Is labor really labor?
Tuesday, December 2nd, 2008Is there such thing as too much of a good thing? Krispy Kremes? Might as well be crack cocaine. The NFL? Give me a bag of Doritos, cold sodas and a bathroom, and call me next week. U2? U bet. Leno? Well, I’m actually a Letterman guy. Have you ever seen Jay not ask a question to a guest that includes the phrase “Now lemme ask you something”.
Labor is both a good and necessary thing for a successful restaurant. But including what I call fixed labor costs when looking at the overall labor component of the profit and loss statement is misleading. Most restaurants have staff on hand who are salaried. Back-of-house managers, the general managers, perhaps even some shift staff, and others may be paid a fixed rate for their work.
When measuring labor cost as a percentage of sales for the period, it is important to separate out hourly labor, which should vary depending on sales volume, from fixed labor. A $50,000 per year GM is still a $50,000 per year GM whether sales are $800,000 or three million plus dollars. Including her salary gives a skewed perception of real labor cost, because her wages are in that expense category whether you’re hearing crickets when you walk in or can’t hear your companion above the crowd buzz.
As an example, let’s say your business raked in $1,200,000 in sales last year. All non-management labor (hourly employees) comprised $240,000, which is twenty percent of total sales. Management labor added another $80,000, or about 6.7%. You might think that total labor as a percent of sales was 26.7%. And you’d be right. Now we look at 2008. The recession hit you as well, my friend, despite your introduction of the ‘Really Really Awesome Blossom’ appetizer. Sales fell to $900,000. Non-management labor was $198,000, or 22%. You still paid your managers $80,000, or 8.9%. Total labor cost: thirty point nine percent. The ‘but’ at the end of all of this is that labor didn’t really go up 4.2%. It went up two percent. Fixed labor costs are just that - fixed.
So, when preparing your financial statement, keep fixed labor costs separated from variable ones. It’ll help you keep a more realistic sense of how your labor costs are holding up.
Now if only the ‘Really Really Awesome Blossom’ was made out of Krispy Kremes. Lard-o-licious!
