3 ways to reduce labor costs

By David Scott Peters

Labor is a major area from which restaurants can bleed profitability. Why? When the clock goes tick, you owe! With food, if you buy too much, as long as it’s not wasted, spoiled or stolen, you can use that food tomorrow. But if you bring in too many people, bring them in too early or underschedule, you can’t tell those employees that the hours they just worked don’t count. This makes it vital to have controls in place to manage your labor costs.

These three changes will help control your labor costs and maximize your profitability:

1. Schedule less. There’s a myth in the hospitality industry that by bringing in more staff, you will give your guests better service. The challenge with this is it’s actually the complete opposite. You want to give your guests a great dining experience, so you bring more servers in to be the most attentive and offer “wow” customer service. Or you bring in an additional cook for faster ticket times. But when you have too many people working and not enough work, they can tend to talk with each other and end up giving less-than-great customer service. I would argue that when you are staffed to a level where you think you could use one more person on the floor, your guests get the best experience you can deliver because your team doesn’t have extra time to get distracted by each other. They only have time to stay focused on the guest. The end result is happy customers, higher sales and lower labor costs.

2. Schedule based on a sales forecast. There is a way to know what the right number is without relying on your gut feeling. It’s extremely common for restaurants to schedule like they always do, even when their sales are lower than expected or when they are coming out of a busy season. This practice can rob you of your profits faster than anything else in your business. Changing this practice starts with making your best guess as to what you think your Monday-to-Sunday gross sales are going to be for the upcoming month by the 20th of the current month. This enables you to adjust your schedules to take care of the needs of your guests and your business without losing money.

Add to this the practice of having a labor cost percentage target to shoot for (a labor budget), and you can simply multiply your forecasted sales by your labor cost percentage target to know how much money you can spend on labor next week. Subtract salaried management, and like magic, you know what you can spend on hourly employees to stay on budget and can adjust your schedule to match. This allows you to go into the week on budget, versus bringing people in and praying you’re busy enough to pay for them.

3. Track labor on a daily basis. Yes, you should track your labor costs every day. You have the tools you need as long as you have a POS system. All you need to do is run a daily report in your POS system each day to see how much you’re paying your employees who worked that day, and divide that by that day’s gross sales to know what your labor cost is. Then as each day goes by, just add the labor costs together and the sales together and divide them, continuing to total and divide to get your running labor cost. The hard part about this process is understanding that once you write a schedule on budget, your labor target will be different each day.

For example, let’s say you are shooting for a total 30 percent labor cost for all hourly employees, before taxes, benefits and insurance, and not including salaried management. Next, you adjust your schedule to be on budget. What you will see after you make the adjustments to your schedule is that your labor cost, based on how you scheduled, may be at 33 percent on Monday, because of a busy weekend, and now you have a ton of prep to do to handle the next few days of business. And since Monday is your slowest day, the labor budget takes a hit. But you also know that on Friday, your customers are managing your efficiencies, that you’re so busy you couldn’t add another server or cook and that your labor cost will be about 27 percent. Ultimately, if you use the hours and dollars budgeted for that week, you will be on budget after averaging it all out. It ultimately means management will have a different labor target to shoot for every day of the week to stay on budget and the hit labor percentage goal.

When you slim down your staff, schedule based on a budget and track your labor on a daily basis, you will put your management team in a strong position to control labor costs and make the business more profitable. You will also gain the benefit of happier customers and a management team who controls the business—not the other way around.

David Scott Peters, “The Restaurant Expert,” is the developer of SMART Systems Pro online restaurant management software for independent restaurants.