What Should Your Labor Cost Be?
What is labor cost? All your labor expenses to run your operation - hourly wages and salaries, is your labor cost. Some people like to include employment-related expenses such as taxes and benefits while others do not. There is no right or wrong way to calculate it if you know what is going on. Including taxes and benefits gives you a more accurate and realistic number, but is a little more burdensome to calculate on the fly. You can further break labor cost down into hourly and salary for better analysis. Labor is usually referenced as a percentage. Labor Costs ÷ Sales = Labor Cost % So, what should your labor cost be? This is one of the hardest questions to answer. It all depends, as labor cost is relative to your financial model and concept. Labor cost is not an arbitrary number that fits all circumstances. 35% labor cost would be perfectly acceptable in one business model but would be disastrous in another. In general, full-service pizzerias will have food cost that is lower because they can command a higher price since they are not just selling a commodity, but rather an experience. However, providing an experience comes with higher labor costs as hosts, servers, bartenders, and dishwashers are needed. On the other end of the spectrum is the delivery/carryout unit that must compete more directly with the chains. Customers tend to lump all of these operations into the same category. These types of pizzerias usually have higher food cost because they need to be competitive on pricing, but have lower labor costs. Most successful pizzerias have a combined labor and food cost of no more than 60%. However, it’s difficult to set an acceptable labor cost goal without knowing your financial model as a whole. If you have the time, create a full-blown business model of your pizzeria using the tools available at www.perfectingpizza.com. Otherwise, if your prime costs are not around 60%, you can start by shaving off one percent at a time. How do you keep labor under control? The simplest and easiest step to keep your labor under control is to set a budget and stick to it. No more scheduling on the fly, no more just filling in spots – it’s time to know how much labor you can spend and hold yourself to it.
- Set Your Target: Just start somewhere. Regardless of whether you took the time to build a financial model or you just know you need to shave a few points off you need to set a goal. Always use a percentage of sales for your target. This allows your labor dollars to rise and fall with sales volume.
- Project Upcoming Sales: Use your POS to help you project your upcoming sales for next week. Look back at last year, consider inflation, local events, holidays, educated guess, etc.
- Set Your Labor Dollar Allowance: Projected sales multiplied by the labor percentage target will give you your Labor Dollar Allowance. This dollar amount is what you can spend on your upcoming schedule. Don’t waiver from it.
- Build the Schedule: Take advantage of great tools on the market such as OpenSimSim to help you build a schedule where you can see your labor dollars in real time. Seeing your labor dollars move as you populate the schedule makes hitting your taget easy. If your schedule doesn’t come in under your target, tweak it until it does.
- Monitor: Don’t put it on cruise control. Labor needs to be managed daily. Make sure labor and sales projections are in line with the real world, if not you will need to make on-the-fly adjustments to stay on track.
- Repeat: It isn’t a one and done task. Every week you will need to build sales projections, establish a labor budget, make a schedule, and monitor it all - in perpetuity.
- Efficiencies: Take a good hard look at your operation. Are there areas where you can work smarter instead of harder? Can a piece of equipment replace an employee? Can you reduce steps or people by arranging your kitchen differently? Can menu items be replaced with simpler offerings that require less labor? Can some of your labor-intensive prep jobs be outsourced?
- Schedule on the “15’s”: There are no rules that say you have to schedule on the hour or half hour. Shaving 15 minutes off several shifts each day can quickly add up over a month. Pull reports from your POS to see exactly when you need your people.
- Adjust for Seasonality: People’s routines change several times through the year, translating into different peak hours and slow times for your operation. You can usually count on the start of school, end of school, and time changes to make a significant impact on your sales patterns. No sense in having your staff standing around at 5 pm when you won't get busy until 6 pm. Stay ahead of this by reviewing your hour-by-hour sales regularly and schedule accordingly.
- Cross-train: Offer your employees incentives for being able to do many different jobs. Paying one cross-trained person an extra $1 per hour for 40 hours to eliminate someone standing around for 10 hours during lulls at $9.00 an hour makes good sense
- Raise Prices: Inflation rarely, if ever, stops. So, as the price of labor, goods, and operating expenses increases so should your prices. Prices should always rise at least enough to offset any increase in your wages. This is especially true for those of you who reside in a state that has minimum wage increases that are tied to the Consumer Price Index. Wages go up -> Prices go up –> end of story.