There are a few major costs in any restaurant business, including your equipment, inventory, utilities and your point-of-sale (POS) system. There’s one other cost that absolutely must be managed properly, and that’s labor cost.
Labor cost is one of your most important costs for a variety of reasons. Firstly, it is one of your largest expenses and makes up an important part of your restaurant’s prime cost - the key metric in determining how profitable your business is.
Secondly, labor cost is important because it's where you spend money on your employees. Your restaurant staff are the people who make high-quality food, provide superior customer experiences and, ultimately, help you to make your restaurant what it is.
The challenge, however, is that labor costs can be difficult to control. Whether it's increases to minimum wage, finding and keeping employees, investing in new payroll technologies or finding new ways to remain profitable, restaurants must constantly find new ways to reduce labor costs to improve profitability.
Before we get into some techniques that will help your restaurant reduce labor costs without sacrificing talented employees, let’s first take a quick look at what restaurant labor cost actually is.
What is restaurant labor cost?
Labor costs are typically the highest costs associated with owning a restaurant, and is the total amount of money you spend on all labor-related costs. That includes salaries, wages, healthcare, benefits, taxes, bonuses, overtime, temporary workers and many others.
Calculating your total labor costs as a percentage helps your restaurant to understand how much money you spend on labor to produce revenue. This can be done in several ways:
- Labor cost as a percentage of total sales: total labor cost divided by total sales.
- Labor cost as a percentage of operation costs: total labor cost divided by total operating costs.
In general, most restaurants aim to keep labor costs between 20 and 30 percent of gross revenue. However, this will depend entirely on the restaurant. High-end table service restaurants will likely have higher labor cost percentages than fast food establishments.
Effective ways to reduce labor cost
Since labor costs are one of the highest costs associated with managing a restaurant, it’s important to measure and analyze this metric closely. Failure to do this could seriously impact your restaurant’s ability to turn a profit.
Thankfully, there are some effective ways that you can reduce labor costs without sacrificing team members from your restaurant. In fact, taking a few steps to reduce labor cost will not only improve your employee experience, it will have huge benefits for your restaurant - from improved employee retention and better experiences for your customers.
Here are five effective techniques your restaurant can use to reduce labor costs.
Control employee attrition: Turnover rates in the hospitality industry are notoriously high, but that doesn’t mean your restaurant needs to follow suit. These high turnover rates can dramatically increase your labor spend, and make managing a successful restaurant a far more difficult task. You can avoid the high attrition rates associated with the sector by focusing on retention techniques, such as rewards, recognition and promotion opportunities. You can learn more on our blog, 5 Ways to Improve Restaurant Staff Retention.
Automate your back-end processes: To run a successful restaurant, you need accurate insights into all of your operational processes. This includes everything from employee time clocking to inventory management. Your employees will be in charge of managing these processes, so make sure you are using highly-effective and automated technologies that make it easy for your team to record this data. By automating these processes you’ll save employee time, and, in turn, company money.
Take your time filling open positions: It can be easy to fall into the trap of filling open positions as quickly as possible, particularly when you urgently need a new team member. The benefits of holding out for the right person, however, are second to none. Waiting for the right employee will reduce the likelihood of them leaving your company and reduce the amount of training they need, saving your business time and money.
Measure and analyze labor reports: Measuring and analyzing labor reports will allow your restaurant to review important data that ensures your business is never over or understaffed at specific times of the day, days of the week or seasons. This insightful data will give you the strategic information you need to better schedule your team.
Train your existing employees: There are two benefits of taking the time and money to train your existing employees instead of hiring new ones. Firstly, your team members are more likely to stay with your business if they know you’re willing to invest back into them and help them progress up the career ladder. Secondly, it’s far cheaper to train existing employees than it is to go through the process of hiring new employees.
Want to learn more about improving profitability within your restaurant business? Contact Sculpture Hospitality today. Our team of experts would love to talk about techniques you can use to improve the back-end operations of your business, including efficient inventory management strategies.