Question:
Is there a guideline on what payroll costs should be as part of a restaurant’s expenses? I use 10% for rent but I don’t know payroll.
– John Sowa, President, Sweet Basils Café, Portland, OR
Answer:
Benchmarks for various costs can be somewhat useful in seeing whether your operation is in line with other similar establishments, but it is much more important that you are consistent with yourself, when profitable.
Labor costs in particular run a wide range in restaurants—as low as 25% and as high as 35 or 40%—depending on the menu, concept and other factors. For example, a fine dining restaurant with many components on the plate and breads, pastries, pastas, and other products made in-house will have a much higher labor cost than a steakhouse selling high-end but relatively simple-to-prepare food like steak, baked potato, and thaw-and-serve flourless chocolate cake.
My advice is to use prime cost—food and labor cost combined—as a more useful metric. That way, you account for the interplay between food and labor: fresh house-made pasta (low food cost; high labor cost); grilled ribeye (high food cost; low labor cost); torchon of foie gras (high food cost; high labor cost); steamed rice (low food cost; low labor cost).
Taken as a whole, prime cost is typically at a maximum of two-thirds of sales (for example, a food cost percentage of 32% and a labor cost percentage of 34%), leaving the remainder for fixed expenses like rent and insurance, utilities and profit.
Keep in mind, too, that when determining target expenses, each restaurant is different. Are you using free or low-cost student labor from a local culinary school? Do you own the building? Are the owners taking a generous salary, a modest one, or none at all from the business?
A good introduction to prime cost here.