Skip to content

How To Calculate Labor Cost For Restaurants & Small Businesses

Share on facebook
Share on google
Share on twitter
Share on linkedin

Did you know that the typical profit margin of a food and beverage business is only 5-10%?

That means that you can’t afford to lose any more money by miscalculating your costs!

The difference between running a business that fails and a business that gives you financial freedom is how you manage your restaurant…

Your labor cost is a huge part of management!

As one of your top 3 biggest expenses, it’s super important that you understand everything that’s included in your labour costs, how to calculate it properly, and use it to budget correctly.

Only then will you get more profit in your pocket.

I’m going to show you how you to calculate labor cost below.

Labor Cost Is More Than You Think It Is

A lot of people have the wrong idea or don’t know how to calculate labor cost. In reality, labor cost is much more than just the hourly wage that you pay your employees.

It also includes benefits, bonuses, payroll taxes, remittance, training costs, uniforms, meals, insurance, health care, vacation days, overtime, and all the subsidies.

This is why it’s a huge chunk of your expenses!

What are the goals of understanding your labor cost?

  • Make sure that there are no hidden expenses holding back your business
  • Know where your business stands compared to industry benchmarks
  • Understand which levers to pull in order to generate more profit
  • See the full business picture

Too many people venture into the small business or restaurant world without truly understanding their numbers, so they’re destined to fail! Labor cost is one of those important numbers.

I’m here to make sure that doesn’t happen to you.

Here’s the two easiest ways on how to calculate labor cost:

1. Labor Cost Percentage of Sales

How To Calculate Labor Cost For Restaurants & Small Businesses 1

The first way to calculate labor cost is as a function of your revenue. As we discussed, there are so many different labor costs are involved.

I like to bundle all the labor costs up together, because I don’t want any labor cost to fall between the cracks as a miscellaneous item in my books. If that happens, it’s hard to categorize and make informed choices.

Now that you have the total amount of money that you spend on labor, including extra expenses, you divide that number by your total annual revenue.

Multiply that decimal by 100 and you have your labour cost percentage for your whole year!

For example, at our restaurant we make a million dollars in revenue before taxes. The total cost of our annual labor cost is $285k. Divide that and multiply by a hundred. The percentage of labor as a function of our revenue is 28.5%.

Now you may be thinking, why is this number important?

Your goal should always be to lower this number. If you’re standing at 35%, that is a very high percent by industry standards.

Now you know that it’s a cost you should put some real work and time into minimizing as much as possible and making sure that your labor cost is super-efficient.

2. Labor Cost Percentage of Total Costs

How To Calculate Labor Cost For Restaurants & Small Businesses 2

The second way of calculating labor costs is as a function of your total operating costs.

What is your total operating cost?

This includes your rent, cost of goods sold (all the ingredients, food costs, etc.), your marketing costs, and any other miscellaneous expenses needed to operate your restaurant.

Your labor cost should also be included! Leaving out labor cost is big a mistake that a lot of people make.

So how do you calculate that percentage? Divide your total labor cost by the total operating cost. Multiply that by 100, and it equals your percentage.

Using the same example, of $1,000,000 annual revenue. Out of the million dollars, $850k is our operating cost of running the whole restaurant, and out of the $850k, $285k is our labor cost.

Now you use this, and divide the total operating costs, multiply by one hundred, and you get 33.5%. So about a third of our total costs is spent on labor.

Once again, this acts as a benchmark for you to know which levers to pull in order to increase your profits.

Just imagine that you have hired an extra manager who’s costing you $80k. Only by calculating your numbers will you know that wage is much too high of a percentage!

Now you’re able to play to detective, and to find out where your redundancies are to cut extra costs.

How To Calculate Labor Cost For Restaurants & Small Businesses 3

At the end of the day, you want to run the most efficient restaurant of small business that’s going to allow you to profit. To do this you need to know your numbers because labor cost is one of the biggest expenses that you can control!

Once you do the calculation, use it as a benchmark and challenge yourself to see how much you can lower your labor costs month by month. Over time, you’ll be able to shave off hundreds!

Even if you cut labor costs down to 28%, you’re still saving 5%. Just 5% of a million is $50,000! That’s pure profit that you’re going to be able to put straight into your pocket or invest back into the business.

These numbers aren’t going to change themselves. Since you’re the boss running this whole thing, you have to take action and it’s always better to start sooner rather than later!

Now that you know your labor cost, it’s time to lower them.

If you’re an aspiring restaurant owner or food business owner that wants to build a profitable business, make sure to sign up for my free masterclass. On there I share with you my 3 step formula, the ACE formula, which helped me build my 7 store ice cream chain and how others used the same formula to start their food business on the right foot.

You May Also Like