Decoding Restaurant Accounting: For better cost control- Part 4 of 4
In the last 3 blogs on Restaurant Analytics, we had covered various indicators for performance measurement in terms of costs and sales and RevPASH. In this 4th and final part of our series, we will be discussing how to control the cost of Labor, which is a major consideration for Restaurant owners & operators.
Labor cost analysis has two major functions: one is determining whether labor costs are excessive or insufficient; the other is determining where these inadequacies occur.
If a particular restaurant has employed more employees than required, then the labor costs will become excessive create operational inefficiencies by overcrowding the organizational facilities. On the contrary if restaurants employ insufficient number of employees, then the customer service will suffer. So the goal in labor planning is to match with customer volume & sales so that the restaurant can provide quality service without excessive cost.
In the Restaurant industry, the ideal labor cost is calculated by comparing it to the total sales in a given period of time. A common recommendation for quick service restaurateurs is to allocate around 15% – 17% of their total sales to labor costs. The Management salaries which are generally “fixed” in nature should not exceed 10% of sales for either full service or quick service Restaurant (Source: baker Tilly research).
In our study we have analyzed actual data of a restaurant’s 2nd Quarter data of 2018. First we will start with Labor cost as a percentage of sales.
In our study it is clear that the labor cost as a percentage of total sales in Q2 of 2018 is 17% for Location 1, 14.10% for Location 2, and 15% for Location 3. As per industry benchmarks, labor cost as a percentage of sales, should remain between 15% & 17%. Hence, Location 1 branch should strive tocontrol their labor cost to remain within the industry range.
Another important metric to assess the productivity of labor is the sales-per-labor-hour (SPLH).
This KPI calculates the earnings generated by the restaurant in each labor hour. The restaurant with an efficient labor force will be able to generate higher revenue per labor hour with the available resources. Higher the ratio, better is the efficiency of the labor. In Q2, the Sales per Labor Hour is highest in Location 2 ($51.75), followed by Location 3 ($47.39) and Location 1 ($44.15). This indicates that the workers of Location 2 are more efficient than the other two branches. Restaurant owners & operators can increase labor efficiency by reducing attrition, cross training employees so that same person can perform multiple jobs & investing in automation to reduce turnaround time.
Another important aspect of controlling labor cost is to reduce the overtime hours.
Depending on where the business operates, there can be specific local laws that govern overtime pay. Generally it is as high as 2 times the normal hourly rate. So the restaurateurs must manage time well and generate adequate revenue in order to cope up with this additional cost. In our study based on actual numbers, the overtime hours as percentage of total hours worked is highest in Location 1 (10.22%), followed by Location 2 (4.63%) & Location 3 (7.91%). However, the total sales during Q2 are lowest in Location 1. It seems that even though the employees are working overtime, it is not getting converted into revenue.
To conclude, managing labor cost is an important task which the management can always overcome by understanding how to calculate various labor cost percentages and implementing the correct strategies to increase the productivity of staff. The restaurateurs must first choose qualified, honest and dedicated employees. Accurate job descriptions, a good orientation to the job, good supervision and adequate on-the-job training about job performance will assist employees becoming productive in no time. The degree to which management is successful in meeting these challenges will ultimately reflect on the financials.
