Labor is typically among the highest costs restaurant owners incur. According to a 2016 industry study by consulting firm BDO , the average labor cost generated by front- and back-of-the-house positions across all restaurant categories comprises 30.5 percent of sales revenue. Limited-service restaurants such as quick-serve and the rapidly growing fast-casual segment spend less than 29 percent. Casual and upscale casual establishments spend 33 and 31 percent, respectively, on payroll. Regardless of the type of food-service establishment you operate, the lower your food cost percentage, the higher your profit.
Because payroll is often the highest expense incurred while running a restaurant, profitability can hinge on a restaurateur's ability to keep labor costs under control. Profit is defined as the amount that is left over after subtracting operating expenses from gross revenue. Assuming other costs remain the same, the lower your payroll relative to your gross sales, the higher your profit, or net earnings. The typical restaurant operates on a slim profit margin of 2 to 6 percent, so a reduction in payroll expense can have a profound impact on profitability.
Lowering payroll expense is a tricky endeavor that can be most effectively achieved with delicacy and finesse. Indiscriminately cutting hours will ruin the loyalty of employees who depend on your for their livelihood. If you cut hours during periods when you need to be fully staffed, you can lose money by being unable to meet demand. Judiciously cutting hours involves carefully studying systems and sales records to identify and leverage patterns, introducing efficiencies and targeting schedule hours to maximize opportunities during your busiest times.
A restaurant's profit margin depends on managing other expenses in addition to payroll. Like payroll, materials or ingredients cost is a variable expense, one that fluctuates in direct relation to the volume of business you transact. Restaurant profit margins are also affected by fixed costs, or expenses such as rent that do not change appreciably even if you serve more customers.
The more items your restaurant prepares from scratch, the greater its labor cost will be relative to its food cost percentage. If your restaurant buys soups and salad dressings from a distributor or from another restaurant, you won't have to pay employees to make these items, but you do pay more for the finished product than you would for just the ingredients. The decision of whether to use convenience foods or to prepare items from scratch depends on the availability of labor, the layout of your kitchen and your sales strategy, such as whether you aim to attract diners who appreciate house-made ingredients.