Best Method for How to Calculate Labor Cost Percentage in a Restaurant for 2024

By: KEXY Team
January 12, 2024
News And Tips

Do you know how to calculate labor cost percentage in a restaurant? then do check out this to know more about calculate labor cost percentage in a restaurant.

It seems very easy to run a restaurant. People who are out of the restaurant business think that it takes nothing to run a restaurant.  They also assume it is a very profitable business and that everyone should do it.

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But as every picture has two sides, being in the restaurant business is similar to that picture. No doubt, running a restaurant can earn a decent amount of profit. But it doesn’t happen with everybody and all the time. Now, you must be thinking why I said that? So let me clarify.

Restaurant owners who are very conscious about optimizing their restaurant labor cost and restaurant payroll percentage are more likely to earn more profit. This is because every restaurant needs to be run smoothly by a manager or owner.

This manager is obliged to optimize metrics regularly and employee schedules and their payroll percentages. The ones who don’t pay attention to this part never earn much profit out of their business.

Before learning about calculations, let’s first learn about what Labor Cost Percentage actually is, and how important it is to know how to calculate it in order to run a profitable restaurant business.

What is the Labor Cost Percentage?

Labor Cost Percentage is the proportional value of the total amount of money that is spent on your labor, against the total profit earned by the restaurant.

It includes the total amount of money that you spent on labor. Labor may include the total number of workers working in different positions in your restaurant.

These may be cooks or chefs, servers, waiters, caterers, dishwashers, managers, and cashiers. There may be other workers if you have hired for your restaurants such as a cleaner, stock buyer, and IT expert for keeping data or certain records.

Example for Understanding Labor Cost Percentage

Add all the expenses that are inundated with salaries of staff, their additional healthcare benefits, wages, and other taxes, in the previous one month.

Now, add up all your food sales that were conducted in the previous month.

Now, you have got two figures. Divide them with each other and multiply the resultant with 100. The answer is your Labor Cost Percentage for one month.

Now, you know what Labor Cost Percentage is. But is it that important? Or can you run your restaurant without it. So for getting your answer, read the importance of optimizing restaurant labor costs mentioned below.

Importance of Calculating Restaurant Payroll Percentage

Restaurant payroll percentage is one of the most important metrics to calculate as it is 30% of the total profit earned by a restaurant. Also, since 2019, the restaurant labor cost is getting increased with the passing time.

According to a report, nearly half of the restaurants reported a high increase in restaurants’ prime costs. So they demanded to increase the menu prices to balance it with prime costs.

So the thing which runs a restaurant is ultimately its prime cost. Then how can one think that it is not important to optimize it on a regular basis? Of course, it is mandatory to establish reasonable employee schedules and a complete system that optimizes restaurant payroll percentage regularly. It can easily be done by having bookkeeping software installed on your computer system.

Another thing you must be aware of is that Covid-19 has affected the metrics of restaurants badly. To reach the high-profit sky again, it is crucial to scale up all the operational performances of your restaurant. The payroll cost is not fixed for every week or month. That’s the reason it needs to be optimized regularly.

What is the Operating Cost of a Restaurant?

Operating cost is the sum of three major cost expenses of a restaurant. These expenses can be described as follows.

Food Cost:

This is the total expenditure on food and beverage rations and can be calculated against the sold item’s prices.

Labor Cost:

This is the total payable amount to the staff of your restaurant.

Fixed Expenditures:

These fixed expenditures of a restaurant include electricity, gas, and water bills. And the payable rent.

Additional Costs when just Starting:

These costs are only for one time as you need to buy some equipment before starting a restaurant business. These may include the cost of furniture, utensils, cookware, and other such things.

How to Calculate Labor Cost Percentage in a Restaurant?

To know the calculation method, first, know what expenditures are included in Labor Cost

  • Salaries of all the employees.
  • Daily wages
  • Hourly wages
  • Healthcare benefits
  • Overtime payments
  • Payroll taxes
  • Paid leaves or vacations

In short, you can refer to it as, any cost, that is related to labor, is a part of Labor Cost.

How to Calculate Restaurant Labor Cost Percentage?

You can use two different methods to calculate your Labor Cost Percentage.

Let’s have a look at both of them one by one.

Labor as a Percentage of Sales:

It’s very simple to calculate it, just follow the following method.

Calculate your Actual Labor Cost:

The actual Labor Cost is a whole figure that is obtained by adding all expenses payable to the labor of your restaurant.

Calculate your Restaurant’s Revenue:

Optimize the bottom line of your restaurant. It means that a clear sum of the total amount your restaurant has earned. Just calculate it without deducting any taxes, or other minimizations.

Divide the Figures Obtained:

Divide the actual Labor Cost by the total revenue of your restaurant. Let suppose the Labor Cost of a restaurant in 2020 was $500,000 and the total revenue it earned was $1,000,000, then divide 500,000 by 1,000,000. The answer will be 0.5

Obtain a Percentage Value:

Obtain a percentage value by multiplying the resultant with 100. According to our example, it will be 0.5 × 100 = 50.

That means the labor cost percentage of the restaurant is 50% for the year 2020. (Just an example).

Labor as a Percentage of Total Operating Costs

Again this is also very easy to calculate. Just follow the below-mentioned instructions.

Calculate the Labor Cost:

Again follow the first step that was calculating the Labor Cost.

Calculate the Total Operating Cost:

Calculate the Total Operating Cost that is the total amount spent on running the business. This amount includes the amount spent on buying raw materials, paying rent, marketing, and all other such expenses.

Divide the Resultant Figures:-

Divide the Labor Cost by Operational Cost. For example, the Labor Cost is $400,000 dollars for the year 2019, and the operational cost is $1,200,000 dollars, then divide 400,000 by 1,200,000. The answer will be 0.3

Obtain a Percentage Value:-

Multiply the resultant value with hundred and you will get the Labor Cost Percentage on Operating Cost.

You can keep a good record of your detailed optimization by using bookkeeping software.

How to Reduce Labor cost?

There can be a number of different ways that you can use to reduce your Labor Cost

  • Make proper employee schedules and revise income plans of your company’s labor
  • Reduce the turnover of your employees
  • Reduce overtime
  • Reduce other extra financial benefits
  • Earn tax credits whenever you hire new employees for your restaurant

Wrapping It Up of How To Calculate Labor Cost Percentage

Optimizing restaurant labor costs might look challenging and a very difficult task to conduct. But consider the fact that it is very important to win a profitable business.

This particular metric is as crucial for a successful business as breathing is crucial to life. First, develop a clear understanding of Labor Cost and Labor Cost percentage. Then start keeping a record of both of them.

Also, when you start optimizing your business metrics this way, you will notice a clear difference in the performance and efficiency of your restaurant.

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