Restaurant Labor Cost: How to Estimate Labor Costs
Since labor costs are one of the most expensive parts of running a restaurant, closely tracking labor costs is imperative for success. Here’s how.
WHAT PERCENT SHOULD RESTAURANT LABOR COSTS BE?
Whether you are an entrepreneur pondering your first, fifth, or 15th small-business venture, many of your considerations remain the same. Naturally, you will first need to decide what kind of business to open and what is most appealing to you. Are you interested in a retail or service-based business? Regardless of what you decide, there are a variety of factors to contemplate before opening your doors, not the least of which being the labor costs associated with opening and sustaining a successful business.
CHOOSING A FAST-CASUAL RESTAURANT FRANCHISE
Let’s assume you have done your research and decided to go with a sandwich franchise in the fast-casual space. You chose a Tom & Chee franchise because of the appeal of the business model and menu, as well as the support that the corporate leadership team provides. Understanding the recurring or occasional fees paid to the franchisor and the initial investment may seem simple once you review Items 6 and 7 in the Franchise Disclosure Document (FDD). But what about the other costs associated with running a business that aren’t listed in the FDD?
GETTING STARTED AND BUILDING A BUSINESS PLAN
When starting a business, you will need to account for startup costs, forecasted revenue, and ongoing expenses. Having a reliable estimate of what your startup costs will look like, including restaurant labor cost, is one of the benefits of investing in a franchise. Some franchises may include a revenue projection or Financial Performance Representation (FPR) in Item 19 of their FDD, but not all companies offer an FDR. In order to build a business plan that is as accurate as possible, you will need to do further research by speaking with existing franchisees about their revenue, costs, and ROI; and delve further into resources on your own
THE COST OF DOING BUSINESS
Business expenses can be grounded in two major categories — non-controllable expenses (like rent and utilities) and controllable expenses. The restaurant industry is no different. Non-controllable expenses are important, but they are primarily fixed costs and don’t vary significantly month by month. Controllable expenses, also known as prime costs, include the cost of goods (food and beverage) and the restaurant labor cost, which are crucial to the success of your business. With a franchise like Tom & Chee, you can expect a standard inventory list that includes required and/or recommended items.
LABOR AND PAYROLL
While labor costs can be simplified into management salary and payroll, among others, it is imperative to always staff your store for growth. The saying is: “Don’t staff for the sales you have, staff for the sales you want!” Furthermore, ensuring that each peak period is staffed appropriately with leadership roles is crucial to keeping satisfied customers coming back again and again. Although the percentages may vary depending on several factors, the restaurant labor cost should typically fall between under 30% percent of your restaurant’s gross revenue.
If you find that your operational profits are lower than projected, you may need to break down costs and analyze where changes can be made. Fortunately, because you chose to invest in a Tom & Chee franchise, you have a team of people to guide you on best practices for keeping those prime costs in check.