Managing labor costs can mean big bucks in profitability
Labor expense is typically the highest cost of any operation. Therefore, containing or reducing your labor cost by a few percentage points can mean big bucks in profitability. The good news is that it’s really the easiest cost center to manage.
Labor cost is tracked and managed as a percentage of your total sales. A typical restaurant will run at a labor cost of approximately 30 percent of total revenue. Comparably, a bar or nightclub can operate at a considerably lower percentage — about 18 – 24 percent of revenue, based upon the type of operation.
Unlike food cost, which is affected by waste, ordering and other elements, or beverage cost, which is impacted by over-pouring, theft and related issues, labor costs are absolute. For example, if you knew your sales were going to be $1,000 tomorrow, you could cap your labor spending easily: By forecasting your revenue each week by the day before you do your schedules, you will know exactly how much you can spend on labor. Once you are good at forecasting sales, your labor cost should hit its target every time. In the previous example where sales are projected at $1,000 a day, the total costs of the scheduled labor cannot exceed $250 a day.
Each type of operation can spend its total labor budget differently between kitchen, bartenders, servers, security and other employees. Typically in a restaurant, approximately 60 percent of the total labor budget is allocated for the back of the house and 35 – 40 percent for the front of the house (servers and other revenue-generating employees). But, this split may vary in your operation.
The trick to consistent labor cost management is in the forecasting. If you forecast too low, your operation will be short-staffed for higher-than-expected sales. On the other hand, if you over-forecast you will have allocated too many employee hours and will be over budget as a result. You don’t need a computer to tell you the obvious: You missed your sales forecast, so your labor cost is high, plain and simple. When this happens, it’s time for management to manage more effectively.
In addition to forecasting, management must stay close to this cost and monitor results daily; they’ll know right away when they are running over labor budget. As soon as management knows, it’s time to begin reducing employee hours for the rest of the week and/or month by sending employees home early, adjusting schedules to reduce hours or eliminating employee shifts. These adjustments can get you back in line in a few days.
This simple forecasting system becomes very easy after only a couple of weeks of using it. So as long as you forecast, monitor and adjust daily, your operation will hit your labor cost goals almost every time.