The Two Most Controllable Costs No. 2 – Labor

In a previous post, I spoke about the two most controllable costs that you need to focus on in order to keep your overall costs under control. In that post, I wrote about the first controllable cost, food. In this post, we will talk about the second factor that keeps your finances in line – labor.

Let’s discuss what labor cost really is. In short, it is what you pay to your employees for the time they spend working for you. Their paycheck is your labor cost. Disregarding payroll taxes and payroll service fees, essentially, if you combine all of the employees paychecks together in one week, that is that week’s labor cost. Keeping the labor cost to a minimum will help you significantly on your goal to having a financially balanced store. In this post, we’ll discuss the methods I’ve used that have helped me keep labor under control without making employees feel like they’re being stretched too thin.

One of the most useful tools I’ve ever come across in the business is a live labor percentage tracker. Many POS systems have one of these already as a feature. This tool helps you see your real-time sales and how it relates to your labor. Here’s how it works: the program sees all the employees clocked in and multiplies their current hours and pay rate. The total of all employees clocked in is then measured against the total sales for the day so far. This creates your labor percentage.

Typically your labor percentage will need to be 10-20%, but depending on your other costs and profit goals, a more precise number ought to be determined and used as a goal for managers and shift leaders. As sales increase, the labor percentage will go down. If you have more people on the clock, the labor percentage will go up. The key to staying in the sweet spot that you determine is knowing how many employees can do the expected amount of work. This requires you to have an intimate knowledge of your individual employees’ efficiency.

When you determine what your labor goal is, keep the live labor percentage on a screed in the office or on one of the POS systems so that the managers and shift leaders can regularly refer to it. If this isn’t feasible, just be sure to check your labor as often as possible so that the goal stays in mind. A good time to check would be right after rush. If labor is higher than ideal right after rush, cut an employee so that it will not contribute unnecessarily to the labor percentage.

Remember that the labor percentage ought to meet the goal at the end of the day. At the beginning of the day, your labor cost will be crazy high. Don’t be too concerned when you see your labor cost exceed even 100%. This will go down as you start to get more sales throughout the day. However, you will need to be significantly lower than you goal right after rush, because with the time afterward, the number will only rise. This is because you will be spending more of your labor cost on cleaning rather than capturing sales.

On that note, it is important to keep in mind that there are two times of the day when labor will only rise and will do so sharply – those being, before open and after rush. During those times, you will be paying employees but not getting any sales to support those paychecks. That’s why it’s important to have a familiarity with what labor ought to look like at each time of the day so that the final reading matches the goal.

So how do we actually find that sweet spot of labor cost? There are two ways to directly cut labor – a lower pay rate or less hours. You shouldn’t be cutting any employee’s pay rate, especially because you can’t afford to pay them anymore. The best way to spend less on payroll without cutting hours off the schedule is to hire employees at a lower hourly rate. I do not recommend using this technique because you will attract less qualified and less motivated candidates and you will only be giving yourself a bigger mess to clean up in the future. It’s okay to have a lower starting pay, but if you try to take advantage of employees by paying them less than what they are worth, you will soon reap what you sow by attracting employees who are worth what you pay. That leaves the only other option – cutting hours from the schedule. If you do the same job with less people, you can increase your profit margin because your income stays the same and your payroll decreases. Be very wary of this technique though. As you cut employees from the schedule, quality can quickly diminish, and if quality goes away, so will the sales. Now you’re in a bigger mess because you will have to cut another employee just to keep up with the lower sales volume. Before you know it, you may be out of business altogether. Not to mention your employees will be frustrated at the added workload with no additional pay.

So how do we fix this problem? Simply – employee efficiency. As you develop confidence in your employees, they will work better not only individually but as a team. I’ve seen crews of three people do a better job than a crew of six all because the crew of three were knowledgeable and worked together well. Your goal is to have all your crew developed and confident enough to easily handle a busy night in that manner. It takes time and effort on your part, but the reward is a peace of mind knowing that your labor cost is easily within reach.

As well, it’s important to avoid overtime for employees, unless you really need it or want to reward certain hard-working employees. Here in USA, all hours over 40 in each week are paid at a 1.5x rate. That means if an employee is normally getting paid $10 per hour, the hours over 40 will be paid at $15 per hour. Limiting these overtime hours is a great way to limit unnecessary increases of pay during the week, because those hours will destroy your labor more than anything else. If you have a salaried employee that doesn’t earn overtime, utilize those hours. In some types of restaurants, general managers ought to be active FOH and BOH members so that those hours are not paid to someone who would otherwise be extra. They ought to savers not the labor wasters. At the same time, be sure not to take advantage of salaried employees. If they are contracted for roughly 50 hours, let them save as much labor as they can during those 50 hours, not working extra so that labor is okay.

It’s important to note that the best path towards success in labor goals is to increase sales. During rush, that labor percentage almost always goes down, so if you can develop sales high enough to seem like the store is always in rush, your addition of extra people to support it will contribute some to the total labor cost but won’t contribute as much to the labor percentage. That’s why even though total labor cost is the actual cost that you will be paying, the metric to manage it is the labor percentage.

I hope you found this post useful. If so, leave a comment letting me know what other ways you’ve found helpful to cut labor without making your employees lose their hair.

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