Controlling Labor Costs in Hospitality

August 11, 2021 | 146 views

Controlling Labor Costs in Hospitality
Controlling Labor Costs in Hospitality

Controlling labor costs is always a top priority to manage profit. Labor is usually the largest portion of a business’s total expense, so any changes in wages directly influence business success. This is particularly true in the hospitality service industry. Employees provide the services you sell, and they are important to the organization’s success.

However, filling lower-wage hospitality jobs after the pandemic has been a challenge. As a result, some hotels and restaurants limit their service, hours, or menus because they have limited staff available. Others are committing to full services but are paying higher wages for hospitality workers. And all businesses are looking for ways to mitigate the increasing average cost of hourly hospitality workers. Controlling labor costs in the hospitality sector requires a deep understanding of your costs and a willingness to do things a bit differently.

Understanding All of Your Labor Costs

If Point B is the successful management and growth of profit, you can navigate your way there if you know where you are now, Point A.

First, you must understand what your current labor costs are. To calculate your Total Payroll Cost, you may have to dig deeply and consider all aspects of having employees. Include benefits, worker’s compensation, payroll services, uniform purchase, and other costs related to having employees.

Then, calculate how much of your sales go to paying employees. A simple calculation would be:  Total Sales Revenue / Total Payroll = Labor Cost (as a percentage of sales).

For the hospitality industry, reasonable labor costs as a percentage of sales range from ~25 – 40%. However, with the increase of minimum wage in many states and cities, the goal is to stay ahead of changes that impact labor expenses. Since we are trying to increase profit, we must either increase revenue or cut expenses. For now, look at ways to cut labor costs.

Reducing Your Labor Costs

Even if your labor expense is in line with the hospitality industry average, there are ways to reduce your costs, especially as wages increase, without slashing your staff levels or reducing services and hours:

  1. Attack overtime. Overtime skyrockets labor expense, so it cannot be a standard way of doing business. To reduce its impact, cross-train your staff to fill in for others as needed. Check that processes and technology are efficient so that employees can complete their tasks within normal hours. And use technology to avoid overtime fraud.
  2. Reduce Turnover. If turnover is high in your organization, reduce the turnover to help reduce labor expenses. Employees might leave due to scheduling issues, lack of upward mobility, or other reasons. Regardless, it means that other employees have to fill in (causing more overtime), and you have to spend more hiring and training someone new.
  3. Adjust schedules. Maybe greater flexibility will work for employees and help reduce your wage expenses. Restaurants and hotels have fairly clear high-need times for employees. There are patterns for mealtimes, room cleaning, check-in and check-outs. Split shifts or on-call shifts might help manage expenses. With good employee scheduling software options, flexible changes could work for employees and your bottom line.
  4. Consider Outsourcing. Benefit costs can run up to 40% over an employee’s wage. In some cases, it might be better to outsource some of your labor expenses. A restaurant needs trained wait staff who knows the clientele and menu, but a hotel could outsource cleaning service. Bookkeeping and other administrative tasks may be better handled for a fee that reduced overall expenses.

As the hospitality industry rebounds this year, labor expense is quickly changing. Managing costs will directly add to profit. With a good look at the details of all expenses, profit will be maintained or improved. Since labor is the largest and most important expense to manage, understand your labor expense thoroughly and reduce unnecessary costs while providing your important hospitality services—profitably.

Author Profile Jon Forknell is the Vice President and General Manager of Atlas Business Solutions, Inc., a software marketing company specializing in employee scheduling software, including ScheduleBase employee scheduling software, and other business software solutions. In the past, Jon has been recognized by the U.S. Small Business Administration as a SBA Young Entrepreneur of the Year. For many years, Atlas Business Solutions has been named one of Software Magazine’s Top 500 Software Companies.

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