How to Slash your Labor Costs in 202019 min read
There’s an axiom in the restaurant business:
Earning a profit consistently isn’t about counting dollars. It’s about counting pennies.
In this post, we’ll tackle labor—one of your biggest expenses—and how to hammer it down. As we’ll see, lowering labor is a long-term process that involves making both macro and micro changes. The macro changes may be sweeping revisions to your overall operating procedure, while the micro changes tend to be small adjustments, such as equipment or software upgrades. Both types of optimization are essential.
First, we’ll start off by taking a look at prime cost, including a brief definition of labor, just so we’re all on the same page. Then we’ll cover common labor percentages by industry so you can get an instant feel for where you want to be. We’ll then switch gears, digging into the tried-and-true labor-lowering process. There’s some hard work ahead, but if you’re persistent, and if you follow the steps in this guide, you will lower your labor costs.
Ready to get started? Let’s go.
When it comes to managing a restaurant, there are a few costs you’ll want to keep tabs on at all times. Collectively, these are known as yours prime cost. Prime cost consists of:
- Cost of goods sold, also known as CoGS. In this industry, that’s typically your food and/or liquor cost
- All your labor expenses.
One reason it’s so important to lower labor costs over time is that you have limited control over food costs.
Very briefly, to calculate goods sold, decide on the time period you’re tracking. Typically, this is one month. Then determine what your beginning inventory was. Next, add to that your total purchase for the period. Finally, subtract your ending inventory.
Note: when it comes to labor cost, keep in mind that labor also includes total taxes, benefits and insurance payments.
For instance, you should add in any workers’ compensation or health insurance payments. Many new restaurateurs only look at the total wages they’ve paid out for the period, but this yields an inaccurate picture of prime cost.
Once you know your CoGS and your total true labor cost, simply add them together to arrive at your prime cost.
As mentioned, the labor half of this equation is the one you’ll have the most control over, so it’s imperative to learn how to keep labor down.
Looking at Labor
Labor will always be one of your biggest costs—at least until biped androids with opposable thumbs come on the market. For now, it’s common for restaurateurs to aim for 20 to 30 percent labor cost, but the ideal varies by type of restaurant. For instance, a full-service restaurant will have higher labor costs than a small, family-owned joint or a casual dining restaurant. In fact, as a general rule of thumb, the higher the level of service you provide, the higher your labor costs will be.
Here is a general guide:
- Quick service should be around 29 percent
- Fast Casual will usually run at 28 percent
- Casual tends to hover around 33 percent
- Upscale casual comes in at around 30 percent, and flat out upscale can be even higher
- Pizza comes in at 31 percent
Source here . Data from 2017.
How to Control Labor Costs?
The truth is there’s no sure-fire way to manage labor costs. Every bar, coffee shop, casual dining or full service restaurant is different. This fact frustrates many new restaurateurs. They want a simple answer to the question, What is an idea labor cost, and how do I keep mine low? But the reality is, your mileage will vary based on a number of factors. 
If a few months after applying the tips in this guide you still struggle with labor costs, you may need to reach out to an expert consultant. Said expert can do a deep analysis of your labor set up and find ways to cut costs you haven’t thought of. On the other hand, the problem could be an outdated, sluggish or inadequate point-of-sale system.
With that out of the way, let’s cover the basics of labor management. In the next section, we’ll dive into this in more depth. But here’s how to manage labor in broad strokes.
Don’t just look at your overall labor cost as one lump sum. Instead, divide your staff into groups. You could, for instance, group all of your front-of-house staff into one category. This might include:
You could then group your kitchen staff into a separate category. Which is costing you more? Next, lump your management staff into its own group.
Then, separate your hourly employees from your salaried employees.
The groups you create are up to you. Divide your total labor in whatever way seems most logical. The point is to do it now, before proceeding with this guide. The tips in the next section won’t make much sense if you’re only looking at your total labor cost.
Once you have your staff divided into logical groups, you can:
- See which group is costing you the most money
- See which group is getting the most hours
With that data in hand, you should get some ideas on how you can lower your labor costs with more careful scheduling.
For instance, you may have a tendency to over-schedule wait staff, or barbacks. Some restaurant owners, meanwhile, discover that that they keep too much staff on hand in the kitchen. A quick kitchen is important, to be sure, but if you over-staff, you’ll have a lot of people standing around during slow periods.
If your bar isn’t crucial to your business, see if you can get by with two servers on slow nights instead of a bartender. This is an easy way to save some money because a bartender tends to demand a much higher salary than do servers.
Simple Labor Tracking
It’s common for restaurant owners to hire someone to do the number crunching for them. But life happens. That employee—often a salaried manager—may get poached by a competitor, or maybe they retire. Either way, this is something that you should know how to do on your own if for no other reason than your own peace of mind.
The simple, bare bones method of tracking labor is to create a spreadsheet in Excel or Google Sheets.
On the horizontal, you want to list your week, Monday through Sunday.
On the vertical, for each day, track your:
- Front-of-house cost
- Back-of-house cost
Then total it all up.
If on Monday you ran $500 front-of-house and $500 back-of-house, your total is, obviously, $1,000.
If you brought in a total of $3,000 on Monday, then your labor for that day was 33 percent.
Proactive vs Reactive Labor Management
Now that you know your labor for Monday was 33 percent, you should pull reports from your POS to get an idea of your average revenue on Mondays, going back several months. Is 33 percent typical for you? Is 33 percent a high labor cost for your restaurant type? For the sake of this guide, we’ll assume it is. In this case, you need to take proactive measures to bring it down.
Look at your POS data to forecast what Tuesday might hold. For many restaurant types, Tuesday’s revenue might look much like Monday’s. If that’s the case, you might need to call a few employees off. If getting labor down is a high priority for you right now, you might even need to help out in the kitchen yourself, or play hostess.
At this stage, the idea is to get a feel for your typical labor and take action to bring it down. Otherwise, all you can do is react after the fact, for instance, at the end of the month. That is generally a losing strategy.
Remember, this is your business. Your employees are your employees, even if they’re your friends—or family—outside of work. Don’t pay them to work if you don’t need them to work. This adds up over time and will drastically add to your labor costs. If you want to succeed in this business, you must vigorously defend your revenue.
Labor Cost Goals & Macro Changes
With an understanding of basic labor tracking established, we can move on to the far more interesting realm of labor cost goals. Managing labor over the long term is a six step process. By putting this six step action plan into place, you can help your managers meet their labor projections, reducing friction and increasing profitability.
#1 Compare Labor to Your Sales Forecast
Creating a basic spreadsheet in Excel or Google Sheets is one thing, and if you’re not already doing that yourself, then it’s a good first step. But today’s POS systems and restaurant scheduling software can blow that out of the water. Scheduling and labor analysis software can give you insights into how to save money and can keep detailed records, but you need to get elbows deep into the data yourself to really get a feel for what’s happening in your establishment.
One tried and true method is to come up with an annual labor plan. This annual plan must take into account two things:
- The costs associated with all employees, hourly and salaried
- Knowledge of how your sales differ on a daily, weekly and monthly basis
To get at the second data point, use this simple formula:
Sales estimate equals number of tables multiplied by average seating per table multiplied by average ticket size multiplied by number of table turns.
Let’s say you have 10 tables. Each table seats four guests on average. Each guest spends $20, and your wait staff can turn the tables twice per shift—just to keep it simple. That works out to $2,000.
Then you would simply repeat this calculation for each shift, keeping in mind that a Friday will generally bring in more than a Monday will. Of course, this sort of back-of-napkin math will only get you so far.
Still, you can see that if you want to bring your labor down this year, you’ll really need to dig into your sales data so you can make a detailed annual plan. At this stage, your goal is to make macro changes. You can get surgical a bit later on.
#2 Come Up Your Annual Plan to Reduce Labor
A plan to lower labor cost at the macro scale is pretty simple. It means making big, broad stroke changes. The benefit is that these changes are easy to implement, which means you’ll get less push back from managers and employees.
Consider any of the following:
- Control your attrition rate. Reduce inefficiency, avoid getting poached and hire smart.
- Optimize your salary structure. Don’t pay too much. Don’t pay too little. Review your salary structure before taking on more managers.
- Cross train. Every employee role should have a sub-role. If your kitchen staff aren’t cooking, they’re cleaning.
- Consider part-time and seasonal. Hiring only full-time employees increases the chances of getting someone who will stay with you longer, but full-time employees are expensive. If you usually hire full time employees, it might be time to consider hiring seasonal employees instead. They’re generally much cheaper.
- Review your sales data. You’ve no doubt noticed that the restaurant business can be highly seasonal. If you’re not factoring that seasonality into your scheduling, you’re wasting money. Do you really need all that kitchen staff on Monday morning in February?
- Invest in automation. Invest in features like online ordering, online table reservation and automatic billing to bring labor costs down. An upgrade to a modern POS system is a good start. What’s more, a modern POS that’s compatible with mobile tablets makes your wait staff more efficient. This efficiency results in both more profits and lower labor. More profits because wait staff can turn more tables and lower labor because each staff member can manage more tables, meaning you don’t need as many on the payroll.
#3 Take Action
The key is to strike a balance between quality and profit. Cut too deep and your quality will suffer. If your quality drops, you’ll find yourself turning fewer tables. Fortunately, most restaurants can stand to trim some fat in the following areas.
Are your managers over staffing the floor? Are you over staffing the floor?
If you have people standing around due to a lack of customers, you’re paying your wait staff to clean. It’s common for new restaurant owners to over staff. Heck, it’s only natural for optimism to take over. We all expect the floor to be packed with paying customers. But that doesn’t always happen. At least, not every day.
The cure to this is to look at your past data and use that to project your future labor needs. Any modern POS system can help you with this. If you rely on a manager to do your scheduling for you, or want to hand this job off to someone else, make sure they know how to run labor reports via the POS. Always look at past data to make sales forecasts.
You should also have a basic understanding of local events that can result in large crowds. This includes city events, such as concerts, carnivals, parties, etc.
Look at hourly employee clock-in data and compare that to your sales data. Are you getting value for money? Note that you can do this on a per day basis. Your mileage will vary, but most restaurant owners find that they have one or two days out of the week that tend to be high labor. Many variables go into this, but one of the main factors is your location.
You may just be in a place that doesn’t, for whatever reason, attract foot traffic on Wednesday, or Tuesday, or Sunday. If this is the case, you need to identify this trend. Once you identify your slow day, go ahead and cut a few hourly employees for that day. The worst case scenario is you have to lend a hand if things turn out busier than you thought they would.
Because labor is such a large part of prime cost, it’s better to err on the side of saving money.
This is a big one, as any seasoned restaurant owner will tell you. Under-training an employee is like turning on a money faucet…and leaving it running—and running. They’ll come to work every day, but they’ll be inefficient. This can cost you money in a lot of ways. If they’re kitchen staff, you’re looking at food waste. If they’re front-of-house staff, then we’re talking about unsatisfied customers.
On the other hand, high turnover rate is not what you want either. A pragmatic approach that addresses the employee’s shortcomings by pairing them with a more experienced employee for additional training is the best approach.
Some business owners think they can’t afford training time. Nothing could be further from the truth. What you absolutely can’t afford is under-trained employees.
Consider asking your top talent to help train new recruits. This way, you get more value for the money you’re paying them, and you’ll ensure the new recruit gets higher quality training. You’ll get a feel for this as time goes by, but generally, what you want in an employee trainer is someone with an outgoing personality and good attention to detail.
Getting this person to help train newcomers will lower your labor over time. It’s one of those macro changes we mentioned earlier.
The restaurant industry has—shocker—high turnover. It’s easy to find bodies to fill roles; it’s hard to keep good help. Many people view a job in a restaurant as a steppingstone. They’ll wait tables while in college. Or they’ll be a hostess in a few places to make ends meet. Few consider it a career.
But if your goal is long-term success, you really need to stick to your guns. Be consistent. Always aim to hire top talent, and then nurture that talent. That doesn’t mean letting your employees walk all over you—always set firm boundaries. But it does mean that you provide ample opportunity to move up where possible and practical.
#4 Review Your Results
Now that you’ve trimmed the fat by making some macro changes, it’s time to review your results.
This step is crucial.
Taking action is one thing, but reviewing results, tweaking things and trying again is the secret sauce. In this step, you want to review the projections you made in your action plan. Did you hit them? Did you bring labor down?
Now that you’ve made changes, it’s time to get elbows deep in your data again. How has the situation changed? Compare labor costs and projected sales with actual data. If you’re not reaching your labor goals, you may need to take a closer look at your managers. After all, you can’t man the fort 24/7. Are your managers implementing your changes consistently?
Based on what you’ve learned up to this point, the goal now is to optimize your process. Go back to your initial action plan. You should now see areas that pop out at you—obvious areas where you can trim fat. You couldn’t see them before because you didn’t have real world data to work with. Now you do.
Once you’ve identified areas to optimize, hold a meeting with your management team. It’s important that they’re on board with any tweaks you want to make. If they’re not on board, your changes won’t have much impact.
Note: never leave your management team in the dark. If they don’t know the game plan, they can’t score the goal for you.
For instance, if you say that you’d like to cut one person on Mondays and Tuesdays, they’re likely to take this as a suggestion. Make it clear that this is not a suggestion, and in fact should be standard operating procedure. Consider allowing an exception if the ranking manager on duty sees a measurable, and unusual, uptick in hourly volume on one of those days.
Again, this comes down to being the boss. You can be friends outside of work. Once you’re within those four walls, you’re the shot caller.
After making changes, check in with your managers on a weekly basis to provide feedback. If you’re not consistent with this, your employees won’t be either. The result is complacency all around.
Lowering labor is important if you want to increase your bottom line. Let’s face it, who doesn’t want to do that? You can lower your labor over time if you come up with a solid plan, implement the changes, review the results and then optimize.
Micro Changes to Reduce Labor
In this section, we’ll explore several micro changes, or swerves, you can make to reduce labor cost. We call these micro changes because they’re specific corrective actions you can take at any time. In general, 80 percent of the changes you make will have little impact. Only around 20 percent of your optimizations will have a big impact. Therefore, experimentation is both called for and necessary.
#1 Review Labor Reports
Modern POS systems and scheduling software can give you access to robust labor cost reports. Take full advantage by reviewing these reports against specific times of day. Look for hours that tend to be high labor, and then look for ways you can trim the fat. Don’t forget to take seasonality into account too.
For instance, it’s common for restaurateurs to find that they over staff at 11 am, right before lunch. If you see this consistently, then have some lunch staff come in a little bit later. This might seem like a small change, and it is, but that’s the point. Over time, this small change can add up to big savings.
It’s a micro change that can have a big impact.
#2 Invest in a Good Employee Scheduling Tool
While it’s fine to start with a general-purpose data tracking tool like Excel, you want to move on to a purpose-made software solution ASAP.
- Spend a lot of time creating spreadsheets in Excel
- Spend time moving back and forth between schedules
- Get actual vs. scheduled labor confused
- Frequently over or under staff…
…Then you need a better employee scheduling tool.
A dedicated employee scheduling tool can help you create a schedule in as little as 30 minutes. Some of these tools use advanced machine learning to help you optimize your labor spend. Computers are pretty good at solving problems like these. Let them do the hard work for you so you can focus on improving your core offering.
Next, go back to step one and review your labor reports. Are you still scheduling too much help during slow periods? This process can take some trial and error, so don’t forget to review, review, review.
#3 Consider a POS Upgrade
Yes, a new POS system can be expensive. But it’s an investment. Besides, modern, cloud-based POS systems usually have lower upfront costs than their old-school, on-site cousins. What’s more, these modern systems usually have more robust reporting and can support modern mobile tablets, digital signage and in-restaurant kiosks. What’s not to like?
Even better for our purposes is the fact that modern POS systems are great at:
- Inventory Management
- Staff management & communication
- Sales reports
- Robust labor reports
- Customer relationship management
Some modern POS systems even offer robust employee scheduling. The bottom line is that with an upgrade, you can lower the other element of prime cost, CoGS, while also lowering labor. That’s a win-win.
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