Running a successful hospitality business, whether it's a cozy cafe or a bustling restaurant, requires more than just exceptional food and service. One of the key elements that can make or break your business is how well you manage your budget, particularly when it comes to wages.
In this comprehensive guide, we'll explore the steps to take control of your second-largest expense and reduce stress in managing the cost.
1. Creating a Budget
Creating a budget is the first and most crucial step in controlling the second-largest cost of your business—wages. Your budget serves as a roadmap, guiding your financial decisions and ensuring you stay on track. It allows you to allocate resources efficiently, preventing overspending and ensuring profitability.
2. The Power of Having a Budget
Having a budget puts you in constant control of your business finances. Whether you need to increase staffing during peak hours or cut back during slower periods, a well-constructed budget empowers you to make informed decisions. This flexibility is essential for adapting to changing circumstances and maintaining financial stability.
3. Know the Benchmark: Industry Average Labour Costs
Understanding industry benchmarks is crucial. On average, a third of your net sales should be allocated to labour costs. However, it's vital to note that this is a general guideline. Different business models, such as small high-volume takeaway coffee shops, may require a different approach. Use this benchmark as a starting point and adjust based on your unique business needs.
4. Gauge Your Business Needs: Team Collaboration and Observation
To fine-tune your budget, engage with your team and closely observe your trade, especially during peak times. A small takeaway coffee shop may require less labour compared to a full-service restaurant. Scrutinize your rotas, question assumptions, and be open to adjusting staffing levels based on the observed needs of your business.
5. Crunch the Numbers: Input Your Rota and Sales
Utilize rota and sales data to calculate the percentage of your net sales allocated to labour costs. This data-driven approach helps you make informed decisions about staffing levels. Regularly review and tweak your budget based on actual performance, ensuring ongoing alignment with your business goals.
6. Unmask Phantom Costs: Beyond Hourly Labour Charges
Labour costs extend beyond hourly wages. Factor in "phantom" costs such as holiday pay, pension contributions, and payroll taxes to generate your total labour expenses accurately. Failing to account for these additional costs can lead to budget shortfalls and financial strain.
Breakdown of Phantom Costs:
Holiday Pay: 12%* of total labour costs (*according to UK Gov guidance)
Pension Contributions: Y%* of total labour costs (check yours with your accountant)
Payroll Taxes: ~7%* of total labour costs (*varies depending on your team, check with your accountant)
As a demonstration, here are a couple of examples of this in practice.
Firstly, an example using 1 hour at £10 per hour wage for simplicty, to demonstrate the aditional 'phantom' costs of labour.
** Figures shown are not acurate and you must check your individual costs for payroll tax and pensions. HMRC 12% holiday pay accrual guidance is true at the time of writing.
Secondly, an example using a pretend weekly wage bill, taken from the rota tool total timesheets for hours worked of all employees.
** Figures shown are not acurate and you must check your individual costs for payroll tax and pensions. HMRC 12% holiday pay accrual guidance is true at the time of writing.
As you can see the additional phantom costs are substantial, almost £500 in additional costs over and above hours worked.
7. Leverage Technology: Rota Software for Efficient Labor Management
Invest in rota software to streamline labor management. This not only simplifies the process of tracking labor but also ensures data accuracy. Avoid relying on spreadsheets, as they can be prone to errors and cannot track holiday time, sickness, laetness, and timesheets. They are not an effective tool for professional business management in this area.
To conclude, mastering your labour budget and control is a fundamental aspect of running a successful hospitality business. By creating a well-informed budget, constantly adjusting based on performance, and accounting for all associated costs, you can reduce stress, increase efficiency, and pave the way for a brilliant and financially stable business. Embrace technology, engage with your team, and take control of your business's financial destiny.
Read this article to learn more about how to keep your hospitality business under good financial control.
I hope this has helped.
Sam