Labour costs
In most scenarios, labour costs are usually higher than stock costs, which means that they’re eating through a chunk of your revenue. It can be tricky to establish the “perfect rota”. When I was at Wetherspoon, one of my managers told me that the company work off a base rota- the number of staff that are needed just to get the doors open. They then said that an extra person was needed on shift for every £1000 in revenue above that base amount. Other businesses have a simpler formula- they have a target of 28%. 30%. 35% and so on for the business, and the business must hit this target, regardless of whether or not the bar has a higher wage bill than the kitchen and vice versa. They all have to work together to come in on or below budget.
The actual cost of employment
I’ve built a labour calculator into a spreadsheet that you can download here. This spreadsheet will help you to calculate the actual cost of your team. Most people don’t think about including Employer’s National Insurance Contributions or Employer’s Pension Contributions in their calculations. I’ve always wondered why they don’t do this, after all, it all forms part of the cost of employing staff!
Employer’s National Insurance Contributions are paid above a certain threshold for each pay period. To work out how much you’re going to pay in Employer’s National Insurance for each member of staff, there’s a fairly simple calculation; hours worked x hourly rate = gross wage for that period. From the gross wage, minus off the threshold.
At the time of writing, the threshold at which Employers start to pay Employer’s National Insurance Contributions was £175 per week, £350 per fortnight, £700 in a four-weekly period, or £758 per month. This is known as the Secondary Threshold.
Work out your employee’s gross wage over their pay period, take off the threshold amount, and with what’s left, times that by the current rate for Employer’s National Insurance which is 13.8%, for example:
John has worked 40 hours this week at £11 per hour. He is paid weekly. His gross wage for the week is £440. The amount that you can pay John in his pay period, before you have to pay National Insurance is £175. So, £440 minus £175 is £265. You’ll pay Employer’s National Insurance at 13.8% on £265, which is £36.57.
Pensions. Please note that we can’t give advice on pensions, and if you’re unsure on how pensions affect you as an employer, or your employees, then you should seek advice from the Pensions Regulator, or a qualified pensions adviser such as a Financial Planner. The calculations given now are based on you as an employer, paying the minimum contribution toward your team’s workplace pension.
If John also fits the criteria for being automatically enrolled in a workplace pension, then you’ll also have to work out your own cost for Pension Contributions. Employers must pay a minimum contribution of 3% towards an employee’s pension, but they can pay more if they wish to. Calculations are usually based on amounts that the employee earns over £120 per week, £240 per fortnight, £480 in a four-weekly period, or £520 per month.
Following on from the previous example of our Employee “John”, he’s earned £440 in that week. £440 minus £120 is £320. You’ll pay 3% on £320 which is £9.60.
£440 plus £36.57 plus £9.60 equals £486.17. The cost of employing John for one week is £486.17. As you can see, it’s not as simple as “john costs me £440”, as John has actually cost you an extra £46.17.
It is this extra amount that most business owners tend not to include when calculating their labour costs, and one of the main reasons that businesses fall behind with paying HMRC. They simply haven’t accounted for it!
Calculating labour as a percentage of revenue
It’s one thing to know how much you’re spending on staff, it’s another to know how much you’re spending on staff compared to your revenue. Most hospitality businesses look at their labour costs as a £ figure as opposed to a percentage figure, and they’ll often be happy when that £ figure is lower from one week to the next.
This isn’t the best way to look at it. On week one your labour cost might be £3,000 and the following week it might be £2,500. The fact that you’ve spent £500 less might seem great on the face of it, but if your turnover in week one was £10,000 and in week two it was £7,500, then your labour spend as a percentage of revenue is actually higher in week two. The percentage of revenue spent on labour in week one is 30% and the percentage of revenue spent on labour in week two is 33.33%.
A 3.33 percentage point increase might not seem like very much, but for every £100,000 in revenue that you generate, you’ll spend an extra £3,333.33 on labour. Imagine if you’re a restaurant with a turnover of £1 million- that’s more than £33,000 that you’ve just wiped off your profit. That’s a member of staff to take over most of your job, or it’s dividends and a salary increase for you!
As I said earlier, different businesses use a different labour percentage based on; the size and layout of the venue that they’re in, their operating hours, and the complexity of the business itself. The majority of restaurants aim for the 33% to 35% mark, whereas fast food operations and takeaways can work within the realms of 25%. Overall though, restaurants, hotels and bars usually fit within the 30% to 40% bracket.
What you expect to spend on labour should be weighed up carefully with the percentage Gross Profit that you expect, or target to make. These two key costs should be carefully balanced as they’ll heavily influence the level of net profit that you expect to make.
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