How to Calculate Restaurant Labor Cost
Are you wondering how to calculate restaurant labor cost or whether you're doing it the right way? Restaurant labor cost is often a restaurant's biggest expense, other than an empty chair in your restaurant. Calculating your restaurant labor costs correctly is critical to you making money or losing money. In this video I'll teach you how to calculate restaurant labor cost.
First you need to gather the right numbers. The thing about calculations is garbage information in equals garbage information out. If you gather the wrong data, you get bad results, ultimately making bad decisions in your business. This very first step is where a lot of restaurant owners go wrong: gross sales vs net sales. Which one do you use? Gross sales are the ring at the register before the discounts have been removed, not including sales tax. Net sales are the ring at the register after the discounts, not including sales tax.
Let me shortcut this for you and tell you it’s gross sales. Why? Because if you run any form of promotional discounts, employee meals, anything, there are comps. You should measure your team based on what the sales would have been, whether you collected the money or not. For instance, let's say I'm planning on a $10,000 a day, but I'm going to comp 50 percent for a favorite charity or something, so it ends up being a $5,000 day.
Does your management team buy product for a $10,000 a day or a $5,000 a day? Do you staff to handle the business for a $5,000 day or $10,000 day? The answer to both is $10,000. Use gross sales when you calculate your restaurant's labor cost.
The second thing you need to gather is the raw labor cost versus total labor cost. What's the difference? In raw labor cost, if you pay a cook $15 an hour, he or she punches in and punches out in one hour, $15 is what they get paid. But that's not what comes out of your bank account. You also pay taxes, benefits and insurance. The raw labor cost is for your managers to follow. When you give them a labor target, it is going to be after you’ve removed taxes, benefits and insurance because your managers are not going to sit there and calculate every employee to find out when they've reached their limit of FICA and SUI, but they can control $15 an hour times the number of hours somebody works. Total labor cost is for budgeting and tracking. That's where you look at everything: every position, including taxes, benefits, and insurance, because that is a part of your prime cost, which is a key cost target for running a profitable restaurant. Any money that comes out of your bank account based on labor is a part of your labor cost.
The third thing you have to understand is the calculation labor cost? It's use divided by gross sales. Believe it or not, if you've been on my channel for any length of time, you understand that is the same calculation you use for cost of goods sold: food cost, bottled beer, draught beer, wine, liquor, N/A BEV, is use divided by sales. In this case, it's not use of product. It's use of minutes, hours, and dollars you are going to spend in payroll.
Now, remember, use divided by sales can give you very different numbers if you’re using raw labor cost versus total. There is going to be a very different way to use that.
Let me paint the picture with some numbers:
Let's say your restaurant did $135,000 in gross sales last month. Your total labor cost for line employees through management, without any taxes, benefits or insurance, was $35,194.84. That is a raw labor cost percentage of 26.07 percent. Now that's going to be important because it’s the number you are going to measure your management team by to see if they did a good job or not. Again, they cannot control taxes, benefits insurance.
Once you add those taxes, benefits and insurance back in, using the same gross sales and raw labor cost, you get to $42,439.37 is use (this was your payroll number). This calculation gives you a real labor cost of 31.44 percent.
That’s 26 percent vs 31 percent, demonstrating that it's important when looking at budgeting that you understand total labor costs is something you have to manage as well. You have to control the whole thing.
I'm sure your next question is, “Where should my labor cost be and what should it be by position?”
That’s where we get into the prime cost calculation, which you can learn about here. With the information you learn in that video, you can understand what kind of changes you need to make to hit the right labor cost for your restaurant and your goals.
If you would like to learn how to own a restaurant that doesn't depend on you being in it to be successful, sign up for my free video course that teaches you three key principles to running a successful restaurant. If you're ready right now to make some serious changes in your restaurant, you can also book a 60-minute call with me where we talk about your challenges and figure out exactly what is holding you back from having a restaurant that doesn’t depend on you being in it to be successful.
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