Updated: Jun 17, 2019
Here’s a philosophical question for you. Do you think of your people as employees, partners or volunteers?
The market for qualified help is thin and getting thinner every day. The competition is tough and getting tougher every day. Today, I’m going to show you how thinking about your people as partners and treating them like volunteers just might be a smarter path to long term success. Did you hear the key word there, it was LONG TERM success.
Notice that I didn’t say quarterly profit, I said LONG TERM success.
Let’s start with the differences between employees, partners and volunteers. Employees, show up late, steal and do the minimum amount of work possible to get through the week and collect their paycheck, so they can go off and do whatever it is that they do…
Volunteers are here for the cause… They believe in what we are doing, they are here to help us achieve the goal. Volunteers don’t get paid, they work for free, to support a cause they believe in. We treat volunteers much better than we do employees, don’t we? Think about it, when someone shows up and wants to work for free as a volunteer, how do we treat them? We treat them pretty damn good.
Partners are in it for the long haul… They invested their money to be part of the venture. Partners have skin in the game. Partners bleed right next to us. Partners are on the same side of the table as we are. Partners don’t get paid until there is a profit to share.
Imagine, we open our restaurant and in the first year we have $900,000 in sales.
Let’s say we were really lucky, we do a great job, and we break even.
This means, we take in $900,000 in sales and have $900,000 in expenses.
By the way, breaking even would be an amazing feat for any first year restaurant.
Just for illustration purposes, imagine we spend $300,000 on Cost of goods, $300,000 on cost of labor and $300,000 on other cost. This means we ran what I call a 33-33-33-0. We spent 33.3% of our sales on each of the three major cost categories, Cost of Goods, Labor Cost and
Now, let’s imagine that in year two, we do even better.
We do $1,000,000 in sales and run a perfect 30-30-30-10.
The 30-30-30-10 means we spend 30% of our sales on each of the three major cost categories.
Here’s how it works, We have $1,000,000 in sales.
$300,000 on Cost of Goods
$300,000 on Labor Cost and
$300,000 on Other Cost.
This means our total expenses are $900,000.
This will leave us with $100,000 as profit.
This is what I mean when I say 30-30-30-10.
If you are a regular listener this podcast, you know that my goal is to help you earn a 10% profit, the gold standard in the restaurant industry.
Here’s a good question… Did your restaurant earn a 10% profit last year? Is your restaurant going to earn a 10% profit this year?
OK, back to the Pep Talk:
As SALES INCREASE we will earn more AND we can share more with our staff, doesn’t that make sense? Think about that for a minute, as sales increase and everybody involved makes more money, we are all on the same side of the table. This is what I call a true win, win situation.
Here’s how that works.
At 1,000,000 of sales with a 30% labor cost we have $300,000 to pay our people.
At $2,000,000 of sales with a 30% labor cost, we have $600,000 to share with our people.
This makes them partners. They may not have actual stock, but they can and should share in the profit and success. The more they sell, the more they make. This puts them on the same side of the table as we are. This is a win-win situation for everybody.
Isn’t that what we really want?
This sounds like a great deal for the employees, because it is.
This allows our people, our valuable employees to feel like partners.
It’s also a great deal for YOU the owner, because YOUR income will double too.
At $1 Million in sales with a 10% profit, you make $100,000.
At $2 Million in sales with a 10% profit, you make $200,000.
WOW! This is an amazing opportunity for YOU, your people and the future of your restaurant.
The only thing that can screw this up is greed!
Let’s dig a little deeper.
I believe that labor is a fixed cost. It takes a certain amount of people to open the normal restaurant every day, and that doesn’t change very much.
For example, look at the kitchen, let’s imagine we need a chef and three cooks and a dishwasher. In the DR we need a manager, a bartender, four waiters and a bus boy.
We need this amount of people no matter how busy we are, or are not. If we have 12 positions, we need to have 12 people to open the doors. If sales fluctuate 25% or 50% either way we still need the same amount of staff. So, labor is a fixed cost.
Let’s go a little deeper:
Cost of Goods is determined by how much food we put on the plate and how much we charge for it, and bar cost is determined by how much booze we put in the glass vs what we charge. So, let’s imagine for this discussion our Cost of Goods is 30%.
Next, we have Other Cost, which is everything else, rent, utilities, etc. But other costs is fixed by a set dollar amount. Yes, I know there will be incremental increase for credit cards and linen, but rent and insurance don’t go up when sales increase. So, other cost is fixed, by a dollar amount.
I know this is a lot of numbers so, let’s do a re-cap.
No matter how much business we do, Food Cost should stay at 30% of sales.
Other Cost is Fixed at $300,000, but let’s add an extra 10% for every dollar of increased sales to cover the incidental costs. So, even if we double business, from one million to two million, other cost should max out around $400,000. Unless you get sloppy…
This brings us back to labor cost…
I believe the amount of people we need is fixed, but the amount we pay our people is not fixed.
Now I’m going to try to explain how this works as our sales increase.
At $1,000,000 in sales, with the 30,30,30,10.
We have $300,000 in COG, $300,000 in Labor and $300,000 in Other Cost.
This adds up to $900,000 in total expense and $100,000 in Profit.
If we double our sales to $2,000,000 here’s what happens.
Cost of goods is still 30% of sales or $600,000
Other Cost, as we just discussed, should max out at about $400,000
If our Labor Cost percentage stays at 30% it doubles and goes up to $600,000,
This makes total expenses$1,600,000
Which makes Profit $400,000
Wow! That’s over 20% Profit.
But, the big question is - is a 20% profit sustainable? We’ll that depends on how you do it, AND are you ready for this… How you treat your people.
Most restaurants have horrendous turnover. Their employees come and go like the wind.
Did you know that the average tenure of a restaurant employee in the USA is one month and four days? Well it is… So put that in your pipe and smoke it!
Another reason the 20% profit will be tough to maintain is, because the really smart people are going to realize that you are making a a lot of money and they will sabotage you. Hey, it’s human nature, this is a really tough labor market to find qualified people. As sales increase, people will have to work harder and they will demand a bigger and bigger reward.
Partners work harder than employees. Partners look for solutions.
So, be smart. Really smart. Reward your people with GREAT PAY and BENEFITS!
As sales increase you will generate enough money to reward your people accordingly.
When you can offer more money and benefits, you will attract better people. Better people, build better restaurants, plain and simple. This, my friends is how you build a winning team and a better restaurant.
I understand that everybody isn’t partner material, and we should be smart and avoid those people like the plague.
Think of your restaurant as a tech start up. At first pay is low, really low. As sales begin to grow, the people who do the work, get a bigger and bigger reward. As time goes by and sales increase you will be able to attract better and better people.
This is how and why independent restaurants will and should always beat the chain restaurants. Nimble and smart… Share the wealth. If you want to be wildly successful, treat your team members like volunteers and reward them like partners.
Remember what my man Zig Ziglar says, "You can have anything you want as long as you are willing to give enough other people what they want."
My Name is Peter Harman. My goal is to help you build a better restaurant and earn a 10% Profit. I’m talking about a sustainable 10% profit that you can enjoy for the next 10 years!
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Thanks for Reading… Now get out there do something great!