The cost of living is on the rise and so are the total operating costs for restaurant businesses. Besides food costs and rent, payroll is at the top of any restaurateur’s mind.
To maximize your profit margins, it’s wise to go over your restaurant labor costs. Are you dealing with a staffing shortage, or do you need to cut back on overtime wages for a healthy-looking bottom line?
Below, we explain how to calculate restaurant labor costs and other related expenses. You’ll also learn potential factors that hike up staffing expenses and ways to save.
As the name suggests, restaurant labor costs refer to the total amount of money your restaurant spends on labor to generate revenue for your food service business.
The total labor cost includes both salaried and hourly employees. It’s typically comprised of:
Wages
Overtime
Bonuses
Payroll taxes
Employee benefits, like healthcare insurance and sick leave
Once you know your total labor costs, you can use that figure to determine metrics like restaurant labor cost percentage and prime cost.
Your restaurant labor cost percentage tells you how much you’re spending on labor in relation to your total sales (or the money you’re bringing in). We’ll discuss this more below.
Your prime cost adds together your labor expense and your cost of goods sold (COGS) — such as the cost of ingredients, beverages, and to-go packaging. Knowing your prime cost gives you insight into your restaurant operations’ efficiency.
Minimizing your labor costs will maximize your overall revenue and profits. Your restaurant labor cost percentage can help you determine if your labor costs are too high.
Here’s how to calculate your restaurant labor cost percentage:
Add up the total labor cost for a specific period, for example, in the month of September.
Add up the total sales made in the same period, which you can get from your point-of-sale system (POS system). (Tip: If you’re using KioskBuddy, it directly connects to the Square for Restaurants POS.)
Divide the total labor cost by the total sales made, and multiply by 100.
As a rule of thumb, your labor cost percentage should not exceed 30%. Of course, this is just the industry benchmark, and the exact figure will depend on the type of restaurant you’re running. For example, a one-man-show food truck will likely have a lower labor cost percentage than a full-service restaurant with 20 people on staff.
If you’ve set up a system for analyzing your business analytics, use the data to your advantage. Forecast when you need to invest in more labor and when to cut down on staffing so that you maintain a healthy labor percentage according to your business needs.
Do you find your restaurant labor costs increasing? Below, we share two top causes that you may want to be aware of. Spoiler alert: One’s more within your control while the other isn’t.
Depending on where your business operates, minimum wage laws will have an impact on your total labor costs. For instance, states like California and Oregon require more than $10 per hour in employee compensation. Meanwhile, the mandate for other locales, like Alabama and Georgia, can be as low as $2.13.
The minimum wage may also depend on the size of your business or the individual role. For example, in California, small businesses with fewer than 26 workers pay a lower rate of $14 per hour than the standard hourly rate of $15. Also, the minimum wage in Connecticut is $6.38 for restaurant workers but needs to be at least $8.23 for bartenders.
Minimum wage requirements are not something you can control as a restaurateur. To meet this expense head-on, you can either raise the prices of your menu items or lower your labor costs by using some of the tips we’ll discuss later.
High employee turnover in the food service industry hikes up your labor expenditures. You lose out on the investment you had made in training your old employees, and now you incur the costs of hiring and training new staff.
Compared to casual and fine-dining restaurants, fast-food joints are hit the hardest by high turnover rates. That’s probably because adolescents often take on part-time work at these places for a short period of time. Many high schoolers and college students also work as summer employees at fast food chains while on vacation. Once school starts or other commitments arise, they quit, leading to a spike in employee turnover.
At this point, you’ve calculated your restaurant labor costs. Unfortunately, the numbers aren’t looking good as they are higher than the norm — or your projections for your restaurant’s profitability. So, does that mean you have to start letting go of employees?
Before you resort to laying off half of your kitchen staff, we want to share a few other ways to help you save on your restaurant labor costs.
Businesses in the food industry, particularly fast-casual and quick-service restaurants, can — and should — leverage technology to help them streamline their labor costs. For example, dishwashing technology may mean you hire fewer dishwashers, or none at all, to keep your plates and cutlery clean.
Another example would be a labor-saving, self-service kiosk like KioskBuddy. It automates customer-facing tasks — namely, order-taking and payments. Plus, its easy-to-use and intuitive interface guarantees fuss-free, frictionless customer interactions.
A tool like KioskBuddy can help you lower your restaurant labor costs in more ways than one. For instance, KioskBuddy’s self-ordering system means you can do without front-of-house staff if you’re on a tight budget. This is perfect for lean business models like food trucks, carts, and pop-up stands.
On the other hand, if you already have front-of-house staff, KioskBuddy helps free up that labor for other restaurant duties when needed. Instead of only handling orders and payments, your cashiers and servers can focus on delivering a seamless dining experience even during peak hours.
KioskBuddy also connects with Fresh KDS (a Square-compatible kitchen display system). This setup optimizes your restaurant labor’s efficiency in the following ways:
Less room for error when it comes to order-taking, so there’s a reduced likelihood of wrong orders and greater odds of satisfied customers
Better communication between the front and back of house in a timelier manner, which helps speed things up during peak periods
Increased kitchen efficiency as your kitchen staff has all the information they need in one place to prepare the orders
As a bonus, customers are likely to order more when they don’t have to wait in line, and a self-service kiosk accelerates the ordering and transaction processes to reduce waiting time. You can even customize your kiosk to cross-sell and upsell related menu items as customers make their selections in real time.
Cross-training is a valuable tool in keeping restaurants’ labor costs low. Plus, it can be easy for your staff to pick up the skills. For instance, if one of your servers has called in sick, a busser can take over ordering and serving on top of their usual duties of clearing and setting tables.
Cross-training gives your restaurant the flexibility it needs to keep the operations running smoothly without incurring extra labor expenses. Enhanced operational efficiency naturally leads to increased restaurant profits.
As a bonus, cross-training expands your employees’ skill set and helps them feel they are advancing in their careers. Pitching in to help each other out also emphasizes team spirit. This could have a positive spillover to employee retention for a lower — and less costly — turnover rate.
Nothing hikes up your restaurant labor costs more than unexpected overtime expenses. So, it makes sense to keep your employees’ overtime hours to a minimum whenever possible. Plus, overworked employees are more likely to quit on you and worsen the existing issue of employee turnover, costing you more dollars on top of the burgeoning payroll.
Besides a well-organized staff schedule, other tactics we’ve listed in this post can also help pare down your overtime costs. Going back to the earlier point on cross-training, a busser who can take up serving duties at a moment’s notice means you don’t have to pull in an extra set of hands or ask someone else to do a double shift.
Plus, self-service technology like KioskBuddy eliminates the need for staff to man the counters all the time, so you can achieve a counter-service concept. This way, there’s a lower risk of overtime incurred to realize your dream of reduced labor costs.
If your budget allows, you can also look into restaurant scheduling software to create and plan a staff schedule that will minimize your overtime expenses.
As a restaurant owner, understanding restaurant labor costs and how to keep them low is essential to your profit margins. It begins with calculating your restaurant labor cost percentage, and keeping your eyes peeled for potential culprits that may spike it.
If you find your labor cost percentage isn’t where you want it to be, consider the various ways we’ve talked about to bring it down. The good news is, you don’t necessarily have to let go of your staff, which is a difficult decision for most restaurateurs. Instead, look for opportunities to cross-train your staff and keep overtime costs to a bare minimum.
Of course, simple, uncomplicated software technology like KioskBuddy can be immensely helpful in your quest to lower restaurant labor costs. By automating the order-taking and payment processes, you’re in a position to hire less staff and have more flexibility in reshuffling employees where they are needed most.
Start your 30-day free trial with KioskBuddy today.