Ask the Expert: Keep labor dollars from slipping through your fingers

Ask the Expert: Keep labor dollars from slipping through your fingers

By Rick Braa, CHAE

QUESTION: My total labor percentage including taxes runs between 36-40 percent each period. I understand this is normal, but I can’t afford it any longer. What are some ideas to help bring that number down?

ANSWER:  Managing labor in non-tip credit states is one of the most important management tasks. In Washington state, where the minimum wage is headed toward $10 per hour soon, every minute counts. To put it in perspective, $10 per hour is $1 every six minutes. With several people on staff, that rate of spend adds up rapidly. To ensure you get what you’re paying for, use these methods to reduce cost:

Start with the right numbers. Total labor including taxes needs to be closer to 30 percent than 40 percent. The lower your cost of goods, the more flexible this number can be; generally, 30 percent all in is a good number. To hit 30 percent, hourly labor needs to be around 20 percent, and management around 5 percent as taxes and benefits will range between 15-20 percent of wages. The higher the management percentage, the lower the hourly percentage and vice versa. Before the next period begins, cost out what the business needs without employee names attached. Total the number of hours and multiply the average hourly rate for both front and back hourly employees, add management wages, then divide the sum by projected sales.

By Rick Braa, CHAE

QUESTION: My total labor percentage including taxes runs between 36-40 percent each period. I understand this is normal, but I can’t afford it any longer. What are some ideas to help bring that number down?

ANSWER:  Managing labor in non-tip credit states is one of the most important management tasks. In Washington state, where the minimum wage is headed toward $10 per hour soon, every minute counts. To put it in perspective, $10 per hour is $1 every six minutes. With several people on staff, that rate of spend adds up rapidly. To ensure you get what you’re paying for, use these methods to reduce cost:

Start with the right numbers. Total labor including taxes needs to be closer to 30 percent than 40 percent. The lower your cost of goods, the more flexible this number can be; generally, 30 percent all in is a good number. To hit 30 percent, hourly labor needs to be around 20 percent, and management around 5 percent as taxes and benefits will range between 15-20 percent of wages. The higher the management percentage, the lower the hourly percentage and vice versa. Before the next period begins, cost out what the business needs without employee names attached. Total the number of hours and multiply the average hourly rate for both front and back hourly employees, add management wages, then divide the sum by projected sales. If the starting point is above 25 percent, go back to scheduling around the business to drive the maximum sales during busy times by having appropriate sales producing staff and minimizing labor in the slow times. Tighten up hours of the day that are low revenue and high labor.

Use scheduling software effectively. In this era, where the average restaurant is spending more than $350,000 per year per million in sales on labor, the investment of $2,000 or less per year for scheduling software is a bargain. Often, the use of scheduling software will reduce cost by 3-5 percent of sales, as it will provide the scheduled labor dollars and percentages prior to starting the period to ensure targeted labor percentages can be accomplished. Labor dollar seepage starts with early clock-ins and late clock-outs. It’s simple. If the spend is $1 for six minutes of time, 10 people clocking in six minutes early and clocking out six minutes late will cost $20 per day. That’s more than $7,200 per year. Scheduling software can provide reports showing who is clocking in and out early or late and how often. Besides tracking time in and time out exceptions, scheduling software will also pull sales data daily and match it up to the scheduled amount showing exceptions. For example, if a schedule was written for $4,000 in sales and $800 in labor, and actual was $3,000 in sales and $850 in labor, you know there were issues with phasing the crew.

Start fast, stay fast. A body in motion stays in motion. A body at rest stays at rest. When an employee arrives at work, make sure the work is ready, and manage those minutes at the start of the shift with diligence. The faster the start, the faster the performance. The goal is to increase productivity daily. Matching busy times with the most productive, fastest people produces the best set of results. Match sales by 15 minutes to the actual employees working every 15 minutes. See exhibit 1.

Exhibit 1 -Red = Labor Hours; Blue = Sales

In the example chart with sales in blue are charted on one axis, labor hours in red on another, it’s clear when there is a sales spike, there is a labor reduction. It’s also clear that the staff is starting too early. Much of this type of behavior is due to prep. Prep hours need to move closer to the sales spikes, and those individuals need to jump on the line and help when the rush hits.

To keep labor dollars from slipping through your fingers, start with the right numbers, use a labor scheduling tool and manage the schedule to speed of performance. Do this and you’ll see those labor numbers come into line. ■

For a more information on improving profitability and driving performance, contact AMP Services at rbraa@ampservices.com. Rick Braa is the co-founder of AMP Services, an accounting and consulting firm specializing in helping companies grow profitability.

(Source: Washington Restaurant Magazine, September 2014)

 

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