Restaurants: Stay Profitable Amidst Higher Wages by Reframing Labor Costs

Building off last week’s article covering some of the ways restaurants can mitigate the impact of wage increases, this week I’m going a bit further into one of those methods—managing labor as a percentage of sales. This method of labor management helps restaurants use labor targets to increase profit margins, which is absolutely essential during this ongoing rise in wages.?

The more restaurant owners I speak with, the more apparent it is that people are experiencing anxieties over the coming wage increases for California fast-food workers. The expectation is that the ripple effect will increase wages in different sectors all over the country, and I agree that’s the likely outcome.?

So the big question facing restaurants is: how can you remain profitable with these changes on the horizon? Fortunately, there is a proven method to not only stay profitable, but actually increase profit margins—managing labor as a percentage of sales.?

What do I mean by that?

Essentially, you need to reframe the way you think about labor costs. Instead of viewing labor simply as an outgoing expense, think of it as a target to aim for—one that, if you hit, your profit margins grow. When you view labor as a percentage of your sales, it becomes easier to manage it in a way that keeps profit in mind at all times.?

How to Manage Labor as a Percentage of Sales

While going through these steps and applying them to your restaurant, it’s important to remember that no two restaurants are exactly alike. You’ll find that the target percentages vary between locations, and they change over time. It’s a good idea to review your labor targets periodically to ensure they still make sense for your business. With that in mind, let’s get started.?

Calculate your current labor costs as a percentage of sales for each location

The first thing you’ll want to do is figure out what percentage of sales you’re already spending on labor. There’s a fairly simple formula to help with this:?

Labor Cost Percentage = (Total Labor Cost / Total Sales) x 100

It may be helpful to further break this number down by where exactly that money is going. For example, employee benefits and overtime are labor costs that need to be considered. For a deeper look at labor costs in general, take a look at this article.?

Set a Target for Labor Costs as a Percentage of Sales Moving Forward

Now that you know what percentage of sales you’re currently spending on labor, it’s time to set targets. Remember, the goal here is to grow and maintain your profit margins. That means adjusting labor so it eats less into your total sales. You also need to be mindful of your service levels—the last thing you want is to be understaffed and see customer service suffer as a result. It’s all about balance.?

Forecasting is crucial for this step. You’ll need to look at historical sales, upcoming events, seasonal changes, and more, then use that data to establish your labor targets. We’ve found the best starting point is a labor cost percentage between 20% and 30% of sales.?

Build and Adjust Schedules

So you have your labor goals in mind, now it’s time to build schedules that help you accomplish them. As I mentioned before, forecasting sales and labor is crucial to this methodology. Once you have a good sales forecast, calculate your labor budget and build your schedule to fit within it. You can use an average hourly wage to get a general number for labor hours, but to manage profitability well, you should insert the actual wage rates as you put employees on the schedule, making adjustments to hit your labor targets.?

So many variables like local events and weather impact demand, so you’ll have to do your best to consider them while building schedules. Still, your labor targets might not be exactly perfect and that’s okay. You’re just trying to keep the margin of error low enough that you’re hitting targets without sacrificing service. It is important to keep records of how your actual labor cost percentage compared to your goals. Take your team through an analysis whenever there is a significant variance. Identify the cause and brainstorm ways to be more labor-efficient.

On a periodic basis, (most of our customers do it quarterly), bring the team together to assess how things can be done more efficiently. Lower your target labor cost as a percentage of sales based on your estimates of the increased efficiencies and put the new targets into effect.

One note—it is common for targets to vary by location as a result of the unique characteristics of each location. What’s important is to manage a given location’s labor as a percentage of sales consistently, and to manage it down over time.

Leverage Technology to Efficiently Manage Labor

For consistent profitability, you’ll need to create an accurate forecast, calculate the average labor allowance, schedule workers, run the planned schedule with actual wages, and make adjustments. That’s a lot all by itself, and to increase profitability over time, it is important to track and analyze actual results versus the planning goals.??

Fortunately, restaurant industry technology is better than ever and the data available, when correctly put to use, makes managing labor as a percentage of sales a much more simple and straightforward process. In fact, we built all the functionality you need directly into the Lineup.ai platform.

Lineup.ai uses artificial intelligence and machine learning to deliver sales, labor, and item-level forecasts that allow you to increase profit margins in a number of ways. In the case of managing labor as a percentage of sales, the platform enables you to set labor targets for individual locations, build out schedules that meet forecasted sales while staying on track to hit goals, keep an eye on progress in real-time, and dive into analytics to keep everyone on track and hold teams accountable.?

Our core functionality at Lineup.ai is forecasting, which is the foundation of efficient labor management. The AI automatically factors in historical sales, local events, weather data, and more so you know you have reliable data. You can use Lineup.ai to set your labor targets for each individual location, to help general managers build schedules that hit the targets, and to hold them accountable for managing to those targets. Our reporting function helps you keep track of the progress. If one or multiple locations are having a hard time hitting their goals, you can identify the issue quickly and work with your team to correct it.?

We built Lineup.ai with situations like increased wages and labor shortages in mind. Our goal is to help restaurants manage labor more efficiently so they can hit profit goals while maintaining excellent service and increasing employee satisfaction. It can be a difficult process to manage, but it’s necessary for success in today’s complex market.??

If you’re interested in a deeper understanding of managing labor as a percentage of sales, check out Lineup.ai’s how-to guide.?

Next week, I’ll take you through a real-life success story of a restaurant lowering labor costs through this practice and saving over $1 million in annual budget in the process.?