by David Pavesic, Ph. D., FMP
You have two major “cost centers” at your restaurant. One is food and beverage. The other is labor. Which one do you think is most problematic?
If you said labor, either you’ve been running a restaurant for at least a few months, or you have some genuine insight into the challenges of running a restaurant.
Labor issues are still the No. 1 concern of most restaurant owners and managers. Food and beverage costs are held in check through price adjustments, portion controls and through purchasing efficiencies. On the other hand, labor costs are not controlled by paying low wages. First, the minimum wage sets the floor for the price of labor in the United States. Second, and more importantly, there is a matter of supply and demand. Most restaurateurs know there are simply not enough qualified applicants for the positions they need to fill.
Labor costs are controlled through sound scheduling and improving employee productivity. You increase productivity through training, better kitchen and dining room layouts, and the use of labor-saving equipment and products. That said, this article does not go into those human resource issues as much as it addresses cost-related issues and ways to increase employee productivity — the areas in which you have most control. It emphasizes the importance of scheduling in controlling labor costs and the ways to collect and analyze payroll data.
The Power of Numbers and Observation
It is very difficult to fly successfully by the seat of your pants in any complex business. Before you can develop appropriate and effective measures for labor cost control, you must gather the necessary information on which to make your decisions. Therefore, the accumulation and reporting of relevant labor cost information is critical. To do this, you need more than your calculator; you need to look around you.
Productivity and labor cost efficiency cannot be addressed and assessed only in “quantitative” terms, i.e., “straight numbers.” If you’ve been tracking your ratios, you might be encouraged to find that payroll comprises a lower percentage of overhead or that you are finding the number of customers per labor hour is creeping up. And these can be good signs. Just don’t lose sight of the “qualitative” side of these activities, i.e., the stuff you can figure out by looking around you, asking questions, and using common sense. If customer service is compromised, the initial savings of a lower payroll cost can be negated by a decrease in sales caused by customer defections to competitors.
On that note, employees cannot be viewed and treated as “inputs” without feelings, needs, and fears. Every time the industry has faced a labor shortage, it becomes more empathetic to the needs of employees. This is accompanied by a temporary and short-term shift away from a bottom-line mentality to one emphasizing employee retention and job satisfaction. We have to remind ourselves that the two most important groups of individuals affecting our business’s success are the customers and the employees. Both must be given the same respect and appreciation.
Don’t Hang Your Hat on the ‘Payroll to Total Sales’ Ratio
When trying to determine the productivity of your staff, the traditional ratio of “payroll to total sales” is not an effective and accurate measure of worker productivity and scheduling efficiency. Essentially, you pull this ratio from your income statement to tell you how much sales you are squeezing out of your payroll expense. What could be more telling? Well, there are three reasons why additional measures must be used to analyze labor costs.
First, ratios such as this are not enough to help you sleep well at night (or keep you up at night, depending on the figure). The traditional labor cost ratio really just indicates to management what needs to be addressed, without providing any specific information. For example,...