Episode Transcript
[00:00:00] I want you to picture a restaurant owner sitting at his desk on a Wednesday afternoon. He's reviewing the schedule for next week. Sales are expected to be a little soft, but he doesn't want to get caught shorthanded in case it does pick up. So he adds another server to Friday night and another cook on Saturday and an extra person on Sunday for brunch, just in case. And then he posts the schedule. And what happens next?
[00:00:24] Monday is slow, so the manager sends somebody home early. Tuesday is slow, so they cut another shift. Wednesday, they make a few more adjustments. And by the end of the day of the week, the owner's feeling pretty good about himself. We were really aggressive with labor all week long, and then the payroll report comes in.
[00:00:40] 38%.
[00:00:42] The target was 30. And he can't understand why, but I can.
[00:00:47] He lost the labor battle before the week even started.
[00:00:51] Why? Because he posted a schedule he couldn't afford to begin with and then spent the rest of the week trying to undo it. And see, this is one of the most common mistakes I see restaurant owners make. They build schedules based on how many people they'd like to have. Then they hope sales will be high enough to justify the expense. And if the sales aren't there, well, they just start cutting. But hope is not a labor management strategy. So today we're going to talk about what your restaurant's labor cost actually should be, how to calculate it, how to set a realistic target, and most importantly, how to build a schedule that gives your team the support they need. What? Without destroying your profitability? Because your employees are one of the greatest assets in your business. But if you don't have a plan for managing that crucial investment in those employees, you're gonna struggle. Why? Because they're going to struggle. They're gonna get burnt out. Let's get into it on today's episode of Restaurant Strategy.
[00:01:42] There's an old saying that goes something like this. You'll only find three kinds of people in the world. Those who see, those who will never see, and those who can see when shown.
[00:01:52] This is Restaurant Strategy, a podcast with answers for anyone who's looking.
[00:02:13] Hey, everyone. Thanks for tuning in. My name is Chip Close. This is the Restaurant Strategy Podcast, two episodes every week where we help you level up and build a more profitable restaurant. I also run a coaching program. If any of this resonates, this is very much what we do day in, day out, week after week with the members of the P3 mastermind. Go to RSprophet.com to learn more about what we do watch a video, read some more information about the program. Set up a call with me or someone from my team so we can answer all your questions. If it's a good fit, we'll talk about what next steps are. And if it's not a good fit, hopefully we can point you in the right direction. Rsprophit.com as always, you'll find that link in the Show Notes.
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[00:04:07] Okay, so before we talk about targets, we need to make sure we're measuring the same thing, right? So we have to answer the question what actually counts as labor? Because when I ask restaurant owners what their labor percentage is, I often get an answer that doesn't include all of their actual labor costs. They tell me what they spent on hourly wages, but they forgot management salaries, they forgot payroll taxes, they forgot benefits. They forgot the other costs associated with employing their team.
[00:04:35] So the first thing I want you to do to calculate your all in labor cost is to put it all together. Hourly wages, salaries, payroll taxes, benefits, payroll fees, any other people related expenses that actually belong in your labor budget.
[00:04:49] Then divide that total by your revenue for the same period. That will give you your labor percentage. And let's say you generate $100,000 in monthly revenue and your all in labor expense is $35,000. Congratulations. Your labor cost is 35%. Simple enough, right? But now I want to ask you a more interesting question.
[00:05:09] Is 35% good? Is it bad? Is it sustainable? And see the answer depends on the economics of your business. Certainly your market, your concept, all of this. I got something called the 30, 30, 20 rule. So I generally target 30% for all in labor, 30% for cost of goods sold, which leaves 20% for everything else you spend money on. In the end, that leaves 20% left over in operating profit. That is an insanely profitable business, one definitely worth running and growing. But see, the framework is meant to help you balance your expenses. It isn't a promise that every restaurant can or should operate, operate with exactly the same percentages, meaning a business with a different service model, wage structure, or cogs may need a different balance. What matters is whether your entire expense structure supports the profit that you're targeting. And I want to make another point. A lower labor percentage is not automatically a better labor strategy, meaning you can cut so aggressively that service actually falls apart. What happens in the end is ticket times increase, your guests become frustrated, your best employees burn out, and suddenly your effort to save money is actually costing you sales. So the goal is not necessarily to run the restaurant with the fewest people humanly possible.
[00:06:27] The goal is to build an efficient operation that consistently delivers the experience you promised. So now let me show you how to do that. We start with the forecast, not the schedule. See, when I work with restaurant owners in the P3 mastermind, one of the very first things I want them to do is forecast revenue, because revenue is one of the three moving targets in our business. Right? I talk about this a lot. We don't know exactly how many people will walk through the door next Tuesday, but we can make an informed estimate.
[00:06:58] We can look at our reservation book. We can look at historical sales. We can look at season seasonality and holidays and local events and the weather. And we can use that information to establish a reasonable sales forecast.
[00:07:12] Let's say you expect to generate $80,000 next week, and your labor target is 30%. Well, that gives you a labor budget of $24,000. So that's the number you start with, not the number you discover after you've already written the schedule.
[00:07:27] $24,000. And see, now your managers have a clear assignment. They build a schedule that can deliver the expected volume of business within that budget. And if they can't do it, you have a conversation. Because maybe the forecast is wrong, or maybe the target needs to be adjusted, or maybe the restaurant is using too many labor hours during the slow periods. Maybe the menu requires more prep than the current sales can support. Maybe we're scheduling too many people at the same time. But see, now we have a specific problem to solve. We have to hit a number. And see, that's much better than simply telling the team to, quote, unquote, watch labor. Because honestly, really, what does that even mean?
[00:08:07] Watch it. Do what? See, I want your managers to know exactly what success looks like. Here's the forecast, therefore, here's the budget. So now go build me a schedule that is under budget. And here's who's responsible for making sure we hit that number. When you, when you show them what they're responsible for and you tell them that they're accountable to that they'll do it. They'll rise to the occasion. Here's the first step of never.
[00:08:33] Of never being over budget. We never post a schedule that's over budget. It's one of the simplest rules I teach. We never post a schedule that's over budget. And now, on the surface, that sounds obvious, right? But I can assure you that an enormous number of restaurant owners aren't doing it. See, they schedule heavy because they're worried about getting busy. And then they plan to make cuts if the business doesn't materialize. But guess what the problem is, right? You can make adjustments throughout the week. You can send people home early, you can trim hours when reservations fall off. But if you start the week dramatically over budget budget, those adjustments will never be enough. You can't reliably cut your way down from 40% to 30. The schedule needs to be built correctly from the start. So here's what I recommend. You have one person build the schedule and a second person review and approve the schedule before it gets posted. So maybe your chef builds the kitchen schedule and then the general manager reviews it. Maybe the service manager builds the front of house schedule and the owner approves it.
[00:09:32] Whatever works for your operation, do that. The point is that somebody needs to check the math. Not just the number of names on the schedule, but the actual cost, how many hours, at what rates. And what about overtime and management salaries and the taxes and the benefits and the all in projected expenses? And how does that compare with the budget? If it's over, the schedule goes back for revision and it doesn't get posted until it's under.
[00:09:57] It doesn't mean blindly removing people until the spreadsheet looks quote unquote right. It means finding a way to execute the business profitably with the support you need at the price you need. Sometimes that requires you to rethink the way the entire restaurant operates, which we'll come back to in a minute.
[00:10:15] See the real opportunity in all this is productivity, and it's an important mindset shift that I want you to make.
[00:10:22] Stop thinking about your employees as nothing more than an expense you need to minimize and start thinking about them as an investment that you need to develop.
[00:10:31] Because two employees with the same hourly wage can produce very different results.
[00:10:37] Meaning one server might struggle to handle four tables, while another might comfortably handle six while delivering a better experience and generating a higher check average. One cook might need help getting through a busy service. Another might be able to handle the station confidently because they've been properly trained and set up for success.
[00:10:56] And one manager might spend the entire shift putting out fires, while another might anticipate problems before they happen. Right. I'm really into fire prevention instead of firefighting when it comes to managers. Same job title, very different levels of productivity. Same thing with cooks, bartenders, servers. So when you look at labor, don't just ask how many people you have on the schedule. Ask what those people are actually capable of accomplishing. And see, here's where training becomes an actual financial strategy. In my book, the new one that's coming out, the Restaurant Profit Playbook, I talk about a three tiered approach to employee development. First tier is about getting a new employee ready to just take a station, right? How do we. How do we get them to know what they need to know by the end of the first week? But then the second tier is about helping that person become as capable as your best employee within 90 days. And the third tier is about creating an environment where that person will want to stay and grow with you for years.
[00:11:54] That's a very different approach from just showing somebody the POS system, handing them the menu and hoping they figure the rest out. I want you to think about what that does to your labor budget. Because better trained employees cost money, but they also make fewer mistakes and over time they need less supervision. And guess what? They can handle more responsibility. And guess what? They provide better service and they stay longer. You spend less time recruiting and training replacements, and they also are more productive. A great cook who's been with you for three years can just pump out food faster. A server who's been with you for a couple of years is better at upsells and generating more revenue per cover, right? I'm not asking you, I'm not telling you to ask employees to do three jobs for the price of one. What I'm doing is, I'm telling you to invest in their skills so they can perform their jobs more effectively and create more value for the business. And yes, for Themselves. Because the most sustainable way to improve labor productivity is. Is to actually build a stronger team.
[00:12:55] Now, I want to share with you 7 Ways to actually get your payroll under control. Because that's what you're looking for. You're looking for something actionable, right? What to do? All right, here we go. We've established our target. We've built a forecast and we've set a budget. And we've agreed that the schedule needs to be within the budget before it gets posted. Now, let's talk about some of the practical levers you can pull here in the book I outline seven we've already discussed. The first one, never post a schedule that's over budget. The second is to adjust staffing as business slows. Meaning your schedule is a plan based on a forecast. But obviously forecasts change. Maybe the weather takes a turn, maybe a large party cancels. Maybe the dining room ends up being slower than expected. So your managers need to respond, and I don't want them waiting until the end of the shift to do it. If the reservation book is looking soft tomorrow, you may be able to make an adjustment today. If the lunch rush is over and the next wave of business isn't coming in for two hours, well, then they need to understand what work remains and how many people are actually required to complete it. Make thoughtful adjustments while protecting service and honoring applicable scheduling requirements. The third lever is to simply level up your team. And again, we just talked about this. Develop stronger employees. Train them, coach them. Give them opportunities to take on more responsibility. And don't confuse having more people on the schedule with having a stronger team.
[00:14:20] The fourth lever is something I'm sure most of you guys do. At least I hope so. It's cross training, meaning let's say you have an employee who's excellent at hosting, but they're also interested in learning how to serve. So why not train them? Because now you've got more flexibility. If you need another server on Friday night, well, maybe you've got somebody at the front door who can simply fill that role. If you need a host on Sunday morning, the same employee may be able to flip back and help at the front door. Cross training allows you to offer people useful hours without scheduling extra bodies in departments that don't need them. I can't tell you how many times we had a host pick up a couple of tables in the front section simply because once the big rush was in, they could take care of those tables. It was absolutely possible.
[00:15:01] Also gives your employees opportunities to develop new skills.
[00:15:06] The fifth lever here is to stagger in times. Again, I love this one because it's so simple. A lot of restaurants schedule everybody to arrive at 4 o'. Clock.
[00:15:15] Why do you really need every server, every bartender, runner, busser in the building exactly at 4? Or could some people arrive at 4:30 or 5 or even 4:15?
[00:15:26] Think about what needs to actually be accomplished before service. Assign the work and schedule people based on when you actually need them. Fifteen minutes might not sound like much. I mean I love restaurants that you know, say you know, 3:30 or 4 or 4:30, but have a 4:15 in time, have a 4:40 in time.
[00:15:43] There's nothing to say. You have to start people on the hour on the 30 minutes. Shaving that 10 or 15 minutes could be crucial.
[00:15:51] 15 minutes if you bring people in at 4:45 instead of 4:30. When you multiply that across multiple employees, multiple shifts can become a meaningful number over the course of the year. To say nothing of the fact that if you've got multiple units, the savings are compounded.
[00:16:07] The sixth lever is to engineer your menu around prep and pick up. And I can't tell you how big this is because sometimes your labor problem is actually a menu problem. Meaning maybe you've got a dish that requires hours of preparation. Maybe you've got a dessert menu that requires a dedicated employee during a period when you're barely selling desserts. Maybe you've simply got too many items coming off one station and the only way your chef knows how to execute that menu is to schedule more people. Well, I want you to challenge that assumption.
[00:16:37] Could you simplify the menu? Could you remove low selling items? Could you change the preparation of a particular dish? Could you balance the workload across stations more effectively? Yeah, sometimes the answer isn't to make the same team work harder, but it's to redesign the work altogether.
[00:16:54] Finally then last lever, seventh lever, is to build a path for promotion. Give your employees a reason to stay, show them how you can develop them, explain what skills they just need to acquire in order to get to the next level and then show them what additional responsibility looks like. And connect that growth to clear opportunities for advancement. And yes, compensation. Because constantly replacing employees is expensive and a restaurant with a clear development path has a better chance of retaining the people that it's invested in. Retention is a labor strategy too. I want to go back here, right cause to this idea of rethinking the operation. And to tell the story, I want to use an example from my own career.
[00:17:35] Years ago I was consulting for a high end restaurant In New York City, the restaurant had a serious labor problem. It happens a lot in fine dining in New York City. And as we started putting budgets in place, one department in particular struggled to make the numbers work. Pastry. See, the desserts were excellent, but they were complicated. And the restaurant was scheduling two pastry cooks every evening to plate them. Two people every night. Even though much of the complicated preparation had already been completed during the day.
[00:18:01] See what happens? The owner eventually made a difficult decision. He just simplified the dessert menu. He removed the evening pastry positions, and he reassigned the plating of those desserts to the cooks working the neighboring station. Gard Manger. And now I want to be clear, this wasn't simply a case of telling two people to work harder. The restaurant changed the menu and the workflow so the remaining team could actually execute it. But guess what happened? Payroll went down. That was what we were trying to solve. And it did work.
[00:18:27] But the restaurant kept serving its strongest desserts. And dessert sales actually increased in the 90 days that followed. Now, I am not telling you to eliminate your pastry department. What I'm telling you is that sometimes the solution to a labor problem simply requires you to challenge an assumption about how the restaurant is supposed to work. This was fine dining. Michelin star restaurant that now had no pastry cooks at night. It was unheard of. But they took the bold step of doing it.
[00:18:54] Maybe you've always had two people on a particular station. Maybe you've always started prep at 8 in the morning. Maybe you've always offered 20 desserts. But the question is why?
[00:19:03] And is that the most effective way to deliver the experience that your guests expect?
[00:19:08] Or is it simply the way you've always done it? See, those questions are worth asking. Because if your current operation requires a labor budget that the business can't support, well, then you have to change something.
[00:19:20] And you can change the menu, you can change the workflow, and yes, you can change the schedule. And yes, you can develop your team, and yes, you can improve your forecast. But you simply cannot ignore the numbers and hope that the next month will be different.
[00:19:36] So again, we love assignments. Here's your assignment. This week. I want you to put your most recent. Pull out your most recent payroll report. And I want you to break down the expenses into categories.
[00:19:47] Back of house, hourly labor. Front of house, hourly labor, management salaries. Then I want you to look at payroll taxes, benefits, and all the other people related costs that belong in your labor budget. And I want you to see right there in black and white where the money is going. Then I want you to calculate your all in labor percentage for last week. Next, I want you to forecast next week's revenue. Use that forecast to establish a labor budget moving forward and compare the budget with the schedules that you've been planning to post.
[00:20:15] If the schedule is over budget, don't simply post it and hope for the best. I want you to sit down with your managers and I want you to find out why. Is the forecast unrealistic? Is the schedule inefficient? Are too many people arriving at the same time? Could cross training give you more flexibility? Does the menu require more labor than the business can support?
[00:20:35] Pick one opportunity, just one, and put a plan into place to address it. And remember, give somebody ownership, Set a deadline, measure the result, and guess what. Repeat. Do that over and over and over. Because that's how you turn labor management into a system instead of a weekly argument over the schedule. Right?
[00:20:55] The bottom line is this. Your team is not the problem. And I want to. I want to bring this back right to the owner from the beginning of the episode, the one who posted that expensive schedule and then spent the rest of the week trying to cut his way back to profitability.
[00:21:08] His problem wasn't that his employees were making too much money. His problem was that he hadn't built a plan for actually managing labor. He didn't start with a forecast, so he didn't establish a budget. He didn't design the schedule around the work that actually needed to get done. And then he expected his managers to fix the problem after the fact mid shift by cutting people. It doesn't work, and I think you know it, and I want you to do it differently.
[00:21:32] So build the forecast, set the target, create the budget, and develop your team. Teach them what you need them to do, and design an operation that can deliver a great guest experience within the financial boundaries of the business. Remember the line, the rules are what make games fun. There's a reason they call it the great game of business. You have to see the joy in trying to deal with the constraints, right? Remember, you didn't build a profitable restaurant to do accounting and to manage by the numbers, but it's what's required to run a profitable restaurant, right? And you don't build a profitable restaurant by treating your employees like numbers on a spreadsheet. You build one by understanding what the business can actually afford, by investing in the people who make it run, and by giving them a system that actually allows them to succeed and shows them what success looks like. The goal isn't necessarily to have fewer people. The goal is to build a stronger, more productive team and a restaurant that can actually afford to keep them.
[00:22:32] Again, if you need help with any of this, this is exactly what we do in the P3 mastermind. It's a group coaching program for hundreds of restaurant owners. We gather them on two calls every single week. Go to RSProphit.com to learn more. Hope you get something out of this show Again. My name is Chip Close. I am your host here of the Restaurant Strategy Podcast. I appreciate you listening and making this show part of your week. If you like this, pass it along, send it along to your managers, to other owners, operators who you know could benefit from it, and I will see you next time.
