost Percentage

  1. Determine the number of guests in your restaurant at a specific period of time: You could be having an average of 50 guests between 4 and 5 pm.
  2. Estimate the number of staff needed to serve them:  You could have 2 cook hours, 3 server hours, and 3 host hours serving the 50 guests.
  3. Determine the cost of each hour. If the cook’s average pay is $15, then the total cost is $30 ($15 multiply the number of cooks). The average wage of $5 for the servers means the total cost is $15, and the average cost of $8 for hosts means the total cost is $24. 
  4. Determine the average check per guest. The average price per guest in your restaurant may be $12.
  5. Calculate Your projected labor percentage. The first step is determining the projected sales of your guests (50 guest x 12 average selling price = $600). You can work with weekly sales, monthly, or even yearly. Then find the project labor dollar that was used on these guests (30+15+24=$69).  For you to get the labor cost percentage, diving the labor dollars amount by the total sales (69/600 = 11.5%). 

Percentage of Total Operating Costs

An alternative method for calculating restaurant labor cost percentage is basing it on the operating costs. The steps in this approach are slightly different as follows:

  1. Determine the labor cost of your restaurant. This is the amount of money that the restaurant has spent on paying staff over a specified period of time.
  2. Calculate total operating costs. This includes all the cost incurred in operating the restaurant business, excluding the sales, rent, making, feed and beverage.
  3. Divide the labor cost by the operating cost to find the labor cost percentage. For instance, if the labor costs for the week was $3,000 and the total operating cost was $11,000, then the labor percentage was 27% (3,000/11,000).

What is the ideal restaurant labor cost percentage?

The ideal percent of your restaurant labor costs should be less than 30% of the business gross sales. Although the ideal percentage differs depending on the restaurant industry (quick service, fast-casual, dining, or fast food restaurants), the lower it is the better the restaurant’s bottom-line.

Different restaurant types have different costs, but lowering costs should always be a goal. If you combine it with food costs, the ideal total percentage for food and labor costs (prime costs) should be less than 60%. 

Ways of lowering labor costs in a restaurant

When it comes to lowering labor costs, most restaurant owners tend to think of scheduling fewer shifts and paying their employees less. While this can be one approach, there are some better and more creative ways of achieving this:

  • Use a clock-in reinforcement feature of the POS system. This allows you to pay employees based on when they start working rather than when they clock in.
  • Understand overtime rules. You can reduce your labor costs significantly by hiring and scheduling enough employees to avoid having to pay work time. This will allow you to keep minimum wages that do not deplete your revenues. 
  • Offer staff bonuses to discourage absenteeism.
  • Go paperless. Using a restaurant payroll system will remove all the tedious pen-and-paper process.
  • Schedule split shifts: Reduce costs by scheduling split shifts with willing employees to amply staff at the right times. Scheduling software can help in implementing effective split shifts. 
  • Cross-train your employees. This allows your employees to perform multiple roles, reducing the cost you would have incurred in hiring two employees for two related tasks.
  • Keep an accurate tally of hours worked. You can spot potential saving time by comparing scheduled hours against the actual hours worked. 

As you familiarize yourself with calculating restaurant labor cost percentage, also focus on how to keep the percentage minimal. Keeping this percentage small helps in achieving higher profits.

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