Is Your Labor Cost Lying To You? Different Ways to Measure Your Labor Cost.
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Understanding labor costs is vital for restaurant owners and managers. These costs can often determine the difference between a successful establishment and one that struggles to stay in business. In this article, we will explore different methods for measuring labor costs in a restaurant. We will cover percentage of revenue, dollars per order, percentage by total seats, percentage by occupied seats, and percentage by hour.
Additionally, we have a special offer from Vanguard F&B Thynk Tank that can help you enhance your food and beverage revenues. We are providing a $50 value guide free of charge, along with consulting services designed to elevate your restaurant's performance.
Importance of Measuring Labor Costs
Labor costs can eat up a significant portion of your budget—sometimes accounting for up to 30% of total expenses in many restaurants. If not managed well, they can severely impact your bottom line. Tracking these costs accurately enables you to make strategic decisions that improve efficiency and profitability.
Knowing how to gauge labor costs allows you to uncover trends, allocate resources more effectively, and optimize your staffing. For instance, a restaurant that better manages its labor costs could see a profit increase of 15% within just a few months.
Percentage to Revenue
One straightforward approach to measure labor costs is by calculating the percentage of labor costs to total revenue. This method gives you a clear understanding of how much of your income is consumed by labor expenses.
How to Calculate
You can calculate this percentage using the formula:
```
Labor Cost Percentage = (Total Labor Costs / Total Revenue) x 100
```
For example, if your total labor costs amount to $20,000 and your total revenue reaches $100,000, your labor cost percentage will be 20%. This is significant because a labor cost percentage of 20-30% is often deemed acceptable in the industry.
Why It Matters
By keeping an eye on this percentage, you can determine if your labor costs align with industry benchmarks. For instance, compared to other casual dining restaurants, which average around 24%, yours would need attention if it creeps above that level.
Dollars Per Order
Measuring labor costs in dollars spent per order can reveal how efficient your service is.
How to Calculate
Use the following formula:
```
Dollars Per Order = Total Labor Costs / Total Number of Orders
```
For instance, if your total labor costs are $15,000 and you served 3,000 orders in a month, your dollars per order would be:
```
Dollars Per Order = $15,000 / 3,000 = $5
```
Why It Matters
Assessing dollars per order can highlight inefficiencies. If this number is higher than average for your restaurant type, it may signal a need to streamline operations or modify staffing levels during peak hours.
Percentage by Total Seats
Measuring labor costs as a percentage of total seats provides insights into how well you utilize your staff relative to seating capacity.
How to Calculate
To find this percentage, use:
```
Labor Cost Percentage by Total Seats = (Total Labor Costs / (Total Seats x Average Revenue Per Seat)) x 100
```
If your total labor costs are $25,000, you have 100 seats, and your average revenue per seat is $50:
```
Labor Cost Percentage by Total Seats = ($25,000 / (100 x $50)) x 100 = 5%
```
Why It Matters
This metric indicates whether your staffing levels are appropriate. For example, if your percentage is above 10%, it might highlight overstaffing, while below 5% could suggest you're not meeting customer needs adequately.
Percentage by Occupied Seat
Another effective measurement is calculating labor costs as a percentage of occupied seats, which can provide an accurate view of labor efficiency during busy periods.
How to Calculate
You can compute this as follows:
```
Labor Cost Percentage by Occupied Seats = (Total Labor Costs / (Occupied Seats x Average Revenue Per Seat)) x 100
```
For example, if your total labor costs are $30,000, you have 80 occupied seats, and your average revenue per seat is $60:
```
Labor Cost Percentage by Occupied Seats = ($30,000 / (80 x $60)) x 100 = 6.25%
```
Why It Matters
This metric is crucial for managing peak hours. It helps you gauge if labor costs align with actual customer numbers and can guide real-time staffing adjustments.
Percentage by Hour
This measurement provides insights into how well staff are performing in relation to the revenue generated per hour.
How to Calculate
Use this formula:
```
Labor Cost Percentage by Hour = (Total Labor Costs / Total Revenue Generated Per Hour) x 100
```
If your total labor costs are $10,000 and you generated $50,000 over 40 hours, then:
```
Labor Cost Percentage by Hour = ($10,000 / ($50,000 / 40)) x 100 = 80%
```
Why It Matters
Identifying peak hours with high labor cost percentages can indicate a need to optimize staffing. If your labor percentage spikes during certain hours, it may show inefficiencies in service that can be improved.
Final Thoughts
Measuring labor costs effectively isn't just about keeping expenses in check. It's about comprehensively understanding your restaurant's dynamics and making informed decisions that drive profitability. By using various methods—like percentage to revenue and dollars per order—you can obtain valuable insights into your operations.
To assist in navigating these metrics and boosting your food and beverage revenues, Vanguard F&B Thynk Tank is offering a limited-time, free pro tip guide worth $50. This guide is full of effective strategies to enhance your restaurant's performance.
Additionally, if you’re interested in deeper insights, consider booking a consulting session with Vanguard F&B Thynk Tank. Our expert team is committed to helping restaurants and hotels optimize their operations and increase profits.
Take charge of your restaurant's financial health. Don't let labor costs deceive you!
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