Boost profitability by managing your restaurant labor cost effectively
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CloudKitchens
How many tacos can be delivered from a 1000sqft restaurant?
The same amount as a 200sqft ghost kitchen.
Restaurant labor cost represent one of the largest ongoing expenses in the restaurant industry, directly affecting a business’s profitability and operational efficiency. Accurately understanding and controlling labor costs is essential for improving profit margins, maintaining sustainability, and ensuring smooth operations.
By effectively managing labor expenses, restaurant owners can optimize their workforce, reduce excess spending, and build a more resilient business model. Let’s see more?
Understanding restaurant labor cost
Define labor cost
Labor cost includes all expenses associated with staffing, such as wages, payroll taxes, benefits, and any other incentives. Labor costs should account for not only hourly or salaried wages but also indirect costs, like training and overtime, which can add up quickly.
Tracking these expenses in detail helps restaurant owners understand where money is being spent and find areas for potential savings.
Industry Standards
In the restaurant industry, a typical labor cost percentage falls between 20% to 35% of total revenue, though this varies based on factors like restaurant type, location, and level of service.
For a full-service restaurant, labor costs might be closer to 30%, while a quick-service establishment might target a lower percentage. Monitoring this percentage ensures that labor costs remain within a reasonable range to support a healthy bottom line.
Read More: Mastering demand management: Strategies for handling peak delivery periods
How to calculate labor cost in a restaurant?
Labor cost formula
To calculate labor cost as a percentage of revenue, use this formula:
Labor Cost Percentage = (Total Labor Cost / Total Revenue) x 100
For example, if a restaurant has a monthly labor cost of $20,000 and generates $80,000 in revenue, the labor cost percentage would be 25%.
Calculating labor cost per meal
Understanding labor costs on a per-meal basis can provide valuable insights. To calculate this, divide the total labor cost by the number of meals served. For instance, if your monthly labor cost is $20,000 and your restaurant serves 4,000 meals, the labor cost per meal would be $5.
Labor cost percentage
Calculating and monitoring labor cost percentage is an important benchmark, as it helps restaurant owners assess labor efficiency. When compared to industry standards, this percentage can indicate if adjustments are needed in staffing or operations to improve profitability.
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Strategies to control and reduce labor cost
Restaurants can gain tighter control over labor costs without compromising service quality, ultimately leading to a more efficient, profitable operation. Check what to do!
Optimize scheduling
Efficient scheduling aligns staff numbers with customer demand to avoid excess labor costs. By using scheduling software that tracks historical sales and foot traffic data, restaurants can better anticipate staffing needs for specific times of day, week, or season.
- Peak hours: Schedule the right number of employees during peak periods, like lunch and dinner rushes, to maintain excellent service and reduce wait times. Consider adding an extra server, cook, or bartender during anticipated busy hours to maximize revenue opportunities.
- Slow periods: During off-peak hours, reduce staffing to the essentials, focusing on positions necessary to maintain basic operations without compromising service quality. Avoiding excess staff during slow hours can significantly cut down on wasted labor expenses.
- Forecasting tools: Use digital tools and software to predict trends based on past data, allowing for more accurate staffing and reducing last-minute adjustments. This proactive approach prevents overstaffing and ensures a balanced, demand-responsive schedule.
Read More: How to run a smarter restaurant business?
Cross-training staff
Cross-training allows employees to perform multiple roles, helping you maintain flexibility and avoid extra hires. This approach ensures staff members can step in where needed, making your team more adaptable and less dependent on extra shifts.
- Versatile workforce: By training waitstaff to handle host responsibilities, or having kitchen staff capable of taking on basic front-of-house tasks, you can reduce the need for specialized hires.
- Reduced absenteeism impact: When employees are trained across roles, it becomes easier to cover shifts if someone calls out sick or has an emergency, reducing the need for last-minute staffing expenses.
- Improved job satisfaction: Cross-training can increase job variety, which can lead to higher morale and lower turnover rates, further reducing hiring and training costs over time.
Implementing automated solutions
Automating specific tasks reduces the amount of manual labor required, freeing up employees to focus on customer experience and other valuable tasks. By leveraging technology, restaurants can streamline operations and reduce labor costs in key areas.
- Automated ordering: Self-order kiosks and mobile ordering systems decrease the need for front-of-house staff while increasing order accuracy and allowing employees to focus on service.
- Inventory management: Digital inventory systems track stock levels and trigger reorders, cutting down the time staff spends on manual inventory tasks and minimizing inventory waste.
- POS systems with integration: An efficient POS system that integrates with scheduling and inventory software helps track sales, inventory use, and labor needs in real-time. This allows managers to make quick adjustments based on real-time data, reducing unnecessary labor and operational costs.
Read More: Innovative restaurant technology trends
Monitoring and adjusting regularly
Regular tracking of labor costs is essential, as it allows for responsive adjustments to prevent overspending. Weekly or monthly labor reviews can provide actionable insights into trends, helping you keep labor costs aligned with revenue.
- Real-time analytics: Use labor reports to identify where your biggest labor expenses are, compare them against sales, and make quick changes as needed. Track overtime carefully, as it can quickly inflate labor costs if not kept in check.
- Continuous improvement: Regularly review schedules, labor costs, and revenue trends to ensure that shifts and staffing levels are optimized. This proactive approach helps reduce costs by quickly addressing overstaffing or underutilization.
- Labor as a percentage of revenue: Set goals for labor cost percentages that align with industry standards (typically around 20-30%) and assess whether you’re meeting them consistently. Adjust schedules, cross-training practices, or technology solutions as needed to keep costs within target ranges.
Common challenges in managing labor costs and how to overcome them
- High turnover rates The restaurant industry is known for high employee turnover, which drives up labor costs through hiring and training expenses. Offering competitive wages, creating a positive work culture, and recognizing employees can help reduce turnover, leading to lower labor costs and a more stable workforce.
- Overtime costs: Overtime costs can quickly escalate if not carefully managed. To prevent unnecessary overtime, use a scheduling system that tracks hours and avoids double-shifting the same employees. Adjust schedules based on demand forecasts to keep overtime costs to a minimum.
- Fluctuating demand: Seasonal changes and special events can create fluctuations in customer demand, leading to inconsistent labor needs. Using data from past seasons or events, forecast busy periods to schedule staff accordingly. For instance, you might hire temporary staff or use on-call employees to cover peak times without committing to higher labor costs year-round.
Read More: Maximizing efficiency: How catering software solutions can streamline your business operations
Tools and software to help manage restaurant labor costs
POS and scheduling systems
Modern POS systems often integrate with scheduling software, enabling real-time tracking of labor hours and insights into busy versus slow hours. Scheduling tools can automate shift creation and ensure that labor aligns with predicted demand, preventing overstaffing or underutilization. Check some technology trends to help your restaurant business!
Labor cost tracking software
Several software solutions are designed to help restaurant owners track labor costs, forecast expenses, and optimize scheduling. Platforms like 7shifts or Lightspeed provide real-time data and analytics to monitor labor costs and stay within budget.
Boost your efficiency and cut costs with CloudKitchens
Controlling labor costs is essential to running a profitable restaurant. By accurately calculating and monitoring labor expenses, optimizing your scheduling, and using efficient tools, you can improve operational efficiency and save money. Labor cost management is an ongoing process, and these strategies, when consistently applied, can make a significant difference in long-term profitability.
CloudKitchens helps restaurant owners streamline operations with innovative kitchen and technology solutions. If you’re looking to improve efficiency and keep labor costs in check, explore how CloudKitchens can support your restaurant’s success. Visit CloudKitchens.com to learn more!
Read more:
- Menu Costing for Restaurants: maximize your profitability
- Restaurant Financing & Loans Guide
- Navigating Restaurant Equipment Financing: Strategies for Success
DISCLAIMER: This information is provided for general informational purposes only and the content does not constitute an endorsement. CloudKitchens does not warrant the accuracy or completeness of any information, text, images/graphics, links, or other content contained within the blog content. We recommend that you consult with financial, legal, and business professionals for advice specific to your situation.
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