Managing your operating costs (like restaurant labor, rent or lease, utilities, and food) is paramount in the ever-competitive restaurant industry. Understanding the labor cost percentage, a vital metric that reflects the relationship between labor costs and overall expenses, can significantly impact your restaurant’s financial health.
With hourly wages and labor costs being a significant component, knowing how to calculate your restaurant labor cost percentage becomes crucial. What are the average labor costs, and how to lower labor costs?
In this article, we’ll guide you through calculating your restaurant’s labor costs, providing essential insights to help you control labor costs and operate your establishment more efficiently.
With the increasing push for higher minimum wages at both the state and federal levels, restaurant owners and managers are becoming increasingly focused on monitoring the percentage of labor costs in their establishments. To effectively manage their restaurant operations, they must maintain precise control over their labor costs and employ the appropriate tools for expense tracking.
The ongoing turnover of employees within the restaurant industry is exacerbating the problem of staffing shortages. The cost of hiring and training an employee is high, so restaurant owners pay attention to labor costs and the possibilities of reducing them.
One of the trends in recent years, which was largely influenced by the pandemic outbreak, is the ability to place online orders with delivery. Thanks to online ordering systems for restaurants, it’s possible to simplify order fulfillment as much as possible, and one employee, instead of more people, can accept orders and forward them to the kitchen instead of answering phone calls, significantly reducing labor costs.
What is restaurant labor cost?
Labor cost in a restaurant encompasses the expenditures linked to compensating the workforce within a restaurant. It is one of the prominent operational expenses for a restaurant and encompasses the remuneration of various staff categories, including:
- Front-of-House Staff: This group comprises servers, bartenders, and hosts/hostesses.
- Back-of-House Staff: Comprising chefs, cooks, dishwashers, and kitchen personnel responsible for food preparation and dishwashing.
- Management: Restaurant managers, supervisors, and administrative staff.
Labor costs typically encompass:
- Base Wages: The hourly or salary wages paid to employees.
- Overtime Pay: Additional wages granted to employees working beyond their regular hours.
- Benefits: Encompassing expenses tied to employee benefits, such as health insurance, retirement plans, and paid time off.
- Taxes: Employer-related taxes, including payroll taxes and workers’ compensation insurance.
Effective management of labor costs in a restaurant is paramount for the financial well-being of a restaurant. Higher labor costs to revenue can diminish profitability, whereas insufficient staffing may result in subpar customer service.
How to calculate restaurant labor costs?
To calculate restaurant labor costs, you need to sum up all costs associated with your workers for a given time period (for example, for a month). Take into consideration the following:
- Employee wages or salaries (hourly or salary rates)
- Benefits costs (e.g., health insurance, retirement plans, paid time off)
- Payroll taxes and any other labor-related expenses
Example of calculating labor costs for a restaurant
Let’s assume you have the following staff in your restaurant:
- You have 5 servers who each get paid $10 for every hour they work. They work 40 hours a week. You also spend $50 weekly on their health insurance and must pay 5% of their wages for taxes.
- You also employ 3 cooks who earn $12 for each work hour. Like the servers, they also work 40 hours a week, and you pay $50 per week for their health insurance. You also have to pay 5% of their wages for taxes.
- You have a restaurant manager who receives a yearly salary of $50,000. That’s about $961 every week. The manager also gets $100 weekly for health insurance; you pay 5% taxes on their salary.
Let’s see how to calculate labor costs for this restaurant for each week
- For Servers:
Weekly wages per server: $10/hour * 40 hours/week = $400/week
Weekly health insurance per server: $50/week
Weekly labor cost per server: $400/week + $50/week = $450/week
Total weekly labor cost for 5 servers: $450/week * 5 servers = $2,250/week
- For Cooks:
Weekly wages per cook: $12/hour * 40 hours/week = $480/week
Weekly health insurance per cook: $50/week
Weekly labor cost per cook: $480/week + $50/week = $530/week
Total weekly labor cost for 3 cooks: $530/week * 3 cooks = $1,590/week
- For the Restaurant Manager:
Weekly manager’s salary: $50,000/year ÷ 52 weeks/year = $961.54/week
Weekly health insurance for the manager: $100/week
Weekly labor cost for the manager: $961.54/week + $100/week = $1,061.54/week
Now, use this restaurant labor cost formula to calculate labor costs:
Total weekly labor cost = Total cost for servers + Total cost for cooks + Cost for the manager
Total weekly labor cost ≈ $2,250 + $1,590 + $1,061 ≈ $4,901
Your restaurant’s total weekly labor cost is approximately $4,901.
You can calculate monthly or yearly costs by multiplying this weekly cost by the number of weeks in a month or a year.
Remember that these are sample numerical values, and the purpose is to show how you can calculate total labor costs for restaurants.
What is the restaurant labor cost percentage?
The restaurant labor cost percentage is a critical financial metric in the hospitality industry, indicating the proportion of a restaurant’s total revenue spent on labor-related expenses.
This percentage offers valuable insights into labor efficiency and its impact on a restaurant’s profitability, helping owners and managers make informed financial decisions in a competitive market.
How to calculate labor cost percentage?
You can calculate the restaurant labor cost percentage in two ways: as a percentage of sales or total operating costs.
Restaurant labor cost as a percentage of sales
To calculate a restaurant’s labor cost percentage referring to sales, divide total labor cost by total revenue and multiply it by 100.
Example of calculating labor cost percentages
Let’s consider “Ninja Grill,” a restaurant, with the following financial data for a specific month:
- Total labor costs (comprising wages, benefits, and taxes) for the month: $12,000
- Total revenue (sales) generated during the same month: $40,000
To calculate the labor cost percentage of sales, use the following formula:
Labor Cost Percentage = (Total Labor Costs / Total Revenue) * 100
In this case:
Ninja Grill’s Labor Cost Percentage = ($12,000 / $40,000) * 100 = (0.30) * 100 = 30%
Thus, Ninja Grill’s labor cost percentage for that particular month is 30%. This signifies that 30% of their sales revenue covered labor expenses during that specific month.
Restaurant labor cost as a percentage of total operating costs
Calculating restaurant labor costs as a percentage of total operating costs is the second most popular restaurant labor cost percentage formula. To calculate the labor cost percentage, divide labor cost by total operating costs and multiply it by 100.
Example of calculating labor cost percentage of total operating costs
Let’s say a restaurant named “John’s Bistro” has the following financial data for a specific period, let’s say, a month:
- Total labor costs (including wages, benefits, and taxes) for the month: $10,000
- Total non-labor operating costs (covering expenses like rent, utilities, ingredients, marketing, and other overhead expenses) for the same month: $25,000
To find John’s Bistro’s labor cost percentage of total operating costs, you can apply this formula:
Labor Cost Percentage = (Total Labor Costs / Total Operating Costs) * 100
In this example:
John’s Bistro’s Labor Cost Percentage = ($10,000 / $25,000) * 100 = (0.40) * 100 = 40%
Therefore, John’s Bistro’s labor cost percentage for that specific month is 40%. This reveals that labor expenses constituted 40% of their overall operating costs.
What overall expenses are attributed to labor costs?
According to Chron, which quotes the White-Hutchinson Leisure & Learning Group’s CEO, a restaurant should aim to keep its labor and food costs below 60 percent of the revenue generated, with labor costs ideally staying under 30 percent of the revenue.
What is a good labor cost percentage?
There are differences in the ideal labor cost percentage between different types of restaurants, for example, operating a full-service, fine-dining restaurant typically results in a higher labor cost percentage than running a casual dining establishment.
To ensure the profitability of the restaurant, labor costs should be as follows, depending on the restaurant type
- Fast food restaurants usually aim for reduced labor costs at the level of 25% to 30%
- Casual dining restaurants rather target 30-35%
- Fine dining restaurants have higher labor cost percentages and aim to keep them between 35% and 40%
As a rule of thumb, restaurants strive to maintain their labor cost percentage within 25% to 35% of their total revenue.
How to manage restaurant labor costs?
Managing restaurant labor costs effectively is crucial for maintaining profitability while providing quality service. Below are some helpful strategies to keep labor costs lower:
- Forecast and schedule wisely: Ensure accurate customer demand forecasting and create well-balanced staff schedules. Focus mainly on scheduling more staff during peak hours and fewer during slower periods to avoid overstaffing.
- Cross-train staff: Foster flexibility in your workforce by cross-training employees to handle multiple roles. When team members can seamlessly switch between tasks as needed, you optimize staffing levels during both busy and slow times, reducing the necessity for excessive hiring and training.
- Optimize staffing levels: Regularly evaluate your staffing levels to ensure they align with customer demand without leading to overstaffing. Striking the right balance between delivering quality service and controlling labor costs is essential.
- Enhance employee retention rate: The restaurant industry is often plagued by high turnover rates, increasing labor costs. New employees need time and training to start working in the new environment. This leads to a much higher labor cost that could be lowered by reducing the turnover rate.
- Control overtime costs: Minimize the impact of overtime pay on labor costs by implementing clear overtime policies and encouraging employees to take breaks at appropriate intervals. Efficiently managing staff schedules to reduce the need for overtime work and ensuring compliance with labor laws is vital.
- Automate time and attendance tracking: Enhance accuracy in recording employee hours by implementing automated time and attendance tracking systems. This minimizes payroll errors and prevents time theft. Here you can check the examples of the restaurant scheduling software you can use.
- Implement bonus incentives to decrease absenteeism: You can reward employees for exceptional performance, such as consistently receiving positive customer feedback or achieving sales targets, offering bonuses to employees with excellent attendance records, or sharing a portion of the restaurant’s profits with employees based on their role and contribution.
- Use the latest restaurant technology trends: Create a restaurant website and implement an online ordering system to let your customers order online. Enable table ordering in your restaurant to allow customers to browse your menu on their smartphones, place orders, and pay online.
These are just a few methods that impact labor costs and help to ensure profitability while upholding high-quality service.
Here you can check more information on how to reduce labor costs in a restaurant.
- Calculating your restaurant labor cost percentage is vital in the restaurant industry. It reveals how much of your revenue is spent on labor, a significant component of your prime cost.
- To calculate labor cost percentage, divide total labor costs (wages, benefits, taxes) by total revenue and multiply by 100. Another calculation method is dividing total labor costs by total operating costs and multiplying them by 100.
- Restaurants often aim for a lower labor cost percentage, ideally between 25% and 35%.
- Food and labor costs are the primary components of prime cost. Controlling these costs is essential for a restaurant’s financial health.
- Understanding how individualized labor costs affect your business allows for tailored adjustments to optimize staffing levels and maintain a desirable labor cost percentage.
Frequently Asked Questions (FAQ)
A restaurant’s target labor cost percentage can vary depending on the type, location, and business model. However, as a general guideline, many restaurants strive to maintain their labor cost percentage within 25% to 35% of their total revenue.
According to Chron, a restaurant should keep its labor costs below 30 percent of the revenue.
The labor cost of a restaurant can significantly fluctuate, contingent on factors such as restaurant type, geographical location, menu complexity, and managerial approaches.
Nonetheless, as a general guideline, numerous restaurants strive to maintain their labor cost percentage within 25% to 35% of their total revenue.
No, labor and food costs are separate components of a restaurant’s overall expenses, and they are not included in each other.
Food cost pertains to all your expenses associated with procuring and preparing the food and beverages offered by the restaurant. It includes the following expenses
- purchasing ingredients
- raw materials
- food preparation activities
- kitchen-related outlays
Conversely, labor cost encompasses the outlays associated with compensating employees contributing to the restaurant’s operations. This category covers
- front-of-house personnel (servers, bartenders, hosts/hostesses)
- back-of-house staff (including chefs, cooks, and dishwashers)
Labor cost constitutes another substantial component of the restaurant’s prime costs.
Labor cost per meal is a critical metric in the restaurant industry, revealing the average expenditure on labor associated with preparing and serving a single meal.
To calculate this figure, you consider total labor costs, encompassing wages, benefits, and related expenses, and divide it by the number of meals served during a specific period.
- For quick service restaurants: 29.4%
- For fast-casual restaurants: 28.9%
- For casual restaurants: 33.2%
- For upscale casual restaurants: 30.4%
- For pizza restaurants: 31.3%