It’s a hot topic and hard to ignore: the cost of running a restaurant keeps increasing. Whether rising food costs, utilities or general operating costs have been stretching your budget, restaurant operators are feeling the increased pressure of staying financially afloat. And when it comes to minimum wage increases, it’s an elephant in the room you can’t afford to ignore.
You can’t control inflation or wage increases, but with the right strategy, you can keep your business running smoothly. Without a plan, running your restaurant’s finances might start to feel like an extra spicy pepper and no milk.
To learn more about how to stay afloat amid wage increases, we spoke with one of our accounting partners, Dave Wiseman from Harmony Group, to get his hot takes.
Harmony Group is made up of CPAs, former restaurant owners and operators who specialize in restaurant accounting. Dave, Vice President of Harmony Group and restaurant operator himself, shared that restaurants are “where people celebrate, where people get together or have their first job. These are such a big piece of our lives and the small business community that it's our honor to work with restaurants.”
“We say accounting is a conversation because we're doing more than keeping your books. We're embedded with your team. We're making sure that your operational team is doing the things they need to do and creating that culture of financial literacy, giving you advice all the way from bookkeeping and standard financial controls to larger strategic decisions such as expansion and capital stack. When you talk about the rising minimum wage, restaurants are important businesses that deserve to be protected.”
Now that we’ve learned a little about Dave and Hamony Group, let’s jump into his hot takes on some burning labor cost and minimum wage questions.
Dave: “I think in a lot of ways everyone knows what minimum wage increases are going to do. It’s going to raise wage costs. It’s going to raise labor costs. And in a business where the natural profit margin for a lot of full-service, mid-market restaurants – the everyday restaurants in your community — is really only 3% to 10%. It’s simply not sustainable in many cases without raising prices to account for those minimum wage increases.
I think the bigger issue, on some level, is that a lot of restaurateurs don’t know if they can absorb a minimum wage increase, but they can at least get behind it because they’re rooted in their communities, if they have time to adjust and if it’s ramped up.
The more unexpected issue, I think, is all of this discussion around the subminimum wage. A lot of places are creating legislation to remove the tip credit. What many people don’t realize is that there are effectively two minimum wages. There’s the statutory minimum wage: whatever is on the books in your jurisdiction, so no one can be paid less than that amount, say $20 an hour. Then there’s what’s called a cash minimum wage for servers, where servers can be paid $2.13 an hour, and the Fair Labor Standards Act tip credit allows tips to make up the difference.
A lot of places are campaigning to get rid of that tip credit. What that does, and this is the part that’s unexpected, is balloon restaurant costs in the front of house in a way that can become unsustainable. It can also force restaurants to do things like add service charges.
What’s frustrating for a lot of restaurateurs in these jurisdictions is that it’s often not an honest conversation. If you think the tipping system is problematic, that’s a conversation we should have, and maybe we should talk honestly about the roots of that. If you think this is really part of a broader unionization push and that front-of-house workers should unionize, then let’s have that conversation too. But let’s have it honestly. No one is being paid less than the minimum wage in the jurisdiction they’re in. So I think that’s a real challenge.
And honestly, this probably is true for restaurateurs as much as anyone: that’s something the public doesn’t really understand about minimum wage. Operators know that if minimum wage goes up, they’re going to have to find that money somewhere. And when you look at the broader landscape whether it’s beef prices, the fact that the American cattle herd is the smallest it’s been in a long time, or the impact of import tariffs- restaurants aren’t getting relief on the cost of goods. So where, exactly, are restaurants supposed to absorb that labor increase?”
Dave: “So, the way restaurateurs should handle minimum wage increases is really the same way they should handle any cost center: with vigilance and evaluation.
And something we really focus on at Harmony is to help people do exactly that. We’re like accounting personal trainers. I say this a lot, but if I wanted to look like Dwayne ‘The Rock’ Johnson, I know what I’d need to do, right? I’d need to eat 800 pounds of cod, get up at three in the morning, go to the gym and work out. I could do it. I just don’t have the discipline, right? I’m not eating my 800 pounds of cod, and I’m not going to the gym at three in the morning. But we’re the personal trainers who help people do that.
And the way you manage cost increases, or minimum wage increases specifically, is by looking closely at your labor. You’re setting yearly budgets. You’re reviewing them quarterly. And then you’re taking those budgets, which we call strategic budgets, and working from them on a week-to-week basis by making sure your schedules are costed out.
You’re asking: what do my next two weeks look like? What are my sales? If I’m doing $100,000 in sales and I want to run at 20% labor, then I’ve got $20,000 to spend. I’m looking at my POS every day. But I’m looking at my POS and saying, where am I tracking toward my labor goals? Am I on track?
So the way you do it is by being aware. By being informed of future changes. And by using that as part of a proactive cost-management plan where you’re budgeting, evaluating your budgets, operationalizing your budgets and benchmarking against them.”
Dave: “I love that question. The most common mistake operators make is a hard one to talk about, because it’s rooted in the same thing that makes them great operators and entrepreneurs: their optimism.
Opening a restaurant, or any small business, really, is brave. You have to be optimistic. If you’re opening a restaurant, you’re doing it even though you’ve heard from a million people, ‘Oh, it’s a bad business. It’s a terrible business. You can’t make any money.’ So you need that optimism. But it can be a double-edged sword.
A lot of times when we talk to clients who are having labor issues, and we’re sensitive to this, because your team is so important to you, you’re working together, you want to support them, you want to do right by them, they can be very reluctant to make the necessary cuts. One of the things we say at Harmony is: you have to manage the restaurant you have.
We can’t control who walks through the door in this business. Sure, there’s marketing, and there are ways you can try to get more people in the door, but you can’t actually control who walks in. The one thing you can control is your expenses.
So a lot of times when we work with operators, we try to approach it with sensitivity and empathy. Our belief is that five sustainable jobs are better than ten unsustainable jobs — or worse, the restaurant goes out of business, and everybody loses their job. And maybe the earlier you make those decisions, the more you can afford to be generous with people. Maybe you can offer severance instead of waiting until checks bounce and you have to close the doors.
But to go back to your question, the mistake we see most often is that people are reluctant to cut labor because they think, ‘Oh no, this new menu will save me,’ or ‘It’s just seasonal — it’ll turn around right around the corner.’ And they wait for revenue to catch up to labor.
A lot of restaurants will say, ‘Hey, we’ll lose money in January. We’ll lose money in February. We’ll do all right in March. We’ll kill it in April. May will be great. Then we’ll tread water in June.’ But at that point, you’ve worked six months of the year just to get to zero profit. So one of the things we say to every client is: let’s just not lose money every month.
There’s a floor for what you need in the restaurant, and training people and scaling labor up and down is hard. That’s part of why this is a hard business. But let’s just not lose money every month. If we can avoid losing money in January and avoid losing money in February, that doesn’t mean we’re making money yet. Maybe we can’t right-size labor to the point where we’re profitable at that revenue level. But at least we’re going into June with money in the bank instead of showing up there at zero.”
Dave: “Hourly labor is obviously where you’re going to pick up a lot of those increases, but let’s go a little deeper than that. I think the way you have to look at this is to step back and ask: what’s the most important metric? What we say is prime cost. And what is prime cost? It’s cost of goods plus labor.
What I mean by that is if you’re seeing minimum wage go up and you know you’re going to have an hourly labor increase, are there ways to lower management costs by bringing on shift managers or key managers? Can you look at whether a small service charge or a larger service charge makes sense?
There are really two types of service charges: you have cost-plus service charges and tip-replacement service charges. A cost-plus service charge is that 3% to 5% charge, whether it’s a credit card surcharge or a health and wellness admin fee.
A tip-replacement service charge is the 20% that a lot of people use in lieu of tips. That’s another lever you can pull to offset minimum wage pressure. So we’ve already covered hourly labor and management and some of the ways you can offset benefits, but that’s only one half of prime cost.
If labor costs are going up, are there ways to be smarter in your food program? I’m never a big believer in cutting quality or cutting the value you give on the plate. But maybe you can create dishes that still deliver great value at a more favorable cost.
Certainly, if you’re feeling labor pressure, you need to be on top of your cost of goods, so you need to be on top of your invoices. Prices are volatile, labor is going up, and you need to stay on top of all of it.
It really comes down to looking at your prime cost holistically, because it needs to be below 65%.
There are two ways to get there. You can have higher cost of goods and lower labor, or lower cost of goods and higher labor.
A steakhouse is the classic example we use: maybe your cost of goods is high, but if you’re getting pre-cut primal steaks and putting a little salt on them, you’re good. If you’re a pasta restaurant, maybe your cost of goods are super low because you’re working with water, flour, and eggs — but you have to make the dough, and you have to make the hand-cut pasta. So there’s no one way to get to 65%.
What I’d say in any rising labor environment is: really look at your prime cost holistically. A lot of times it can feel hopeless for people like, ‘There’s nothing I can do; labor is going up.’ This is a tough business. But there are levers to pull and things you can do.
We’re not unsympathetic to the challenges our clients face. We work through them together.
And the biggest thing I’d add, because we’ve seen real success with this, including clients whose revenue went down while profits went up, is: educate your staff.
This is a business with a lot of different entry points. Some people come up through big corporate restaurant groups where they’re getting drilled on the P&L in financial meetings. Other people come up through mom-and-pop operations, and that can mean anything from a very sophisticated financial operator to the three-shoebox method of accounting, which is money in, money out, money left over. So people may absolutely care about learning how to run the business; they just may not know how.
In these rising labor environments, educate your staff. Tell them: ‘Hey, labor is more expensive right now. Maybe we need to tighten up clock-in times here or there.’ Give them the education and background so they can be the people on the ground helping build that culture of financial literacy, managing the business day-to-day, keeping prime cost under 65% and helping you find the levers to pull in a rising labor environment.”
Dave said it best: running a restaurant isn’t easy, but you have options. Get creative with managing labor costs, have a game plan and make sure to educate your staff. Prices might keep increasing, but with increased financial literacy, you don’t have to worry as much about your restaurant being a sinking ship.