The Way to Calculate Labor Cost: A Formula for Restaurants

The Way to Calculate Labor Cost: A Guide for Restaurant Owners

Business owners have to take care of several major operational costs: mortgage or rent payments, inventory costs, labour costs, and a couple of others depending on the business. This post will focus on the last item from the list, and research all the actions involved in how to compute labor cost.

In the restaurant business, average labour is roughly 30-35 percent of company revenue, which makes it among the most costly expenditures.

In the staff to cook and serve the meals, to those who manage cleaning and management, the cost of labour for each these functions adds up fast. Many variables factor into labour costs. Being on top of those expenses is essential for the existence of the company.

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But many owners struggle with the challenge of maintaining their labour cost low. What’s involved in this process exactly?

What’s Labor Cost and Why Do Business Owners Want To Calculate it?

Labor cost is the total dollar amount your restaurant spends on workers, including pay for salaried and hourly employees, in addition to taxation and employee benefits. The amount spent on labour also affects your prime cost — total cost of goods sold and total labour cost — that is the metric that many restaurateurs use to analyze their restaurant’s efficiency.

It’s important to not forget that labor costs are much greater than hourly or salaried wages (though these are a large chunk of the total). But in reality, labour costs include such expenses as payroll taxes, overtime, health care, bonuses, sick days, vacation days, insurance, benefits, food, supplies, training costs and much more.

Fundamentally, consider anything even remotely related to employee salary as a labour cost.

What that means for you, then, is that while you will cover your servers $15 per hour, your real labour costs are much higher because you must factor in all of the other expenses.

Here’s the way to calculate your whole labor cost. Basically, anything which may be categorized as labor-related enter your labor cost percentage calculation.

Why do you will need to calculate it?

Acceptable labor cost percentages can run anywhere from 25 to 40 percent of a restaurant’s gross revenue. High-end restaurants that devote substantial attention to making a fine dining experience and making all menu items from scratch will land on the high end of the spectrum. Fast casual restaurants with easy menus and items bought from food service warehouses and reheated, usually land on the lower end.

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To know your payroll numbers and evaluate where there’s room for improvement, monitor hours relative to labor functions like front-of-house and back-of-house operations. This information can inform you if portions of your restaurant are ineffective or overstaffed, and demonstrate where payroll costs can be trimmed.

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What’s Restaurant Labor Cost?

Labor cost is the entire amount spent on the employees in your restaurant’s payroll. Some business owners make the mistake of just including the wages of hourly employees in their labor costs. Restaurant 365 defines these direct salary as”unburdened labor.” On the flip side,”fully burdened labor” refers to extra expenses paid out, such as salaried employee salary, employee benefits like health care, and extra costs like payroll taxes and Social Security.

To calculate labour costs, you want both. Add up all expenses associated with salary, benefits, and other fully burdened labor line items. A labor calculator can assist you with this procedure.

However, the complete cost alone does not paint the complete picture. For labor costs to imply anything, they ought to be compared to your overall earnings.

How to Compute Labor Cost Percentage

Labor cost percentage is the connection between your labour cost and your total revenue over the same timespan. To figure your labor cost percentage, divide your labour cost by your overall sales for the identical period. You can plug your overall sales into a labour cost calculator to receive your labor cost formulation.

To calculate, we will set up a hypothetical worker who works full time, is paid hourly and with a pay rate equal to $15 per hour.

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Determine Gross Pay

When an employee works full time, they will possibly work 2,080 hours in 1 year (40 hours x 52 weeks). So you’ll start with this equation:

  • Gross Pay = Purchase Rate x Gross Hours
  • Gross Pay = $15/hour x 2,080 hours
  • Gross Pay = $31,200

Compute Hours Not Worked And Web Hours Worked

You’ll never know precisely how often an employee will be absent, but you can hazard a pretty good guess. In case you have previous records for different workers, average their absentee numbers together and apply that amount to some other employee.

Let’s say you think of a mean of 10 days lost due to holidays, vacation, and sickness.

Convert that quote to hours using the following equation:

  • Hours Not Worked = 10 days x 8 hours
  • Hours Not Worked = 80
  • Now subtract those hours not worked in the total hours worked in the first step (2,080).
  • Net Hours Worked = Gross Hours — Hours Not Worked
  • Web Hours Worked = 2,080 — 80
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Net Hours Worked = 2,000

Add Other Yearly Costs

Bear in mind, labour costs include expenses aside from simply wages. Insurance, bonuses, taxes — all these things have an impact on which you pay your workers.

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Calculate Actual Hourly Labor Cost

You understand your employee’s base pay rate ($15 per hour in this case ), but it is essential that you compute their real hourly labor cost with this restaurant labour cost formula:

  • Actual Hourly Labor Cost = Annual Payroll Labor Cost / Internet Hours Worked
  • Actual Hourly Labor Cost = $35,200 / 2,000
  • Actual Hourly Labor Cost = $17.60 per hour

That number tells you that if all the other factors are factored in, you are paying your employee $17.60 per hour of real work.

How To Control Labor Cost

Lowering your labour costs does not mean you need to pay your workers less. In actuality, you can find better ways to reduce among the greatest expenses for your company. Here are a few pointers that will help you get control of your labour costs.

1. Plan Your Program In Advance

Planning your program well in advance is among the best ways to reduce your labor costs over the long run.

We recommend creating your employees’ work schedule at least a month ahead of time. This gives you plenty of time to review, tweak, and perfect the hours worked in order to minimize labor costs while still covering all changes.

Additionally, it provides your employees time to discover substitutes for days they can not do the job so you are not left short-staffed.

2. Tabulate Labor Costs As You Program

Calculating labour costs can be a laborious job. There are several moving parts — who will operate when, part-time vs. full-time, pay rates, overtime — it’s easy to get lost in all of the numbers and be overwhelmed.

Additionally, there is the fact that when you’ve got a program that works, something inevitably comes up that needs changing one or more bits. And as soon as you change one variable, all of the other factors and calculations usually change also.

3. Contain A Rotating Shift

A rotating shift is a scheduling system where workers move through a cycle of working the day shift, the night shift, and any swing changes which might be necessary.

For some companies, the rotating program could be first shift, second shift, third shift. For restaurants, the rotating program could be opening shift, lunch shift, and dinner/closing change.

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4. Train Employees To Fill In At Other Positions

Training your employees to be proficient at their jobs is vital for the success of your enterprise. Think about cross-training them to be adept at another job as well to help reduce your stress and keep labor costs low.

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5. Monitor Overtime Hours

Tracking overtime hours is another critical way to keep labor costs low. If left unattended, overtime hours can quickly become a massive drain on your budget and affect your bottom line for the worse. It’s crucial to keep your workers’ overtime hours as low as possible so that they do not get out of control. The best way to do this is with applications.

The Relationship Between Labor Cost and Prime Cost

Many restaurant owners find it more helpful to estimate their margins by looking at prime costs, or components and labour combined, as opposed to looking at labour costs in isolation. It might be sustainable to have higher labour costs if your food costs are reduced or vice versa.

Food and labour costs together should equal about 66 percent, or two thirds of your gross earnings. You might have higher labor costs as you make all the components on your menu at house, balancing the labor expense by saving money on components. As an alternative, you might purchase prepared items from another company or by a food service warehouse. This strategy may lower your labor costs but may increase your food costs.

Although labor is generally considered as a variable cost, one which changes relative to the amount of business you transact, your restaurant incurs fixed labour costs to maintain a skeleton staff, even if no clients walk in your door.

The dynamics of managing finances in a restaurant can be intimidating. Hopefully, this guide about the best way best to calculate labor cost provides you with a clearer path towards handling the financial potential of your restaurant.

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