How Measuring Labor as a Percent of Sales Can Be Misleading
Labor as a percentage of sales is the most popular method restaurant managers use to consistently hit their labor and sales budgets. And while its effective on the surface level, it’s actually flawed. Don’t worry, don’t worry, you’re not doing anything wrong if you’re calculating labor as a percentage of sales (SPLP); in fact, you […]
Labor as a percentage of sales is the most popular method restaurant managers use to consistently hit their labor and sales budgets. And while its effective on the surface level, it’s actually flawed.
Don’t worry, don’t worry, you’re not doing anything wrong if you’re calculating labor as a percentage of sales (SPLP); in fact, you should definitely keep that number in your toolbelt. It’s just that, measuring your success based solely on SPLP can be misleading.
FRINGE CASES CALL FOR FORECASTING
In a restaurant, there are just far too many situations that might trick you into thinking your labor is running high.
For example, let’s say you are a manager at a Mexican restaurant. At 3:30 p.m. on a Tuesday, one guest comes in and sits at the bar. They order two beers and settle on the free chips and salsa. As a manager tracking sales and labor together, you have to ask yourself: who actually worked for that single guest?
You have to ask yourself: who actually worked for that single guest?
Chances are it was just the bartender. But – and this is the tricky part – you still had to pay a server and a hostess and a line cook, who really didn’t have anything to do with this transaction.
In this example, your labor as a percentage of sales would be through the roof! Cutting labor would be the obvious solution, right? Actually, no. It’s not fair to cut the only cook. What if the guest had ordered enchiladas?
Let’s keep going with this scenario. Say we did cut the line cook the next day. That’s what the labor percentage told us to do. Only this time a group of four come in for a late lunch. You’ve now got for hungry guests and no cook in site.
The ratio of guests to staff is a tricky one. Using labor as a percentage of sales alone means those guests don’t get the best level of service. Using your SPLP in combination with other calculations, however, can help you accurately predict the most dollar productive ratio of labor to guests.
One of the ways you can do that is to measure labor against what you forecasted. This is a good measurement because forecasting tells you how many people you are likely to serve during a given day part and then how many employees you’ll need to make sure guests are taken care of and budgets are hit. You’ll usually see it called Sales Per Labor Hour (SPLH).
Now you’re relying on solid projections (usually based on historical data gathered from the POS) to guide your labor and your schedules. Forecast too high – and you risk having too many people on staff. Forecast too low – and your team is in the weeds with a line out the door. Forecast just right, and you’re sales and labor budgets are sitting pretty.
HOW TO CALCULATE YOUR SALES PER LABOR HOUR
- Separate or split employees with the same salary into groups
- Add together the total number of hours worked in each pay group for hourly employees
- Multiply the hourly rate by the total number of hours worked
- Divide salaries by the number of weeks in a year (or months in a year if doing a weekly or monthly budgeting)
- Add together the wages in each pay grade to determine total labor costs
Now you’ve got the perfect trifecta: A budget, a benchmark sales per labor percentage and then ideal sales per labor hour to keep your profit margin in check.