10 easy steps for calculating Restaurant Labor Cost

Restaurant Labor Cost

Rising restaurant labor cost is an increasing concern for entrepreneurs in the food sector.

Note: This article is from a friend across the pond (hence the $$ references) – But much that is detailed here is applicable across all jurisdictions:

With many existing restaurants out there and the number increasing day by day, the food industry has become cut-throat competitive.

Restaurants now operate on razor thin margins in order to stay afloat in the competition.

When you add up all the cost of restaurant staff – (including Managers, Accountants, Chef/Cook, Kitchen Staff, Captain, Runners, Servers, Delivery Staff) – the labor expense is ever increasing.

To make sure that the percentage of the profit is not compromised, a tight leash for labor expenses is a must.

Below are some easy steps for calculating Restaurant labor cost to simplify the process and save your precious time.

1. Estimate the number of Guests

The first step in calculating the labor cost is that of estimating the frequency of guests around the clock. For every restaurant, there exists a peak and a low time; an ideal staffing scenario includes proportionate staffing.

For example, weekends have a large flow of customers in comparison with weekdays. The frequency of guests helps ascertain the number of servers required to tend a single table.

2. Estimate the number of Staff per Guest

Once you have figured out the frequency of guests, the next thing you need to do is have an estimate for the number of staff required to serve the guests. Calculate it  for each table. Each table requires a Captain who takes the order and a Server who serves the food. Other required staff includes Cook, Runner and an extra server if required. Therefore it is easy to assume that every table requires a Cook, Server, and a Captain.

To get a fair idea of staffing for 40 guests, following can be considered:?1 Cook hour for every 20 guests : 2 Cook hours for 40 guests?1 Server hour for every 10 guests : 4 Server hours for 40 guests?1 Captain hour for every 20 guests : 2 Captain hours for 40 guests?So, a total of 8 employee hours are needed to serve 40 guests

3. Determine the Labor Wages according to the Groups

Before going to the next step, let’s ascertain the group of the labor wages. There exists two modes of labor wage payment i.e. wages per hour and fixed salary. Calculate the cost of hourly employees, fixed salary employees and the total taxes and benefits offered.

For hourly employees, add the total hours per day of your staff for the week and then multiply it with the hourly wage. For different hourly wages for different servers, this needs to be done separately.
The easiest way to get all these complex calculations done, is to adapt Restaurant management software.

4. Calculate the Payroll Taxes

Payroll taxes have to be calculated while determining the labor cost. In order to do this, find out the amount of payroll tax to be paid according to your government policy. Calculate it for each employee. This step too can be simplified using Restaurant management software.?

5. Calculate Federal Unemployment Taxes

Also known as FUTA, this tax is applicable to the first $7000 of the employee. Multiply each employee’s wage and salary earning by 0.06 in order to determine the FUTA taxes that have to be paid by the employee. This step can be skipped if the employee’s year to date earnings exceed $7000. For earnings which exceed the threshold limit, calculate the taxes on the portion less than $7000.

6. State’s Unemployment Insurance Premium or Taxes

The State unemployment tax is not the same everywhere and for this reason, one needs to, find out the company rate and the employee eligibility criteria set by the state for for the labor and the payroll professionals. All of the above taxes are included as an expense in the total amount of the labor cost.

7. Costs and benefits

Almost every restaurant has some type of costs and benefits which they provide their employees. These costs and benefits may include the company’s contribution towards the health and retirement plans, the cost of employees meals, value of the stock option provided to the management, allowances like parking allowances, house rent allowances, and gym memberships. Determine the exact value of the mentioned cost and benefits and add it to the total labor cost.

8. Cost of worker’s compensation premium

This fund is created in order to compensate the worker for any mishap due to work. While the chances of a mishap are less likely to happen at a restaurant, the premium has to be paid for each payroll cycle. This premium paid by the employer has to be added to the total or the prime cost and can help in determining the cost of labor percentage.?Each state has its own set of rules, so the premium can be purchased from the state itself or from some commercial provider. The amount of premium is decided on the basis of the workplace’s claim history and also on the employees present at the workplace. The performance of the  workers is also taken into consideration.

9. Determine the projected sales

By considering the above taxes, costs and benefits the other factor to be weighed in is the average check paid by a guest; to find the projected sales. This step is required to ascertain the income against the expenses which are being incurred. The average checks per guest helps determine the amount of weekly or monthly sales. In order to find this out, calculate the total costs incurred and also the profit margin on each dish.

10. The final stage

This stage is bifurcated into two parts where the first part is the total amount paid as expense and the other part is finding out the projected labor percentage.?• The first step is, to sum up the amount paid in salaries, wages, payroll taxes, unemployment insurance taxes, and benefits. After finding a total amount, proceed to the next step.?• To find out the projected labor percentage, divide the labor wages by the sales. If it falls in the normal range then the labor cost is not chipping away your profits but if it is high then you are overstaffed.?Projected labor percentage = projected labor dollars / projected sales??The above-mentioned steps are pretty easy. Thus, calculating  labor cost isn’t a difficult job. This is necessary future policy decisions and increasing profit.

Author Bio : Utsav Upadhyay is currently advising clients how to create and manage effective advertising campaigns in accordance with the principles of Inbound Marketing. I offer Inbound Marketing auditing services, which are a great way of determining what your company’s strong and weak points are. I also provide Inbound Marketing training and consultation sessions via callhippo Marketing Sessions. In Free time I research about restaurant and hotel management services. Author Email : utsav@softwaresuggest.com


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