What You Need to Know About Labor Cost Percentages

how to figure out labor percentage

In this example, it’s 60% of the total cost of doing business. Despite what you think is driving up costs, hiring more workers isn’t usually the culprit; it’s actually overtime. Those time and a half hours add up, and according tothe Bureau of Labor Statistics, it accounted for 4.6% of totalstatewide revenues. Even some salaried contracts are structured in a way that if a worker works over their allotted 40, there are overtime perks written in.

This method leaves profit out of the equation and determines if your labor costs are excessive compared to the rest of your overhead. In the above example, if your total operating costs for the year were $600,000, then your labor cost was 25% of your total overhead. Overhead represents the average cost of benefits per employee. To figure it out, just how to figure out labor percentage divide your total annual overhead costs by the number of employees at your business. This includes building costs, property taxes, utilities, payroll taxes, benefits, insurance, supplies, and equipment costs. Once the total overhead is added together, divide it by the number of employees, and add that figure to the employee’s annual labor cost.

Using Direct Cost to Allocate Overheads

Once you have months and years of data, you can create an average labour percentage to aim for, and compare performance on the same day or week across different years. In RotaCloud, you can automatically calculate labour cost percentages as you adjust your rota. Calculations are performed in real-time, meaning that managers can experiment with a variety of scenarios and shift patterns and have a greater idea of how they will affect labour spending.

how to figure out labor percentage

While the tips outlined above can be beneficial in all restaurants, these ones listed below are more applicable to franchises. Some restaurants can feel constricted by their traditional sit-down or take-out dining options. However, there are a few ways to increase revenue during each shift without increasing labor costs. Labor cost percentage is determined by dividing all labor-related costs by your gross sales in a given time period, then multiplying that quotient by 100%. Restaurant labor cost is hard to keep low and it ain’t going down. 60% of respondents to a 7Shifts survey of restaurant managers said their labor costs went up in 2019.

How Is Labor Cost Calculated?

When you save on fees, your COGS number rises—leading to healthier profits and a healthier labor cost percentage. It’s not the cheapest option, but it’s one that’s sure to cut down labor costs and drive future profits. Here are 7 ways to combat the rise in labor costs without having to lay off your staff. Labor tracking hardware when you have examples of labor costs. Labor tracking software and analytics, you can get a better picture of how much each hour is costing you so you can make informed decisions about product or service pricing, material costs, and labor.

  • This way, if you’re short-staffed, you won’t need an employee to work a double shift .
  • In fact, labor and food are the most expensive operating costs for the foodservice industry.
  • From time tracking and payroll to workers’ comp and meeting payroll records requirements, we’ve got your back.
  • Inventory management Grow your product-based business with an all-in-one-platform.
  • These individuals would be first cut for lunch and first cut for dinner (to ensure they don’t spill into overtime).

Check your labor reports once a week or once a month specifically for overtime calculations to see how much you could be saving. Chances are, you’ll be able to move something around to cut some of these costs in the future. In this example, Jimmy’s Pizzeria’s labor cost percentage for the month is 27%. Staying on top of labor cost calculations and monitoring labor expenses are essential for running a successful company, whatever industry you’re in. Now you know the actual labor cost per hour for hiring Maria.

Collect Sales Information

They don’t need servers, because of the limited service style, or specialized cooks in the kitchen because fast food recipes are created for quick, easy execution. While it’s extremely important to treat your staff well and pay them fairly, controlling labor costs is equally important to maintain profitability and ensure that everyone has a job https://online-accounting.net/ in the first place. Here’s a few ways to keep your labor cost percentage in check. This is not just a shift from 24% to 36%, but rather a 50% increase in your labor cost percentage. Going above the recommended 30% labor cost percentage typically signals that you’re now over-staffed and might need to cut back on hours or possibly head count.

how to figure out labor percentage

Once each day, week, or month has passed, it’s good practice to plug actual sales and labour data into your spreadsheet or other software to see how your plans stacked up to reality. Once you’ve set a target labour percentage (based on historic/baseline figures), you can use it to help you build your rotas. You can now work out a labour budget that’s based on expected sales.

What is the ideal restaurant labor cost percentage?

While restaurant labor shortages continue challenging the industry, restaurants are also struggling with record-setting employee churn and staff retention. This is where effectively scheduling employees is critical. Luckily, there isovertime softwarethat even gives warnings if costs are getting too high. The following sections describe what you need to determine, in order to streamline labor costs the smart way. 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.

  • Because if you run any form of promotional discounts, employee meals, anything, there are comps.
  • All of those costs are variable, and shouldn’t be taken as hard and fast rules.
  • Always use the same time-period costs when determining the percentage of labor.
  • Integrations don’t have to be difficult, check out our HR solutions to see how our products can fit your needs.
  • If hourly, you’ll need to determine how many hours will be worked per week and how many overtime hours will be needed, if any.
  • We’ve already done the legwork of vetting and checking references so you can book with confidence.

No matter what your industry, consider on-demand staffing. Our technology provides you with our W-2 workers on an as needed basis, or as a solution to more permanent hiring needs. Listen in to hear me break down what the most successful restaurant owners do to run restaurants that make money and give them personal freedom. Find the right HR solution to streamline administrative processes and free up time for value-added tasks, helping ensure that labor is worth the cost. CPAs Instantly access HR & payroll data with real-time analytics to guide decision-making. Keep an eye on this number to make sure you have enough staff to handle the demands of each quarter. If it’s higher than 30%, then you’re probably spending too much on labor.

Get the restaurant industry scoop delivered to your inbox. Using a restaurant payroll system will remove all the tedious pen-and-paper process. AJ Beltis is a freelance writer with almost a decade of experience in the restaurant industry. He currently works as a content specialist at HubSpot, and previously as a blogger at Toast.

This table shows industries’ labor costs from 2019 to 2020 as reported by the Bureau of Labor Statistics. Workforce management software and automating time and attendance functions are excellent steps toward more effective labor cost management.

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