When you look at your P&L, your food cost and labor costs are your two highest line items, AND they are they are also the most controllable. Understanding these two numbers and what influences them is the best way to taking control of your profits. In this two-part series on labor costs, we will talk about calculating and understanding labor costs, and in the next blog we will talk about how to get a handle on and control labor costs.
Knowing your Numbers
The first step to success is knowing where you stand. Not understanding how the numbers are calculated or what goes into the formula will kill your small business. Restaurants run razor thin margins and uncontrolled labor costs will take you from the black to the red in a matter of weeks.
We will use this sample P&L to explain the labor cost calculation.
Formula:
To calculate labor costs, you will take your total labor costs (in this example $40,310) and divide it by your total sales ($119,950).
40,310 / 119,950 = 33.6%
As shown in this example, we do recommend that you break down your labor costs by two line items: managers on salary and staff which includes all of your hourly employees. It is also recommended that you track your employee benefit costs as an additional line item.
Expenses that should be included in your employee benefit line item are:
Paid time off / vacation
Employee insurance costs (health, dental, vision, etc.)
Bonuses
Payroll taxes
Benchmark:
The industry standard benchmark for labor cost is between 25-27%. However, if you get down to 25%, I'd recommend you keep working to get it to 24.5%, when you hit that goal, keep working to get to 24%.
In our example above, our labor costs are considerably higher than they should be. To be in line with the 25-27% benchmark, they should have budgeted between $30,000-32,300. It's possible they were training new staff, or a manager may have taken some vacation during that month, which reinforces having a budget, knowing where you stand, and where you are tracking.
Budgeting:
Now that you know where you stand, and where you should stand, it's time to get ahead of your labor costs - with a budget. Our Labor Forecast Tool will help you determine how many hours you have available to allocate to your team based on your projected sales.
Each week use this tool when you make your schedule, so you know how many hours you have available to schedule your staff, based on your projected sales. If you are not as busy, you may need to cut staff hours and have your salaried managers work additional shifts to keep your labor costs in line.
Weekly vs. Daily Tracking:
The Labor Forecast Tool will help you stay within budget as you are creating your schedule, but you will also want to keep up with this on a daily, real time basis. Your POS (Point of Sale System) will likely have the functionality to calculate your labor costs based on your current sales for the day, especially if you use your POS system as your timekeeping system. If it doesn't, you will want to watch your available hours for the day and if you are not hitting your projected sales for the day, send people home and cut hours.
In part 2 of our blog series on labor costs, we will tackle ways to control labor and reduce labor costs.
If you want someone to walk you through this activity for your store, give us a call and request a LABOR COST ANALYSIS consulting call. amanda@calirussogroup.com