If you’re like most businesses, you’re always looking for ways to reduce costs. But what if we told you that there’s a way to reduce labor costs by 3-5% without ever using an excel spreadsheet again?

What are Labor Costs?

Labor costs form the biggest dollar outgo for businesses. For a restaurant, it typically accounts for 30-35% of the total revenue.
However, with the minimum wage rates varying markedly, the amount spent on labor by organizations in one US state may not be the same as that spent in a neighboring state. Furthermore, based on the type of the service, some restaurants may end up using as much as 50% of their revenues for paying employee wages.
A 2019 research by software company Harri pointed out that 45% of restaurant operators saw a 3-9% rise in labor costs. According to a BDO report, the average restaurant labor cost increased to 31.2% in Q2 (second quarter) of 2019, from 31.2% in the same period the year before.
Restaurants often look to keep expenditures on labor within 20-30% of their revenues. To have a better understanding of the way labor impacts a company's profitability, let's first define labor cost.
Salaried employee wages, overtime, hourly wages, incentives and bonuses, health insurance, payroll taxes, paid days off, expenditure on supplies, public transportation allowances, meal expenses, training costs, and so on are all included in the labor costs of a restaurant. Labor costs are calculated on an annual, monthly, or weekly basis.
The average labor cost varies depending on the type of restaurant. That's because labor costs (and food costs) vary depending on the sales mix of products, food and service quality, operating hours, and pricing. Therefore, labor expenses in full-service and luxury restaurants are higher than those in fast food restaurants.
According to an article in Chron, fast food establishments are able to cap their labor expenditures at 25%, but table service restaurants typically spend 35-40% on labor. A fine dining restaurant would spend significantly more on labor than a steakhouse selling dishes like baked potato and steak that are relatively easy to prepare. This is because the fine-dining restaurant serves more items and prepares more items in-house.
The cost of labor might be variable or fixed. Fixed labor costs are simple expenses on salaried and permanent staff like cooks, servers, managers, and hosts. Payments provided to temporary workers are referred to as variable labor costs. For example, extra waiters and cooks may have to be brought in to manage operations in a restaurant on a busy Friday night, during the holiday season, or on the occasion of a lavish private party.

How to Calculate Labor Costs

When analyzing a restaurant's total operating costs, its labor costs are a significant metric to examine. The total cost of goods sold (COGS) and labor expenditures provide a clear idea of the prime cost of a restaurant. This is a critical metric that the investors and management use to assess a foodservice company's efficiency and financial health. According to experts, the prime cost of a restaurant should be no more than 60% of its total sales.
Calculating restaurant labor costs is, in fact, an important initial step in developing a business plan. It can be done by adding up all of the employees' wages, bonuses, incentives, allowances, insurance, and so on. However, not every employee works the same number of hours. Another option is to work out the total labor expenditure by hours worked. It is possible for business owners to measurelabor costs accurately with the help of data generated by the point of sale (POS) systems, and make forecasts accordingly.
Labor costs of restaurants can be calculated in two broad ways, namely, as a percentage of total restaurant sales, and as a percentage of the restaurants' total operating costs.
To get labor cost as a percentage of total restaurant sales, you need to dividelabor cost by the total yearly revenue earned. The latter essentially refers to the company's bottom line, or its earnings prior to taxes being levied or other deductions being made. It can be calculated using POS data. After that, the figure is multiplied by 100 to get a percentage.
To calculate labor cost as a percentage of a restaurant's total operating costs, measure the expenditure made on labor for every dollar expended on rent, marketing, food, drink, and so on. In order to arrive at a percentage, you need to multiply this figure by 100.
Once the labor cost percentage has been calculated, the next step is to look for ways to cut labor costs. Labor costs have often weighed on restaurants' razor-thin profit margins heavily. With the minimum wage rates getting modified and the labor pool diminishing, the matter has become more complicated.
Restaurants must spend more to recruit, train, and retain staff due to the tight labor market. Seven out of ten restaurants experience regular staffing shortages, the 2019 State of Full Service Restaurants survey pointed out. Some companies have been able to mitigate the impact by implementing technologies such as online ordering and self-service kiosks.
At the end of the day, the large-scale and indiscriminate sacking of employees is not the greatest answer to ballooning labor costs. It's inhumane. Secondly, it may affect customer service and, as a result, sales. As a result, restaurants must devise creative ways to reduce labor costs.

Importance of Labor Costs for a Restaurant

Inflated costs tend to offset and mellow down the earnings from brisk business. So how can an organization drive costs down? For starters, shifts that can be managed effectively by, let's say, five workers, need not have seven or eight workers. If a fewer number of employees can do a job efficiently and complete it well within the deadline, why on earth would you need extra hands?
The biggest mistake that many organizations often commit is to employ more people than is necessary. These surplus workers add no perceptible value to the business, and spending money on them is no less than wastage of resources.
Moreover, instead of keeping them chained in a company where their labor is redundant, these workers ought to be freed to offer their labor where there is a need. Alternatively, they may be reallocated tasks within the same organization if there is a possibility for it.
Accordingly, a restaurant in search of bussers and dishwashers can retrain and re-employ some of the extra servers it had hired. Employing surplus labor also prevents the organization to extract the best out of its employees to justify their wages.
Therefore, hiring and labor management procedures must be optimized, and even a 3-5% reduction in labor costs would deliver substantial benefits to the organization.
Labor cost control is critical for making efficient use of labor in the manufacturing process, achieving maximum output with the least number of resources, and achieving better output quality with the least amount of time and effort invested by the workers.
A restaurant that does not carry extra flab in the form of surplus staff would always offer the employees enough to do. Servers, for example, would have a sufficient number of tables to manage and a sufficient amount of tips to earn. A high table turnover rate and low staff-to-table ratio would make the employees happy and encourage them to stay. Considering the huge expenses involved in identifying, interviewing, hiring, onboarding, and training applicants, an organization has a lot to gain by retaining its employees.
Also, when the workers know that the company is strict about controlling labor costs, they would think before wasting time and materials or engaging in unnecessary overtime. There are smart tools for companies to nab rule-breakers, and the knowledge that they are being watched would stop employees from being inefficient, and give the organization a competitive edge.
The processes involved in controlling labor costs provide valuable information on aspects like labor availability, labor utilization, efficiency, and absenteeism. These business intelligence data can be used subsequently by organizations to plan better.

Why Excel Spreadsheets are Inadequate to Manage Labor

When you use Microsoft Excel to schedule employees, it's not always evident what the wage costs would be. An Excel spreadsheet calls for hourly wages to be manually updated on a regular basis. This is time-consuming and error-prone. Indeed, the susceptibility to human errors is a serious drawback of Excel spreadsheets and impacts all operations done using Excel.
Also, it is difficult to determine whether schedules made in Excel are within budget. It's also impossible to figure out labor costs compared to anticipated turnover.
Excel schedules are unable to display labor availability automatically, and data have to be entered manually, which again opens up the scope for errors and oversight. Similarly, employee absences aren't always noticeable. Absences, like availability, are not shown by default. Absences, too, must be manually entered first. A workforce management software, on the other hand, centralizes all the relevant employee information in one place, and data are updated automatically and can be accessed in real-time.
It's tough for team members to collaborate on a project using Excel because it only works on one machine for one person. When multiple employees are working on the same schedule, let's say on a shared terminal, it is difficult to identify which team member made what changes.
Spreadsheet data may be spread over multiple workstations, folders, offices, or locations. Even if you are able to locate files, finding the logic of formulae from one Excel cell to another is a massively time-consuming process.
According to research by Ventana, Excel users spend 12 to 18 hours every month editing, consolidating, updating, and correcting spreadsheets. Excel spreadsheets that aren't connected can result in isolated data, especially if they're emailed around.
Excel spreadsheets do not update in real time, and each change necessitates human intervention. Therefore, labor availability, absences, sales figures, and other parameters may change without the business owner knowing about them immediately. This prevents the business owners from quickly calculating labor cost changes and making the necessary adjustments like updating staff schedules or tweaking hiring procedures. The use of spreadsheets, therefore, slows down decision-making.
For spreadsheet users, it is an extremely tedious task to extract information from various departments, and then consolidate and summarize the data so that they can provide actionable insights.

How Labor Costs can be Reduced Using Software

On the basis of established business and human resource parameters, a business manager can make use of software to forecast staffing requests and predict ideal staffing needs.
Accordingly, a restaurant using demand/sales forecasting software is able to generate business intelligence data on the basis of which labor needs can be ascertained and employee schedules decided. Periods of high customer footfall such as dinner time, or festival days would warrant more employees to be scheduled to handle a shift, while periods of lull or slow traffic periods such as the period between lunch and dinner, and harsh winter days may allow restaurants to make do with a minimal number of employees. This way, labor costs can be optimized. In this regard, workforce management software needs to operate in tandem with demand/sales forecasting software.
Business owners using staff scheduling software need not worry about understaffing or overstaffing and can handle last-minute time-off/shift change requests without getting sleepless nights.
Employees, on the other hand, can check and accept schedules at their leisure, as well as notify supervisors and coworkers of their shift swap requests and non-availability well in advance.
These friendly processes add to employee satisfaction, leading to greater employee retention and saving fresh recruitment and onboarding costs.
Every business, irrespective of its size, must monitor the hours put in by its employees. Timesheet software can help business owners in keeping track of projects and payroll while accounting for vacations, sick leaves, overtime, and similar unforeseen events. When you are attempting to save money, consolidating all these data in one location makes it much easier to correct mistakes, and make decisions.
Workforce management (WFM) solutions also allow the overtime facility for employees to be streamlined. If an employee is approaching unauthorized overtime, the WFM system would alert both the company and the employee.
According to US labor laws, workers who are qualified for overtime compensation must get paid at least 1.5 times their usual pay rate if they work beyond 40 hours every workweek, or fixed and regularly recurring duration of 168 hours or seven 24-hour periods in a row.
As is evident, overtime wages would substantially add to the organization's labor cost burden, and once an employee works overtime, non-payment of overtime wages would attract hefty fines by the labor authorities. So employee overtime can catch an organization between a rock and a hard place, and so, it has to be cleverly managed and used when absolutely necessary. Unlike businesses using smart software, those relying solely on spreadsheets cannot save themselves from unnecessary employee overtime.
With the help of WFM solutions, requests for long-term leaves, such as those dealt with by the Family and Medical Leave Act (FMLA), can be tracked easily.
Workforce management solutions with dashboards provide managers with real-time visibility into staff punctuality and scheduling data, letting them solve any problems before they become serious.
WFM software can also generate reports based on important parameters to show how the employees progress over time. Accordingly, the best performing employees could be scheduled to manage critical and busy shifts so that the business functions efficiently without the need to employ surplus labor. This would then ensure that labor costs can be kept at a manageable level.
Employers may handle the demands of open shifts or arrange employee replacements almost instantly with WFM software that operates smoothly on mobile devices. WFM solutions give a clear idea of the employees available for work so that temporary workers do not have to be brought in case an employee calls in sick. This allows organizations to avoid spending money on external workers and hence, control labor costs.

Key Points to Consider While Buying a WFM Software

1. User-friendly- A workforce management solution ought to be simple. Fundamental user-friendly features such as automatic notifications, integrated workflow, and mobile-to-desktop job management should be taken into account. Other features that enhance usability and make the experience of the employees consistent and satisfying include drag-and-drop, stored shifts, and copying frameworks.
2. Enterprise-level data security- Any firm would be worried about entrusting confidential and valuable data related to employees to a new system. Therefore, enterprise-level security of data is a key consideration while selecting WFM systems.
3. Integrated reporting and analytics- This is a feature that any successful WFM system should have. It assists businesses in determining what is truly effective and which the areas of improvement are. A WFM system that has embedded reporting and analytics features can provide actionable insights on various subjects such as location-specific staffing and payroll, and suggest ways to drive downlabor costs.
4. Mobile app- Mobile devices are now an indispensable part of our lives. Workforce management solutions that can be accessed through mobile apps make business operations easy to manage. Accordingly, future labor requirements can be estimated, and matching schedules can be made just with a few clicks of the mobile touchscreen. The absence of a WFM software mobile app may have a substantial negative impact on employee engagement.
5. Flexibility- Proper scheduling with the help of workforce management software can assist businesses in fostering workplace flexibility and allow employees to strike a good work-life balance. Happier employees are more efficient and wedded to the organization. An organization that can boost employee satisfaction need not look for employee replacements and can save a considerable amount onlabor costs.
6. Demand forecasting- Staff scheduling solutions can help in matching workers to customer needs. Technology allows businesses to anticipate consumer demand and build 'perfect' rotas. Labor demand for specific locations and tasks can also be predicted.
7. Controlling absences- Online staff scheduling automates the task of managing employee absences. This is a far better approach than having to deal with physical request forms and time-consuming manual processes. By easily managing employee absences, the organization can take better and faster decisions on ways toreduce labor costs.

Best WFM Software for Restaurants

Zip Schedules is a feature-rich workforce management and staff scheduling software solution that can be accessed from the Hubworks app store as well as Apple Play and Google Play, and is possibly the best such solution in the market.
Zip Schedules is software that can be self-implemented. The program is easy to use thanks to features like simplified onboarding, a simple design, and a free mobile app.
It allows favorite schedules to be saved as templates, allowing new schedules to be created quickly and effortlessly. A business owner can even modify a previous week's itinerary to create a new one in order to accommodate changes.
Shifts can be inserted into staff slots, eliminating the need to create new schedules every time. This way a great deal of effort and time can be saved.
Zip Schedules makes communication among the team members, as well as that between the employees and managers, transparent and efficient. For instance, managers can use the internal messaging system offered by this software solution to quickly share important news with the employees. Also, the employees receive the schedules as soon as they are released, and supervisors can take immediate action based on leave requests or acceptance of shifts offered by coworkers.
With the help of Zip Schedules, managers get a complete picture of employee availability, shift swap and time-off requests, and are alerted when a shift opens up.
All this vital information is readily available and can be accessed by simply glancing at smartphones. Employees who require time off can use the Zip Schedules app to find coworkers who can fill in for them. With the click of a button, a manager using the Zip Schedules mobile app may accept or refuse employee requests at any time, from anywhere, in merely a matter of seconds.
Zip Schedules makes the process of preparing and changing schedules quite simple. Not only that, but it also makes schedule-writing smarter. It includes a prediction engine that lets business owners predict sales, and on the basis of that schedule employees in a way that both overstaffing and understaffing can be avoided.
Zip Schedules costs $19 per location per month for businesses having 1 to 20 workers. Organizations having 21-50 employees would have to pay $39 per location per month to avail of the services of Zip Schedules. A custom version serves companies having over 50 workers. Free support and a free mobile app are provided with all three plans.