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How to Calculate Your Restaurant Labor Cost Percentage

9 Minutes Read

Calculating Your Restaurant Labor Cost: Managing Labor Costs and Labor Cost Percentage

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This article explores innovative strategies to optimize staffing, leveraging data for smarter scheduling and fostering a culture that empowers your team.  Discover how engaged employees can become revenue drivers, not just expenses. From rising restaurateurs to seasoned veterans, this guide equips you to unlock the true potential of your workforce and transform labor costs into a profit engine.

Further reading: Mastering the Restaurant Balance Sheet: Tips, Template & POS Strategies

How can restaurants effectively manage labor costs?

What Are Restaurant Labor Costs?

Restaurant labor costs encompass all expenses related to the staff, including wages, benefits, payroll taxes, and other associated costs. These costs include wages for chefs, waitstaff, managers, and support staff such as dishwashers and hosts.

Also, labor costs cover employee benefits like health insurance, paid time off, and retirement contributions, as well as overtime pay and training expenses. Knowing your labor cost percentage is vital because it directly impacts the restaurant's bottom line and profitability.

The Good Restaurant Labor Cost Percentage

The ideal restaurant labor cost percentage ranges between 20% and 35% of total sales. This percentage varies based on the type of restaurant, location, and level of service.

For example, fine dining restaurants usually have higher labor cost percentages due to specialized staff and higher service levels, while quick service restaurants often have lower labor costs.

Keeping labor costs within this range helps restaurant owners maintain profitability and operational efficiency. Benchmarking against the industry standard can help improve efficiency and profitability.

How to Calculate Your Restaurant Labor Costs

  1. Direct Costs: These are wages, salaries, and benefits for all employees, including chefs, waitstaff, managers, and other staff. Direct costs include hourly wages, salaried positions, and any bonuses or commissions paid to employees.
  2. Indirect Costs: These include payroll taxes, health insurance, employee benefits like paid time off and retirement contributions, and other related expenses. Indirect costs also cover overtime pay and the cost of training and cross-training employees.

Formula to Calculate Restaurant Labor Cost Percentage

The labor cost percentage is calculated using the following formula:

Labor Cost Percentage = (Total Labor Costs/Total Sales) × 100

For example, if your total labor costs for a time period are $50,000 and your total sales for the same period are $200,000, your labor cost percentage would be:

Labor Cost Percentage = (50,000/200,000) x 100 = 25%

This means that 25% of your total sales revenue is spent on labor costs.

Strategies to Optimize Labor Costs

Efficient Scheduling

Use scheduling software to match staffing levels with expected customer demand. This approach helps to reduce your labor costs by avoiding overstaffing during slow periods and ensuring adequate coverage during peak times.

Tools can automate the scheduling process, track employee availability, and adjust shifts to optimize labor costs as a percentage of sales. Efficient scheduling minimizes unnecessary labor hours and supports better labor management.

Cross-Training Staff

Train restaurant employees to handle multiple roles, such as having a server also trained as a bartender or a cook. This flexibility allows you to adjust staffing based on immediate labor needs without hiring additional staff.

Cross-training helps reduce restaurant payroll expenses and prepares your team to fill in when someone calls in sick, ensuring continuous service. This strategy also lowers employee turnover by providing variety and growth opportunities for your staff.

Monitor Performance

Regularly review labor reports and analyze key metrics like labor cost as a percentage of total sales, average hourly wage, and overtime hours. Calculating your labor costs frequently helps identify inefficiencies and areas where you can cut costs without compromising service quality.

Using POS systems to generate detailed sales reports can provide insights into employee performance and highlight areas for improvement. Effective monitoring allows restaurant operators to make data-driven decisions to reduce labor costs.

Use Technology

Implement automated systems such as POS, inventory management, and payroll processing to streamline operations. Using restaurant technology like integrated point of sale systems can reduce manual errors and save time on administrative tasks.

These tools help calculate labor costs accurately and improve efficiency. For example, accounting software can simplify payroll taxes and benefits management, contributing to lower operating costs. Adopting advanced restaurant technology supports better labor management and enhances overall profitability.

Further reading: Learn About the Benefits of a Chart of Accounts for Restaurant

Importance of Labor Cost Management

Proper labor cost management is essential for maintaining profitability in the restaurant industry. Effective labor management allows restaurant operators to understand how much they’re spending on labor, which is critical for controlling prime costs (labor and food costs combined).

By managing labor costs well, you can invest in other areas like marketing and menu development, enhancing customer experience and driving sales. Keeping labor costs in check also means you can offer competitive wages and benefits, reducing employee turnover and attracting top talent. In the long run, this balance supports a positive work environment and contributes to higher profit margins.

How Benefits and Taxes Impact Labor Costs

Benefits and payroll taxes significantly impact restaurant labor costs. Costs include health insurance, retirement contributions, and paid time off, which are substantial expenses that must be factored into your labor budget. Payroll taxes, such as Social Security and Medicare, add to the total labor cost and need to be accounted for when calculating labor costs.

Understanding these indirect costs is essential for getting an accurate picture of your restaurant’s labor cost percentage. Properly managing these expenses ensures you can offer competitive compensation packages while maintaining profitability. By effectively managing benefits and payroll taxes, restaurant operators can reduce their labor costs and improve overall financial health.

Streamlining Restaurant Labor Costs with Accountants and Bookkeepers

Understanding and Calculating Labor Costs

To begin, it’s essential to understand how to calculate labor cost percentage. Labor costs include wages, salaries, benefits, and payroll taxes. To find your labor cost percentage, divide your total labor costs by your gross sales, then multiply by 100. For example, if your restaurant spends $10,000 on labor and has $50,000 in gross sales, your labor cost percentage is 20%.

Using Tools and Benchmarks

Tools help track employee hours, reducing the need to schedule unnecessary shifts. Also, understanding the industry benchmark for labor costs allows you to compare your performance against other fast-food restaurants or hospitality businesses. The average labor cost should be between 25-30% of total revenue.

Strategies for Lowering Labor Costs

Accountants can identify areas to cut costs without compromising service. They recommend ongoing training for staff to focus on efficiency, minimizing overtime pay, and utilizing time and a half only when necessary. Implementing a restaurant prime cost strategy, which combines COG and labor costs, offers a comprehensive view of overall expenses.

Benefits of Professional Management

With accurate calculations and strategic scheduling, restaurateurs can better manage their front-of-house and back-of-house teams. Understanding how much you’re spending on labor helps in making informed decisions. By lowering your labor costs, you’ll be able to allocate resources to other essential areas of your business.

Key Takeaways

  1. Learn to Calculate: Read resources to learn how to calculate restaurant labor costs for any time period you want.
  2. Track Time Periods: Accurately track labor costs for the specific time period you want to analyze.
  3. Effective Management: Learn strategies for managing restaurant labor costs effectively.
  4. Calculation Techniques: Learn how to calculate restaurant labor costs to improve profitability.
  5. Optimize Scheduling: Explore methods for optimizing scheduling and reducing labor costs.

How can Taxfyle help?

Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.

At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.

Legal Disclaimer

Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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published

June 3, 2024

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Ralph Carnicer, CPA

Ralph Carnicer, CPA

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