Rethink Your Labor Budgets
Derek Smith
Performance Measurement Expert | Operations Management | Restaurant Tech | Revenue Management
A critical responsibility of management is labor cost control. Traditionally, many restaurateurs have relied on a percentage-based approach to budgeting labor costs, pegging them to a percentage of revenue. However, this method, while popular, is increasingly proving to be flawed and counterproductive in today’s market.
The Challenge of Percentage-Based Labor Costing
The core issue with percentage-based labor budgeting is its dependence on revenue as a variable. In a bid to manage labor costs effectively, many restaurants increase their average prices. The rationale seems straightforward: higher prices should translate to higher revenue and therefore, a lower labor cost percentage. But this is a misconception. The labor cost percentage is intrinsically tied to revenue; so, if you set a target of, say, 26.5% labor cost, and then increase your prices, you inadvertently need to reduce your labor cost percentage to actually realize any financial gain. Otherwise, your team ends up budgeting for labor based on inflated revenue figures, leading to inefficiencies and missed opportunities for true cost savings.
Covers Per Labor Hour: A More Effective Metric
To genuinely capture labor savings alongside price increases, restaurants need to pivot towards a more productivity-focused metric: covers per labor hour. ( Jim Taylor has mastered this measure). This approach shifts the focus from revenue percentages to actual operational efficiency. It measures how many customers (covers) are served per labor hour, providing a direct insight into the productivity of the workforce.
By adopting this metric, restaurants can align their labor budgets and targets with the actual service performance. It becomes easier to identify areas where labor can be optimized without compromising service quality. For instance, if a restaurant can maintain or even increase the number of covers per labor hour, it indicates that the team is working efficiently, justifying the labor costs regardless of revenue fluctuations.
Practical Steps for Implementation
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While percentage-based labor costing has its merits, it falls short in a dynamic pricing environment. By shifting the focus to covers per labor hour, restaurateurs can gain a more accurate and actionable insight into labor productivity. This approach not only aligns with financial goals but also supports operational excellence, ultimately contributing to the restaurant’s success in a competitive marketplace.
If you are interested in using this method in 2024 but you are not sure where to start, let's chat! I have been using this measure for nearly 10 years and it has dramatically improved the labor cost of the clients that I have worked with.
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Happy Holidays!
Former multi-site venue owner now CEO/ Founder @Peiso | President AWCC
1 年If a venue increases prices, they won’t maintain the same labour cost percentage; that wouldn’t make sense. The would decrease it. Or ideally, much better than alternative metrics, though sometimes difficult to do, is a profit target. Labour targets then constantly iterate based on the moving parts of the business.
Passionate Culinary and Hospitality professional. Curating #meaningfulexperiences by means of #unreasonablehospitality.
1 年Very good F&B article as always!! However, this applies to hourly paid labor. Many, if not all, Asian countries' labor are paid monthly according to contract, some are paid daily as casual daily workers; which makes labor a fixed cost. The way many of us calculate fixed (salaried on contract) staffing is to figure out how many to cover each shift for both front and back of house. For instance if my unit requires a total of 12 workers I multiply that to 1.5, as there are scheduled days off, annual leave (paid vacation days), and sick day assumptions. Should there's a need to add during busy seasons, like the current festive season, daily workers are added. There's a spreadsheet metric I use to calculate this. So when I propose a 'revenue' budget during preopening any F&B unit(s), I base this on the labor required as a percentage.
Restaurateur ? Author ? Keynote Speaker?Award Winning Business Strategist.
1 年Appreciate the shout out here Derek Smith ????
Performance Measurement Expert | Operations Management | Restaurant Tech | Revenue Management
1 年This productivity measure applies to Front of House labor. Back of House labor productivity should be linked to quantity of mains or food sales. Most scheduling software will give you the option to schedule based on covers or food sales. Try that approach for a week and see how it works. If you need assistance in setting up these measures, let's chat!