How to reduce labor costs by 3-5% without ever using an excel spreadsheet again
If you're like most businesses, you're always looking for ways to reduce costs. But what if we told you that there's a way to reduce labor costs by 3-5% without ever using an excel spreadsheet again?
What are Labor Costs?
| Labor costs form the biggest dollar outgo for businesses. For a restaurant, it typically accounts for 30-35% of the total revenue. |
| However, with the minimum wage rates varying markedly, the amount spent on labor by organizations in one US state may not be the same as that spent in a neighboring state. Furthermore, based on the type of the service, some restaurants may end up using as much as 50% of their revenues for paying employee wages. |
| A 2019 research by software company Harri pointed out that 45% of restaurant operators saw a 3-9% rise in labor costs. According to a BDO report, the average restaurant labor cost increased to 31.2% in Q2 (second quarter) of 2019, from 31.2% in the same period the year before. |
| Restaurants often look to keep expenditures on labor within 20-30% of their revenues. To have a better understanding of the way labor impacts a company's profitability, let's first define labor cost. |
| Salaried employee wages, overtime, hourly wages, incentives and bonuses, health insurance, payroll taxes, paid days off, expenditure on supplies, public transportation allowances, meal expenses, training costs, and so on are all included in the labor costs of a restaurant. Labor costs are calculated on an annual, monthly, or weekly basis. |
| The average labor cost varies depending on the type of restaurant. That's because labor costs (and food costs) vary depending on the sales mix of products, food and service quality, operating hours, and pricing. Therefore, labor expenses in full-service and luxury restaurants are higher than those in fast food restaurants. |
| According to an article in Chron, fast food establishments are able to cap their labor expenditures at 25%, but table service restaurants typically spend 35-40% on labor. A fine dining restaurant would spend significantly more on labor than a steakhouse selling dishes like baked potato and steak that are relatively easy to prepare. This is because the fine-dining restaurant serves more items and prepares more items in-house. |
| The cost of labor might be variable or fixed. Fixed labor costs are simple expenses on salaried and permanent staff like cooks, servers, managers, and hosts. Payments provided to temporary workers are referred to as variable labor costs. For example, extra waiters and cooks may have to be brought in to manage operations in a restaurant on a busy Friday night, during the holiday season, or on the occasion of a lavish private party. |
