Hospitality Finance

1
Hospitality Finance

• Managing the Cost
• of Labor

2
Welcome

• Class Review
• Past, Present, and Future
• Exam
• Annual Reports
• Notes- Labor

3
Class Review

• Where have we been?
• Basic Accounting Knowledge
• Basic Interpretation Skills
• Basic Understanding of Controls
• Where are we now?
• Controls, Controls, Controls
• Where are we going? Put into Practice
• Labor
• Cost Volume Profit
• Operations and Budgets
• Capital Feasibility

4
Class Review

• Exam
• Annual Reports

5
Main Ideas of Labor Control

• Labor Expense in the Hospitality Industry
• Assessing Labor Productivity
• Maintaining a Productive Workforce
• Measuring Current Labor Productivity
• Managing Payroll Costs
• Reducing Labor-Related Costs

6
Labor Expense in the Hospitality Industry

• Labor cost is critical since it comprises
  approximately one third of revenues and since
  foodservice, essentially a service business, is
  dependent on the motivation, training and skills
  of its workforce
• In today's market, labor is so expensive. Methods
  must be used to accomplish necessary tasks and
  stay within the allotted labor budget.
• In some foodservice establishments, the cost of
  labor actually exceeds the cost of food and
  beverage products.

7
Labor Expense in the Hospitality Industry

• Labor Expense includes salaries and wages, but it
  consists of other labor-related costs as well.
• FICA taxes, unemployment taxes, worker's
  compensation, group life insurance, health
  insurance, pension plan payments, employee meals,
  employee training, employee transportation,
  employee uniforms, employee housing,
  vacation/sick leave, tuition reimbursement
  programs, and employee incentives and bonuses.

8
Labor Expense in the Hospitality Industry

• Payroll refers to the gross pay received by an
  employee in exchange for his or her work.
• A salaried employee receives the same income per
  week or month regardless of the number of hours
  worked.
• Payroll is one part of labor expense.

9
Labor Expense in the Hospitality Industry

• Minimum staff is used to designate the least
  number of employees, or payroll dollars, needed
  to operate a facility or department within the
  facility.
• Fixed Payroll refers to the amount an operation
  pays in salaries.
• Variable Payroll consists of those dollars paid
  to hourly employees.
• Do not confuse minimum staff with fixed and
  variable payroll.

10
Labor Expense in the Hospitality Industry

• Management has little control over fixed labor
  expense, but nearly 100 control over variable
  labor expense.
• Labor expense refers to the total of all costs
  associated with maintaining a foodservice
  workforce.
• Total labor expense will always exceed that of
  payroll.

11
Labor Expense in the Hospitality Industry

• Payroll is considered a "controllable" labor
  expense, unlike FICA taxes and insurance
  premiums.
• But, in reality, managers may even be able to
  influence some of the noncontrollable labor
  expenses, such as providing a training program to
  reduce injuries and insurance premiums.

12
Labor Cost Problems

• The Hospitality industry has four unique labor
  cost problems
• The industry tends to pay lower compensation,
  which attracts a less competent sector of
  employees.
• The industry employs a large number of teenagers,
  who tend to be less reliable than older workers.
• Based on current demographic trends, the
  percentage of teenagers available in the
  population will be decreasing. It has been
  predicted that there will be a shortfall of
  teenage workforce for the food industry of up to
  1 million workers in the near future. The number
  of teenage workers shrunk by 11 between 1986 and
  1990. This means that the foodservice industry
  will have to rely more on elderly and handicapped
  employees.
• Foodservice businesses experienced fluctuating
  levels of activity throughout the week and the
  day which complicates the scheduling of employees
  and their productivity.

13
What Determines Payroll Cost?

• Payroll costs are determined by three factors
  (1) the hourly rate of pay, (2) the level of
  fringe benefits and (3) employee productivity.
• Fringe benefits can be a significant portion of
  payroll costs. These benefits can include
  vacation time, holiday pay, sick leave, employee
  meals, social security (the employer's share is
  7.65 of employee's salary), unemployment
  compensation insurance, and medical insurance.

14
Fringe benefits

• The foodservice has been rather stingy in
  providing extensive fringe benefits to its
  workers. However this is changing. With the labor
  force getting tighter and the need to reduce high
  turnover the industry is improving the benefits
  offered to employees. Some of the major offerings
  are
• Compulsory benefits. These include socials
  security (which both the employer and employee
  must contribute an equal amount), workmen's
  compensation and unemployment insurance.
• Medical insurance. A very expensive benefit but
  one that highly valued by workers. This benefit
  has been shown to reduce absenteeism. It can also
  be a tool to reduce the industry's high turn over
  problem.
• Retirement programs. These programs are generally
  restricted to management but larger foodservice
  companies are extending these benefits to its
  non-management workforce. The most popular type
  plans are defined contribution in which both the
  employer and employee contribute to a fund such
  as a mutual fund. These benefits also offer tax
  advantage to the worker.
• Profit sharing. These are generally restricted to
  management employees. They designed to motivate
  employees to maximize the operation's income.
  They are designed to create a "win, win"
  situation where both the employee and stockholder
  benefit.

15
Assessing Labor Productivity

• Productivity is important because it defines how
  much an employee is able to get done each hour.
  Restaurant operations find it difficult to
  achieve full productivity due to the peaks and
  valleys in the daily volume of business.
  Management needs to be concerned with the labor
  cost per productive hour.
• Productivity is the amount of work performed by
  an employee in a fixed period of time.
• There are many ways to assess labor productivity.
  In general, productivity is measured in terms of
  the productivity ratio as follows

Output Input Productivity Ratio
16
Example

• If management was considering two potential
  employees (1) an employee who is to be paid 6
  an hour plus 1.50 fringe benefit, and who takes
  an hour and a half to perform a particular task
  versus
• (2) another employee who is to earn 7 hour plus
  2 in fringe benefits, but performs the same task
  in one hour. The first candidate performs the
  task at a cost of 11.25 (which would be 6
  1.50 x 1.5 hours).
• The second employee, although the higher paid
  individual, is more productive since he performs
  the given task at a lower cost 9 (7 2).
  Management's objective should be to keep payroll
  cost as low as possible, not necessarily to hire
  lower paid, but unproductive, employees.

17
If we just regard cost, Hounddog looks like the
best bet at 6.60 per hour. However considering
productivity, this employee has the highest cost
at .55 per customer. Jones occupies an opposite
position with the highest cost per hour of 10.00
but the lowest cost per customer .40. The moral
of the example is to consider productivity as
well as raw cost per hour.
18
Productivity Issues

• The three basics elements that determine
  restaurant productivity are
• The employees hired.
• The equipment available to employees in the
  performance of their duties.
• The employees' work methods. If employees are
  highly motivated, if equipment is provided to
  reduce as much labor intensive work as possible
  and if management uses well thought out,
  efficient work methods, productivity should be
  high.

19

• Factors that tend to cause lower productivity in
  the foodservice industry are
• The peaks and valleys in work volume.
• The existence of many small single restaurant
  enterprises.
• Menus with numerous items that require the
  restaurant's staff to produce many different
  types of meals.
• Frequent changes in menus
• An inexperienced workforce hindered by low pay
  and high turnover

20

• Productivity is a critical in controlling
  restaurant costs. Fast food operations have
  achieved high productivity through simplified
  menus, automated equipment, self-service,
  pre-prepared foods and simplified work processes.
  For example, a typical fast-food operation is
  able to serve 100 patrons with 10.5 hours of
  labor input, whereas it takes over 70 hours for a
  full-service operation to handle the same number
  of patrons. Management needs to be alert to any
  mismatch between work to be done and number of
  workers available. Parkinson's Law states that
  workers tend to adjust the pace of their effort
  in proportion to the work that needs to be done
  if there is less work to do, they would work at a
  slower pace. This is often the case in the food
  industry, with uneven flows of work, peaks and
  valleys of activities and where employees often
  set their own work standards.

21
Strategies to Reduce Labor Cost.

• The use of pre-prepared convenience foods.
  Pre-prepared and convenience foods are more
  expensive, but they save labor and reduce food
  waste. Some large chain operations have
  commissary kitchens that serve many of their
  restaurants. Commissary kitchens prepare meals
  for inventory thereby realizing the benefits of
  factory type production.
• Limit the number of items offered on their menus.
  Restaurants with specialized menus attract those
  customers who want the types of meals offered.
  With a limited number of menu items, restaurants
  are able to operate more efficiently. Restaurants
  with many items on their menus incur high labor
  and food costs they also have great difficulty
  in maintaining meal quality.
• Self-service salad bars, buffets and self-bussing
  of dishes.
• Cross utilization of employees. For example, bus
  persons can assist servers by carrying meals
  orders to the diners' tables.
• Designing the restaurant with the layout,
  equipment and working conditions that facilitate
  high productivity. Too often restaurant
  facilities are designed without any consideration
  to worker efficiency. Chain restaurants have
  achieved efficiency and productivity by
  standardizing their restaurant layouts and
  equipment.
• Greater use of labor saving equipment. For
  example point-of-sales systems and terminals
  improve the productivity of cashiers, kitchen and
  serving area personnel, accountants and
  management. Hand held computer terminal are
  coming into use. Kitchen equipment can increase
  productivity through improved microwave ranges
  and automated ranges and ovens.

22
Getting Effective Control of Labor Cost

• A seven-step program that management can use to
  gain effective control of their employees and to
  maintain and improve productivity is as follows

23
The Job

• Personnel policies. Effective supervision needs
  to be backed up by sound administrative policies.
  Policies should cover recruiting, hiring,
  orientation and training, supervisory policies,
  evaluations methods, compensation and job
  termination.
• A job analysis which consists of two parts the
  job specification and the job analysis. The
  job specification outlines the qualifications
  that a potential employee needs to fill the job.
  This covers education and work history, plus
  physical, mental and age requirements. The
  job description lists the tasks and duties to be
  performed. Job descriptions are useful in hiring,
  training and orienting new employees. When
  preparing a job analysis., management needs to
  review the entire restaurant workload and
  determine how it is to be divided between
  employees.
• A good job analysis eliminates questions of who
  does what, prevents work overlap and prevents
  individual employees from being overworked or
  under worked.

24

• Job Evaluation
• In the process of job evaluation management
  attempts to specify how workers fit into the
  organization. This can be done in three ways
• Job analysis is a complete description of each of
  the jobs in the organization. This is usually
  done through a job description that sets forth
  the position name, code, salary grade,
  responsible duties, qualifications, and reporting
  and supervisory responsibilities.
• How each job fits into the organization. This is
  done through an organization chart which shows
  the reporting structure of the organization.
• A critical factor in job evaluation is to assure
  that each employee receives the right wage.
  Factors such as labor supply, relation to other
  companies, skills required, consistency within
  the organization and supervisory
  responsibilities. This is accomplished through
  wage and salary policies, which are administered
  by personnel department.

25
Maintaining a Productive Workforce

• 10 Key Factors Affecting Employee Productivity
• Employee Selection
• Training
• Supervision
• Scheduling
• Breaks
• Morale
• Menu
• Convenience vs. Scratch Preparation
• Equipment
• Service Level Desired

26
Maintaining a Productive Workforce

• Employee Selection
• A job description is a listing of the tasks that
  must be accomplished by the employee hired to
  fill a particular position.
• A job specification is a listing of the personal
  characteristics needed to perform the tasks
  contained in a particular job description.

27
Maintaining a Productive Workforce

• The employment application is a document
  completed by the candidate for employment.
• Job interviews, if improperly performed, can
  subject an employer to legal liability.
• Preemployment testing is a common way to help
  improve employee productivity.
• Skills tests can include activities such as
  typing tests, and computer application tests.
• Psychological testing can include personality
  tests, tests designed to predict performance, or
  tests of mental ability.
• Preemployment drug testing is used to determine
  if an applicant uses drugs.

28
Maintaining a Productive Workforce

• Increasingly, hospitality employers are utilizing
  background checks prior to hiring employees in
  selected positions.
• Not conducting background checks on some
  positions can subject the employer to potential
  litigation under the doctrine of negligent
  hiring, that is, a failure on the part of an
  employer to exercise reasonable care in the
  selection of employees.

29
Maintaining a Productive Workforce

• Training
• Effective training will improve job satisfaction
  and instill in employees a sense of well-being
  and accomplishment. It will also reduce
  confusion, product waste, and loss of guests.
• Effective training begins with a good orientation
  program.
• Task training is the training undertaken to
  ensure an employee has the skills to meet
  productivity goals.

30
Maintaining a Productive Workforce

• Steps for Training
• Plan the training session.
• Present the training session.
• Evaluate the sessions effectiveness.
• Retrain at the proper interval.

31
Maintaining a Productive Workforce

• Supervision
• Proper supervision means assisting employees in
  improving productivity.
• This is why it is so important for managers to be
  on the floor, in other words, in the dining area,
  during meal periods.

32
Supervision issues

• Management needs to deal with certain issues that
  can arise in supervising workers. Some the
  critical ones are
• Absenteeism. Absenteeism to needs to kept to a
  minimum. Excessive absenteeism will increase
  labor cost due to the need for replacements. Also
  service quality will suffer. Download here to see
  a spreadsheet demonstrating the three absenteeism
  ratios discussed in the textbook.
• Turnover. The foodservice is plagued with high
  turnover. Some estimate it at 10 per month or a
  complete turnover in personnel in ten months. The
  consequences of this situation are inexperienced
  workers, high training and hiring cost and
  diversion of management time to the hiring
  process.
• Overtime. Overtime can result in excess pay hours
  and premium pay. There may be times when overtime
  is justified but it needs to be tightly
  controlled by management.
• Employee well-being issues.
• Employees with health problems will not be
  effective workers. Some of the issues that
  management needs to deal with in these areas are
  
• Safety and accident prevention. Management needs
  to effective prevention programs to reduce
  accident exposure in order to protect workers,
  reduce exposure liability claims and comply with
  government laws and regulations.
• Wellness programs. Management can encourage
  employee health through formal or informal
  policies. If medical insurance is a fringe
  benefit, a formal wellness program could be cost
  justified by reducing medical insurance premiums.
  
• Substance abuse. Management needs to be alert to
  employees with drinking or drug problems.
  Problems in this area can have devastating
  effects on productivity and worker morale.
  Employee Assistance Programs has been an
  effective tool in dealing with these kinds of
  problems.

33
The Job-Standards, Forecasts

• Work simplification is the study and analysis of
  each job to determine the easiest and most
  productive way of performing its duties. This
  includes changes in procedures, work layout, the
  use of labor saving equipment, and the use of
  pre-processed foods. Work simplification
  increases productivity and reduces labor cost.
• Work production standards are developed from
  information in work production records. The
  standards are measurements used to judge a
  worker's productivity. These measurements,
  expressed in sales dollars per day, meals
  produced per day, or in other quantitative
  factors, measure employee productivity.
• Workload forecasts are derived from the daily
  meal forecast. Management, using work standards,
  calculates the number of employees needed to
  handle the expected workload. Management's goal
  should be the achievement the proper level of
  staffing commensurate with the work to be done.

34
The Job-Scheduling

• Scheduling of workers. After determining the
  number of workers needed, management must
  schedule the individual workers in the proper
  time slots. The process is complicated by
  fluctuations in the number of customers served
  throughout the day. Scheduling should ensure that
  the proper number of employees are on hand to
  handle the volume of work required throughout the
  day.

35
Maintaining a Productive Workforce

• Scheduling
• Even with highly productive employees, poor
  employee scheduling by management can result in
  low productivity ratios.
• Proper scheduling ensures that the correct number
  of employees is available to do the necessary
  amount of work.
• Split-shift, a technique used to match individual
  employee work shifts with peaks and valleys of
  customer demand.

36
Maintaining a Productive Workforce

• Breaks
• Employees have both a physical and a mental need
  for breaks from their work.
• Employees need to know that management cares
  enough to establish a break schedule and stick to
  it.
• Management should view breaks as a necessary part
  of maintaining a highly productive workforce, not
  as lost or wasted time.

37

• Block Scheduling-Scheduling patterns are
  important. Foodservice operations could schedule
  their workers on a block basis. Workers would
  work as a group in a regular shift (no overlap)
• Staggered Scheduling-Because most restaurants
  experience varying levels of activities during
  the day, they a use a staggered work schedule.
  Employees arrive at different times building up
  to a full staff level at meal times (overlap)

38
Job number control list

• A number of restaurants use a procedure called a
  job number control list to facilitate the
  staffing of the restaurant. Each job listed on
  the control list needs to be analyzed, described
  and formalized. Quite often a work production
  standard is used to determine the number of
  positions required for each job type .
• Under this system new employees must be hired for
  a specifically numbered and classified job that
  is documented with a job description and a job
  specification. People are not hired just because
  "the help is needed."
• Restaurants using the job number control list
  system must plan in advance for the duties and
  responsibilities of each job in their operations.
  Under this system overlapping jobs are avoided.
  No one is added to the payroll on a permanent
  basis unless it is for a numbered job.
• Too often employees are hired for temporary
  needs, but they remain staff on after the need is
  over. Having specific jobs listed on the job
  control form doesn't mean that every job listed
  needs to be hired.
• The list should provide the number of employees
  needed in a given position to handle the highest
  possible volume. If the list provides for 10
  cooks, but only 5 are justified by current
  business volume then only 5 cooks should be
  hired.

39
Staff Equivalents

• This question here involves the issue of full
  time staff equivalents. To cover one full time,
  365 day a year, position requires 1.55 employees
• Days in the year to be covered 365
• Weekend days off (104)
• Sick days (7)
• Holidays (8)
• Vacation (10)
• Days worked by one employee 236
• Full time equivalents to cover one position
  365/236
• If a restaurant requires 40 employees on hand
  each day of the year, then they would need to
  hire 62 full-time employees (40 x 1.55).

40
Part-time workers

• Part time workers are used extensively in the
  foodservice industry. Part-time workers offer
  advantages and disadvantages. The advantages are
  
• Because of the uneven activity in the daily
  operation of a foodservice operation, part-time
  workers are used to fill in for short periods of
  time when activity is high
• Part-time employees are not as costly as full
  time employees. They receive lower salaries and
  little or no fringe benefits.
• Part-time workers can be utilized to fill in on
  the weekends and provide coverage when regular
  employees have time off.

41
However, there are problems

• In a large city, it can be expensive for
  part-time workers to commute to work. The cost of
  transportation quite often cannot be justified by
  income earned in a short work shift.
• Using part-time employees increases the number of
  individuals on the payroll.
• There is more accounting work, such as the
  writing of checks and the filling out of tax
  forms
• Part-time helps creates more scheduling

42
Labor scheduling problems

• Management can encounter a number of the problems
  when scheduling workers
• If a restaurant serves three meals a day, it is
  often impossible for one shift to handle all
  three meals. On the other hand, the time period
  between breakfast and dinner does not lend itself
  to two full shifts.
• Foodservice operators experience peaks and
  valleys of activity during normal work shifts,
  not the steady production encountered in a
  factory setting.
• The proper scheduling of workers requires
  accurate forecasts of daily activity. The best
  forecast can be upset by weather or other factors
  beyond management's control resulting in too few
  or too many workers.
• The foodservice industry cannot use idle workers
  to produce meals for inventory which can be
  released at another time when needed. The time of
  idle workers cannot be stored and used at another
  busier time.
• An intangible factor of scheduling relates to
  service quality. While management may be able to
  determine the number of people needed to handle a
  given number of customers, the issue of quality
  can be an important variable in staffing.

43
The scheduling process

• Foodservice labor scheduling proceeds in the
  following steps
• Develop work production standards for each
  position in the restaurant.
• Examine the daily activities of an operation's
  various units to determine their busy and slow
  periods.
• Determine how customer counts affects the
  different organizational units within the
  restaurant.
• Determine the number of workers or work hours
  needed to handle forecasted customers in
  accordance with the operation's work production
  standards.
• Prepare the schedule based on the capabilities of
  each of the organization's employees. The
  assignment should be based on a number of factors
  such employee experience, rotation
  considerations, wage rates and any legal
  restrictions such minors work hours.

44

• After completion of the above steps schedule the
  employee for each workday.
• After the schedule is finished it should be
  reviewed by the next level of management (the
  restaurant managers.). The review should cover
  issues such as (1) projected sales relationship
  to work hours, (2) projected labor cost percent,
  (3) the number of customers per labor hour, (4)
  labor cost per hour and (5) any other criteria
  utilized by management.
• After the schedule is approved, notify the
  individual employees of their work schedule.
• Review the schedule on an after fact basis to
  determine how actual performance compares to
  schedule. Determine if there is a need for
  change.

45
Maintaining a Productive Workforce

• Morale
• Management must create a fun, motivating
  environment for employees to work in.
• Motivated groups usually work for a management
  team that has created a vision, communicated the
  vision to employees, and ensured that employees
  share the vision.

46
Maintaining a Productive Workforce

• Creating a vision is nothing more than finding a
  "purpose" for the workforce.
• A shared purpose between management and employees
  is important for the development and maintenance
  of high morale.
• Recognize all employees for what they do best
  even the dishwasher.

47
Maintaining a Productive Workforce

• Employee turnover is high in some sections of the
  hospitality industry. By some estimates, it
  exceeds 200 per year. You can measure your
  turnover by using the following formula

Employee Turnover Rate Number of Employees
Separated Number of Employees in Workforce
48
Maintaining a Productive Workforce

• Separated is the term used to describe employees
  who have either quit, been terminated, or in some
  other manner have "separated" themselves from the
  operation.
• Some foodservice operators prefer to distinguish
  between voluntary and involuntary separation.
• A voluntary separation is one in which the
  employee made the decision to leave the
  organization.
• An involuntary separation is one in which
  management has caused the employee to separate
  from the organization.

49
Maintaining a Productive Workforce

• The turnover formula can be modified to create
  these two ratios

Involuntary Employee Turnover Rate Number of
Employees Involuntarily Separated Number of
Employees in Workforce
Voluntary Employee Turnover Rate Number of
Employees Voluntarily Separated Number of
Employees in Workforce
50
Maintaining a Productive Workforce

• Turnover is expensive. This expense is comprised
  of actual and hidden costs. Actual costs include
  interviewing and training time, while hidden
  costs refer to the number of dishes broken by a
  new dishwasher, etc.

51
Maintaining a Productive Workforce

• Menu
• In general, the more variety of items a kitchen
  is asked to produce, the less efficient that
  kitchen will be.
• Menu items must also be selected to complement
  the skill level of the employees and the
  equipment available to produce the menu item.
• Since most operations change their menus
  infrequently, it is critical that the menu items
  selected can be prepared efficiently and well.

52
Maintaining a Productive Workforce

• Convenience vs. Scratch Preparation
• The decision of whether to "make" or "buy"
  involves two major factors, the product quality
  and the product cost.
• It is important to remember that make or buy
  decisions affect both food and labor costs.
• Management, often in consultation with kitchen
  production staff, must resolve make or buy
  decisions.

53
Maintaining a Productive Workforce

• Equipment
• Equipment should be properly maintained and
  updated if employees are to be held accountable
  for productivity standards or gains.
• Service Levels
• When management varies service levels, it varies
  employee productivity ratios.

54
Measuring Current Labor Productivity

• Ways to measure productivity
• labor cost percentage
• sales per labor hour
• labor dollars per guest served
• guests served per labor dollar
• guests served per labor hour

55
Work Production Standards

• Work production standards are quantitative
  expressions of the amount of production expected
  from various types of jobs in a specific period
  of time. These standards can stated in terms of
  sales dollars or meals served per worker.
• A server may be rated on the dollar volume of
  business handled or on the number of covers
  handled. A coffee shop server might be expected
  to handle forty-five to sixty covers in a
  two-meal period, whereas a server in a more
  formal dining room could only be expected to
  handle from 25 to 30 covers.
• The standards will vary by job description. Unit
  production standards can be expressed, for
  example, in covers by servers, dishes washed by
  dishwashers, meals prepared by cooks and patrons
  served by the cashier.
• Food service operations usually use an employee
  workday as the unit in which to express work
  standard performance. To determine the number of
  employee workdays, divide work hours by 8.
• For example, if 100 hours of server time were
  used during a day, then the number of workdays
  would be 12.5.

56
How are work standards developed?

• Work standards can be developed in a number of
  ways. Larger operations may employ sophisticated
  techniques such as time and motion studies to set
  their standards. Staff industrial engineers or
  outside consultants would perform this service.
  The work standards would be determined for one
  restaurant and then applied to the other
  restaurants of the chain.
• If there are no industrial engineers or outside
  consultants available, records of employee
  productivity can be used. By analyzing the work
  performance history of the better employees over
  a period of time, management can observe the
  range or distribution of work units produced per
  day the standard can then be based on the
  average or a point within the center of
  observations.
• Obviously it would not make sense to take the
  highest or the lowest point as these might
  represent unusual circumstances. Once management
  has established work standards for all employees,
  they can then monitor daily performance against
  these standards.
• Typically, new employees might be below standard
  but their performance should improve over time.
  Work standards for the entire workforce can be
  revised upward as the work force becomes more
  experienced.

57

• How do work standards compare with percent
  controls?
• Work standards provide a definite baseline or
  goal to achieve, and it is relatively
  straightforward to observe how well each worker
  performs against predetermined standards. It is a
  simple matter for management to see if a
  particular job is over or below standard. The
  performance against standard can also give
  information relating to the quality of service
  and whether the particular job is overworked.
  Labor cost percents provide less specific
  information. They merely show the relationship
  between labor cost and sales and this
  relationship can vary if there is a change in
  either of these categories

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Measuring Current Labor Productivity

• The labor cost percentage is computed as follows
  

Cost of Labor Total Sales Labor Cost

• It is important to realize that there are
  several ways to define cost of labor just
  hourly, hourly and management, all costs
  including payroll.

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Measuring Current Labor Productivity

• The most perishable commodity any foodservice
  operator buys is the labor hour. When not
  productively used, it disappears forever.
• This is why many operators prefer to measure
  labor productivity in terms of the amount of
  sales generated for each labor hour used.

Total Sales Labor Hours Used Sales per
Labor Hour
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Measuring Current Labor Productivity

• However, sales per labor hour neglects to
  consider the amount paid to employees per hour to
  generate the sales.
• Labor Dollars per Guest Served

Cost of Labor Guests Served Labor Dollars per
Guest Served
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Measuring Current Labor Productivity

• Guest Served per Labor Dollar
• As a measure of productivity, guests served per
  labor dollar expended has advantages. It can be
  used by foodservice units that do not routinely
  record dollar sales figures.

Guests Served Cost of Labor Guests Served per
Labor Dollar
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Measuring Current Labor Productivity

• Guests Served per Labor Hour is a true measure of
  productivity, not a measure of either cost and
  productivity or sales and productivity.
• It is extremely useful in comparing similar units
  in areas with widely differing wage rates or
  selling prices.

Guests Served Labor Hours Used Guests
Served per Labor Hour
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Measuring Current Labor Productivity

• Many operators prefer to compute their
  productivity measures on a daily, rather than on
  a weekly or monthly basis. This can easily be
  done by using a six-column form with cost of
  labor, sales, and labor cost .
• An operator may establish labor subcategories
  such as production, service, sanitation, and
  management.

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Measuring Current Labor Productivity

• Labor costs for each subcategory can be
  estimated. By following the rules of algebra and
  adding the word estimated, the guests served
  per labor dollar formula can be restated as
  follows

Number of Estimated Guests Served Guests Served
Per Labor Dollar Estimated Cost of Labor
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Managing Payroll Costs

• Essentially, the management of payroll costs is a
  four-step process, which includes the following
  factors
• Determine productivity standards.
• Forecast sales volume.
• Schedule employees using productivity standards
  and forecasted sales volume.
• Analyze results.

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Managing Payroll Costs

• Determine productivity standards.
• A productivity standard is defined as
  management's view of what constitutes an
  appropriate productivity ratio in a given
  foodservice unit or units.
• Productivity standards represent what you should
  reasonably expect in the way of output per unit
  of labor input.
• Productivity standards are typically based on the
  following types of information unit history,
  company average, industry average, management
  experience, or a combination of some or all of
  the above.

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Managing Payroll Costs

• Forecast sales volume.
• Sales volume forecasting, when combined with
  established productivity standards, allows a
  foodservice operator to determine the number of
  employees needed to effectively service those
  guests who will visit the facility.

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Managing Payroll Costs

• Schedule employees using productivity standards
  and forecasted sales volume.
• You can establish a labor budget using your
  productivity standards, your sales forecast, and
  the labor cost percentage formula you have
  already learned.

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Managing Payroll Costs

• Remember that the labor cost percentage
  formula is defined as

Cost of Labor Total Sales Labor Cost

• If you include the words forecasted,
  standard, and budget, and follow the rules of
  algebra, the labor cost percentage formula can be
  restated as follows

Forecasted Total Sales Labor Cost Standard
Cost of Labor Budget
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Managing Payroll Costs

• You can establish a budget for total number of
  labor hours needed to service your establishment.

Guests Served Labor Hours Used Guests
Served per Labor Hour

• If you include the words forecasted,
  standard, and budget, and follow the rules of
  algebra, the guests served per labor hour formula
  can be restated as follows

Forecasted Number of Guests Served Guests Served
per Labor Hour Standard Labor Hours Budget
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Managing Payroll Costs

• Because employee schedules can only be done in
  terms of either hours scheduled or dollars spent,
  an employee schedule recap form can be an
  effective tool in any daily analysis of labor
  productivity.
• Since labor is purchased on a daily basis, labor
  costs should be monitored on a daily basis.

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Managing Payroll Costs

• Some foodservice managers practice an on-call
  system whereby employees who are off duty are
  assigned to on-call status.
• Other managers practice a call-in system. In
  this arrangement, employees who are off duty are
  required to check in with management on a daily
  basis to see if the volume is such that they may
  be needed.
• Schedule modifications should be done hourly, if
  necessary.
• It is critical to match labor usage with
  projected volume.

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Managing Payroll Costs

• 4. Analyze results.
• To complete the job of managing labor-related
  expense, you must now analyze your results by
  comparing actual labor cost to budgeted labor
  cost.

Actual Amount Budgeted Amount of Budget
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• Elements of the analysis The two functions of
  labor cost analysis are
• To determine whether labor costs are over or
  below management established standards.
• To determine where in the operation the
  deviations from standard are taking place.

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Managing Payroll Costs

• Standard cost, that is the labor cost needed to
  meet established productivity standards, rather
  than "budgeted cost.
• In the case of labor, we may still be within
  reasonable budget, though we may vary greatly
  from the standard.
• For this reason, the authors prefer the term
  budgeted labor rather than standard labor. Labor
  standards will always vary a bit unless guest
  counts can be predicted perfectly which, of
  course, is rarely the case.

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• Difficulties in analyzing labor cost. There are
  basically three difficulties in analyzing labor
  cost problems
• Once it has been determined that labor costs are
  excessive management needs to determine why.
  There can be a number of factors poor
  scheduling, poorly trained or inefficient
  employees, excessive overtime, high employee
  turnover or high absenteeism.
• Another difficulty in analyzing labor cost is
  that the discrepancies can occur in different
  parts of an operation and balance each other out.
  For example, high labor cost in the kitchen could
  be offset by low cost in the service area low.
  Each of the labor components must be analyzed
  separately. Discrepancies can balance out over
  time so labor cost needs to be analyzed on a
  weekly, daily or even hourly basis. Sometimes
  labor costs can be too low and result in poor
  service and potential loss of customers.

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• Quality needs to be considered as well as
  quantity. A particular server may not serve as
  many patrons as other servers but may have better
  rapport with the customers and results in return
  business.
• How important is labor cost?
• By looking the following income statement we can
  see labor's significance,
• Income Statement Sales

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• However labor cost percents costs can sometimes
  be misleading
• Percentages, calculated on a weekly or monthly
  basis, will not disclose daily discrepancies,
  which can often balance each other out.
• Menu price and employee wage rate changes in will
  affect the relationship of sales to labor cost.
  If management uses labor cost percents, they need
  to recognize when these changes take place and
  adjust the percent standard accordingly.
• Labor cost percents can be distorted by a number
  of underlying causes, such as sick or vacation
  relief.
• Comparing labor cost percents between restaurant
  operations, which on the surface look similar,
  can be misleading. Labor cost percents depends on
  a number of factors menu pricing, the amount of
  convenience foods used, buffet service, layout of
  the restaurant, equipment utilized, local labor
  market and services provided. Seemingly similar
  operations can have vastly different cost
  percents because of these circumstances.

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• Labor Analysis

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Reducing Labor-Related Costs

• If management finds that labor costs are too
  high, problem areas must be identified and
  corrective action must be taken.
• Ways to reduce fixed labor costs include improve
  productivity, increase sales volume, combine jobs
  to eliminate fixed positions, and reduce wages
  paid to the fixed payroll employees.

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Reducing Labor-Related Costs

• One way to increase productivity and reduce
  labor-related expense is through employee
  empowerment, involving employees in the
  decision-making process.
• Today, employees have come to realize there is
  more to life than work. Management, unable to
  always offer more money, has been forced to come
  up with new incentives.
• Employees are seeking job satisfaction in
  addition to salaries or wages.

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Summary

• Labor Expense in the Hospitality Industry
• Assessing Labor Productivity
• Maintaining a Productive Workforce
• Measuring Current Labor Productivity
• Managing Payroll Costs
• Reducing Labor-Related Costs
• Next Week
• Cost-Volume-Profit
• Budget Exercise Review