Labour costs are one of the largest expenses for any restaurant, often accounting for 25-35% of revenue. Managing these costs effectively is crucial for maintaining profitability and keeping your operations running smoothly. Inefficient restaurant labour costs can quickly drain your budget and affect your profits negatively.
But what exactly goes into calculating labour costs? It’s not just about wages; several factors, including benefits, payroll taxes, training expenses, and overtime pay, contribute to the total. Understanding these components is the first step in controlling them, allowing you to calculate your restaurant’s labour cost percentage and make informed decisions about staffing and budgeting. Reaching the ideal labour cost can increase your restaurant’s profits significantly.
You don’t have to compromise with service quality to reduce labour costs we have discussed efficient ways that can help you reach the ideal labour cost percentage.
What Restaurant Labour Costs Include?
Labour costs in your restaurant are more than just the salaries you pay to your staff. They include:
- Wages: This is the biggest part and includes pay for all employees like chefs, waiters, cashiers, and cleaners.
- Benefits: Costs for health insurance, retirement contributions, and other employee perks.
- Payroll Taxes: These are mandatory and can add up quickly.
- Training Expenses: Costs for onboarding and upskilling employees.
- Overtime Pay: Higher pay for hours worked beyond the regular schedule.
Understanding what goes into labour costs is the first step to controlling them. It helps you avoid surprise expenses and plan your budget effectively. Labour costs typically make up 25-35% of a restaurant’s revenue, depending on its size and type, so keeping these costs under control is crucial for profitability.
How to Calculate Your Restaurant Labour Cost Percentage?
Calculating the labour cost percentage is simple and gives you a clear picture of how much you’re spending on staff compared to your revenue. Here’s how you can calculate it:
- Add Up All Labour Costs: Include wages, benefits, payroll taxes, and other expenses.
- Calculate Total Revenue: Use the revenue for the same period as your labour costs.
- Apply the Formula:
Labour Cost Percentage = (Total Labour Costs ÷ Total Revenue) × 100
For example, if your labour costs are RM50,000 and your total revenue is RM200,000:
(RM50,000 ÷ RM200,000) × 100 = 25%
An ideal labour cost for a restaurant is between 20% and 30%, depending on factors like location and type of service. Monitoring this percentage regularly helps you spot inefficiencies and adjust your operations before costs spiral out of control.
How to Evaluate Your Labour Costs?
To evaluate your labour costs effectively, start by comparing them with industry standards. For Malaysian restaurants, labour costs should typically range between 25% and 30% of revenue. If your percentage is higher, it indicates inefficiencies that need to be addressed.
Next, track seasonal trends in your restaurant. Labour costs often fluctuate depending on the time of year. During peak seasons, you might need more staff, while slower periods may require a leaner workforce. By evaluating seasonal patterns, you can adjust staffing levels to match customer demand and reduce unnecessary expenses.
Analyzing roles and productivity is another critical step. Assess whether all your employees are contributing effectively to your restaurant’s operations. For instance, you can measure productivity by calculating sales per labour hour or tasks completed per shift. If you find that certain roles are underperforming, consider retraining staff or reallocating responsibilities to improve efficiency.
Using technology can significantly enhance the evaluation process. Payroll software and workforce management tools provide detailed reports on overtime, absenteeism, and other metrics that impact labour costs. These tools make it easier to identify problem areas and implement corrective measures promptly.
Regularly review overtime expenses as well. Overtime pay can inflate labour costs quickly if not monitored. Evaluate whether your scheduling practices are leading to unnecessary overtime and adjust shifts accordingly. Consider hiring part-time staff during peak hours to reduce reliance on overtime.
Finally, involve your management team in the evaluation process. Encourage them to track key metrics like labour cost percentage and productivity levels. When managers are accountable for these figures, they are more likely to implement efficient practices and help control costs.
10 Easy Tips to Reduce Labour Costs
Reducing labour costs doesn’t mean cutting corners or compromising service. It’s about working smarter, not harder. Here are some actionable tips:
1. Optimize Scheduling
Avoid overstaffing during slow hours. Use tools to forecast busy times and schedule staff accordingly. Cross-train employees so they can handle multiple roles when needed. This flexibility helps you run efficiently with fewer people.
2. Automate Repetitive Tasks
Invest in technology to handle routine tasks like order-taking, inventory management, and payroll processing. For example, a point-of-sale system can streamline operations and reduce manual errors. Automation not only saves money but also boosts efficiency.
3. Reduce Employee Turnover
High turnover rates increase costs for hiring and training new staff. Keep your employees happy with fair wages, regular feedback, and growth opportunities. Engaged staff are more productive and less likely to leave.
4. Monitor Overtime
Overtime can quickly inflate labour costs. Set clear rules about overtime and monitor schedules closely to avoid unnecessary extra hours. Encourage managers to adjust shifts instead of approving overtime.
5. Outsource When Possible
For tasks like cleaning or deliveries, consider outsourcing instead of hiring full-time staff. This way, you only pay for the services when needed and save on benefits and taxes.
6. Use Part-Time or Temporary Staff
During peak times, hire part-time or temporary staff instead of full-time employees. This reduces fixed costs while giving you the flexibility to adjust your workforce as needed.
7. Train Your Team
Well-trained employees work faster and make fewer mistakes. Conduct regular training sessions to improve skills and productivity. This reduces the time and cost spent on correcting errors or redoing tasks.
8. Track Key Metrics
Monitor metrics like sales per labour hour and labour cost percentage restaurant-wide. Use this data to make informed decisions about hiring, scheduling, and training.
9. Negotiate With Vendors
Sometimes, labour costs are indirectly affected by other expenses. Negotiate better deals with vendors for food and supplies to free up the budget for labour without compromising quality.
10. Set Realistic Goals
Define clear labour cost targets for your team and involve them in achieving these goals. When everyone understands the importance of reducing costs, they’re more likely to cooperate.
