How to Run a Restaurant – Labor Cost

Labor Cost Awareness

Controlling your labor cost is one of the most important factors in running your business.

Chances are, if you don’t control your work, chances are you’re losing income.

What is prime cost?

Prime cost is the total cost of goods sold, the gross labor cost of all your employees, which includes payroll, payroll taxes, workers’ compensation, health insurance, and other employee benefits. For a fast food or casual F&B facility, a good benchmark for primary cost is 60% or less of F&B revenue.

Learn what the main cost in your restaurant should be at the top of your to-do list.

Do you know the labor cost formula?

Payroll divided by total sales = percentage of labor

The average percentage of labor in most restaurants should be twenty for 25% for hourly employees and 10% for management.

The upscale restaurant will have a higher percentage of labor. The combination of menu sales, food and service quality, prices, and hours of operation will impact food and labor cost percentages.

How to maintain a good percentage of labor cost?

Train your administrative staff on how to effectively monitor your employees.

It all starts with creating the restaurant schedule.

Don’t just schedule employees to fill shifts, schedule enough employees to accommodate your guest for exceptional service.

Create a sensible schedule that makes sense. Have management keep a register of managers in the office; Be sure to enter sales figures that exceed projected sales.

Community events also play a very important factor. See if you can get a school calendar to stay informed about school plays and other events.

Know what’s happening in the neighborhood like:

  • events
  • Theater plays
  • Musicals
  • Sports events
  • Know the schedules of the theater performances, what time do they let out?

Chamber of Commerce: The Chamber of Commerce is a great way to find out what’s happening in your area. Look up your state or local Chamber of Commerce, there are all kinds of events posted on their community board.

Supermarkets are a great way to find out what’s going on in your neighborhood.

How can I keep my labor percentages low?

  • Training of own staff: The better the training, the less the change of errors or faults. Make sure you have a great training program. Training the trainers is a great way to show them what is expected of them. In each position there should be a person assigned to train staff members, each trainer should be properly trained and administer questionnaires. Trainers should not train your employees unless they demonstrate learning skills and techniques, these employees should train your employees the way you want them to be trained. Management needs to monitor the training to make sure it is done correctly.
  • Cross training: Train dishwashers at the frying station or serving tables. The host or hostesses may assist servers with drink orders or bring food to the guest. Prep cooks may be cross-trained as a cook. The point is that during peak hours you can move employees into different positions when sales are higher than normal or if servers are in the weeds. Cross-trained employees can handle multiple positions during off-peak hours, that way you can have minimal employees during slow periods.
  • Competent employees: Training staff on how to do their jobs in the best possible way will create the WOW EFFECT as long as they are consistent and competent.
  • Manage shifts correctly: Who trains the managers? – Owners must be involved in the day-to-day running of their restaurant. There are several ways to train management. When looking for a manager for your restaurant, make sure they have previous experience and have reference checks done. The owner can train the employee or you can find a restaurant consultant who trains staff members, either through face-to-face training or via the Internet. Once the administration staff has received the proper training, they can train the rest of the staff on how to provide WOW service to each of your guests.
  • Know what your percentage of work is in the hour: Owners or management need to know where they stand on the percentage of labor per hour. You can recover your restaurant sales by taking a reading at the Point of Sale (POS), the same goes for labor dollars. Then divide payroll dollars by total sales = percentage of labor. A good benchmark for labor would be 20-25% for hourly employees and 10% for management. If you use a paper check system because you don’t have a POS, keep track of your hourly sales and labor. Create a sales and labor record so that you can record sales and labor. Both the owner and management can count the figures or use the hostess to count guest checks per hour and the management can recover the labor dollars. Remember not to cut employees off before any meal period. Servers will try to convince management to downsize because they will make more money, there needs to be enough staff to accommodate your guest with exceptional service. During the end of any meal period, management must give instructions to staff regarding their additional work and the closure of their assigned areas. These staff members must be off the clock on time, don’t let them milk the clock, it is your money that is being wasted.
  • Do not exaggerate restaurant staff: Overstaffing the restaurant would be very costly. If you outnumber employees on staff, be sure to react quickly by sending employees home early if sales aren’t taking place.
  • How do you create a sensible schedule?? Know what your projected labor dollars are and divide by last week’s sales or use a moving dollar sales figure.
  • Continuous sales: Add up the previous three weeks of restaurant sales and divide by 3.

Example: If you are in week four, add week one ($1,552.00), week two ($1,932.00), and week three ($2,405.00) = $5,889.00. Divide labor dollars $1300.00 by sales $5889 =22%. Use the 22% to guide you in creating a sensible schedule.

After you create a schedule, if the projected labor exceeds 25%, you must make adjustments. If the percentage is less than 20%, you can add more hours to the schedule.

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