Labor cost percentage tells you how much of each sales dollar goes to paying people. It's one number, and it's probably the most useful thing to look at when you're building a schedule. Here's how to work it out, what to count and what to do with it.
The formula
Labor cost percentage = total labor cost ÷ total sales × 100
If you spent $4,704 on labor this week and sold $15,000, your labor cost is 31.4%. Our free calculator will do this for you.
What to count
This is where people fool themselves. Wages alone understate what labor costs you. Include:
- Hourly wages, including overtime
- Salaries for anyone who works in the business, and many owners leave out their own
- Employer payroll taxes
- Benefits and workers' compensation
- Paid time off taken during the period
A simple way to estimate the extras is to add a percentage on top of wages. It's often somewhere from 8% to 15% depending on your state and benefits, but your accountant can give you your real number. For the example above, $4,200 in wages plus 12% for taxes and benefits comes to $4,704.
Whatever you decide to include, do it the same way every week. A consistent number you can compare over time is worth more than a perfect one you calculate differently each time.
Match the time periods
Compare labor and sales for the same days. If your pay week runs Monday through Sunday, take sales for those same days. Mismatches are a common way to get a number that makes no sense.
Look at it weekly at least, and by day if you can. A healthy weekly number can hide a Tuesday that loses money every single week.
What's a good number?
It depends on the kind of business, and anybody who gives you one number is guessing. People often quote 25% to 35% for restaurants, though a full-service restaurant, a fast-counter place and a cafe run very differently. Retail is often lower. Service businesses like cleaning or landscaping often run much higher, since labor is what they sell.
Your best benchmark is your own history. Pull your last three to six months and find your best weeks. What was the number when things ran well, service was good and the team wasn't exhausted? That's your realistic goal.
Too low can also be a problem. If your labor falls well below normal, check if you're running short and customers are waiting. Very low labor followed by falling sales is a pattern worth catching early.
A second number: sales per labor hour
Percentages move around when pay changes. Sales per labor hour doesn't care about wages. It tells you how much you're selling for each hour you're paying someone.
Sales per labor hour = total sales ÷ total hours worked
$15,000 in sales over 260 hours is about $57.69 per hour. You can use this to plan: if your goal is $60 and you expect $3,000 in sales on Saturday, you can schedule 50 hours.
It's a good way to plan staff by day, because you don't need to think about who earns what.
How to bring the number down
Start with the schedule, not with your people's pay.
Look for the mismatches. Compare hours scheduled against sales by time of day. Almost every business has a stretch that's overstaffed, often the first hour after opening or the last hour before close.
Stagger start times. Two people starting at 11 and 1 can often cover what two people would cover if they were both on from 9. You'll get the coverage where it's needed.
Watch overtime. Each overtime hour costs 50% more. Check who's heading over 40 by midweek. You've still got time to move a shift.
Reduce the last-minute scramble. Replacing someone at the last minute often means overtime or an unhappy employee. Clear swap rules and a call-out policy help here.
Cut turnover. Every new hire costs training time, when two people are paid for one person's work. Keeping people is one of the most effective ways to lower labor costs over time. We've got some ideas on that.
Cross-train. Someone who can work both the register and the stockroom lets you run with fewer people during slow times.
How not to bring it down
Don't cut until your team can't take breaks, doesn't get off on time, or starts working off the clock. That's how you get wage claims and resignations. Off-the-clock work is illegal even if you didn't ask for it, as long as you knew or should have known about it.
Remember, too, that cutting hours can cost sales. Lose a few customers to long lines each day, and you may lose more than you saved.
Check it before the week happens
The best time to fix labor cost is before you publish the schedule, when moving a shift costs nothing.
In PinkLinq, the schedule shows hours and labor cost next to your sales for each day. Type in projected sales or let the forecast use your last four weeks. Set a goal as a percentage or as sales per labor hour. Days over the goal turn red, and each day shows how many hours its sales can carry.