How to run a restaurant – cost of labor
Awareness of labor costs
Controlling labor costs is one of the most important factors in running your business.
Chances are, if you’re not monitoring your labor, you’re most likely losing revenue.
What is cost?
Cost is the total cost of goods sold, gross labor costs for all of your employees, which includes wages, payroll taxes, worker’s compensation, medical insurance, and other employee benefits. For a fast food or casual food and beverage establishment, a good indicator of cost is 60% or less of food and beverage revenue.
Learning what your restaurant’s cost is should be at the top of your to-do list.
Do you know the labor cost formula?
Wages divided by total sales = labor rate
The average labor rate in most restaurants should be at 20 to 25% for hourly employees and 10% for management.
The luxury restaurant will have a higher labor rate. Menu sales mix, food and service quality, pricing, and hours of operation will affect your food and labor cost percentages.
How to maintain a good labor cost ratio?
Train your management staff on how to effectively supervise your employees.
It all starts with creating the restaurant schedule
Don’t just schedule employees to fill shifts, schedule enough employees to meet your guest with exceptional service.
Create a reasonable schedule that makes sense. Have management maintain a log of managers in the office; make sure you enter sales figures that exceed projected sales.
Community events also play a huge factor. See if you can get a school calendar to keep up to date with school plays and other events.
Know what’s happening in the neighborhood like:
- Sport events
- Do you know the theater show times, what time they start?
Chamber of Commerce: The Chamber of Commerce is a great way to find out what’s going on in your area. Look up your state or local chamber of commerce, there are all kinds of events posted on the community board.
Supermarkets are a great way to know what’s going on in your neighborhood.
How can I keep my labor rates low?
- Appropriate staff training: The better the training, the less the errors change. Make sure you have a great training program. Training the trainers is a great way to show trainers what is expected of them. Each position must have a designated person to train staff members, each trainer must be properly trained by hand and conduct tests. Trainers should not train your employees unless they demonstrate learning skills and techniques, those employees should train your employees the way you want them to be trained. Management should monitor the training to ensure that it is being done properly.
- Cross training: Cross train dishwashers at the fryer station or bus tables. The host or hosts may assist the servers with drink orders or food delivery to the guest. Ready chefs can be trained as a chef. The point is that during peak hours you can move employees to different positions when sales are higher than normal or if the servers are in the weeds. Cross-trained employees can work multiple positions during off-peak hours, so you can have minimal staffing during slow periods.
- Experienced employees: Teaching staff how to do their jobs to the best of their ability will create WOW EFFECT as long as they are consistent and experienced.
- Proper shift management: Who trains the managers? – Owners must be involved in the day-to-day running of their restaurant. There are several ways to learn management. When looking for a manager for your restaurant, make sure they have previous experience and that reference checks have been done. Either the owner can train the employee, or you can look for a restaurant consultant to train staff members through hands-on training or through the Internet. Once the management staff is properly trained, then they can train the rest of the staff on how to deliver EHA service to each of your guests.
- Know what your hourly labor rate is: Owners or management should know how they stand in terms of hourly labor rates. You can derive your restaurant sales by taking a point of sale (POS) reading, the same goes for labor dollars. Then you divide payroll dollars by total sales = labor percentage. A good benchmark for labor would be 20 to 25% for hourly employees and 10% for management. If you’re using a paper checkout system because you don’t have a POS, track your sales and labor by hours. Create a sales and labor journal so you can record sales and labor. Both the owner and management can count the numbers or use the housekeeper to count guest checks by the hour, and management can extract the labor dollars. Remember, don’t lay off employees before a meal period. Servers will try to convince management to lower the floor because they will make more money, there must be enough staff to accommodate your guest with exceptional service. At the end of each meal period, management must give instructions to staff regarding their side work and the closing of their designated areas. These staff members should not be on time – don’t let them milk the clock – it’s your money that’s being wasted.
- Don’t overstaff the restaurant: Overstaffing the restaurant would be very expensive. If you overstaff employees, make sure you react quickly by sending employees home early if sales aren’t happening.
- How to create a reasonable schedule? Know what your estimated labor dollars are and divide them by last week’s sales or use a rolling figure in sales dollars.
- Current Sales: Add up the last three weeks of restaurant sales and divide by 3.
Example: If you are in week four, then add week one ($1552.00), week two ($1932.00) and week three ($2405.00) = $5889.00. Divide labor dollars $1300.00 by sales $5889 =22%. Use the 22% to guide you in creating a reasonable schedule.
After creating a schedule, if the planned labor exceeds 25%, then you need to make adjustments. If the percentage is below 20%, then you can add more hours to the schedule.
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