Accounting Analysis: Minimizing Payroll Cost

Estimating Cost of Sales Cost of sales is estimated by reviewing past performance results for this category, as well as current menu pricing and supporting costs. Off-premise caterers should know their desired cost of sales, based upon current pricing and costs. For example, an off-premise caterer whose overall pricing strategy is a markup of 3 times the cost of food should achieve a 33 1/3 percent cost of sales in the long run as depicted here: Food cost for dinner is $5 times 3 = $15 Cost of sales % is $5 divided by $15 = 33 1/3% A chart of markup factors and their associated food costs follows: MARKUP FACTOR PROJECTED FOOD COST/COST OF SALES 20% 5 25% 4 33 1/3% 3 40% 2.5 Most off-premise caterers operate between a 20 percent and 40 percent cost of sales. For budgeting purposes in this chapter, we will use 33 1/3 percent in our example. Payroll and related costs such as payroll taxes, Worker's Compensation Insurance, and other costs directly related to payroll vary from caterer to caterer. Unlike costs of sales, which are much more variable in nature based upon the volume of business, payroll costs generally have components that are fixed, and components that are variable. Most off-premise caterers employ one of more employees on a permanent basis, who are paid to work regardless of the level of business. These people are essentially fixed payroll. Successful caterers know that the fewer employees in this category, the better. The main problem with large numbers of permanent employees is that when business drops off in slower seasons, these employees are still paid, which can quickly erode profits and create huge losses. Every off-premise caterer should have as a major goal to keep payroll costs in check by keeping permanent employees at a minimum, and striving to staff parties with part-time staff who work only when needed. This type of staffing maximizes variable payroll costs. Ideally, payroll and related costs as a percentage of sales should stay constant, rather than fluctuate wildly as sales increase or decrease from month to month. Off-premise caterers generally operate with payroll and related costs between 20 and 30 percent. It is extremely important at this juncture to point out that those operators with high food cost percentages should have lower labor cost percentages, and vice versa. An off-premise caterer with a 40 percent food cost and a 35 percent labor cost will not stay in business long. Ideally, caterers should strive for a combined cost of sales and payroll percentage of 50 percent or less if they are to maximize their profitability. The next budgeting step is to compute actual payroll and related expenses based upon available knowledge. In the above example, let us assume that the offpremise caterer employs a cook who works an average of 30 hours per week at an hourly rate of $7.50 per hour and a helper who works 20 hours per week at an hourly rate of $5 per hour. These two employees will earn $325 per week, or $16,900 annually. This off-premise caterer's related costs (employer's FICA expense, unemployment taxes, Worker's Compensation and other expenses that are directly related to payroll) are an additional 20 percent of actual payroll, increasing the $16,900 amount to $20,280 ($16,900 x 20% = $3,380 + $16,900). A short-cut to obtain the same result is to multiply $16,900 times 1.2, which will yield the same answer. This off-premise caterer hires additional staff for parties, and this staff, including related costs, is 10 percent of total revenues in this example.