Break Even Analysis: How to Calculate Break Even Point for a Restaurant
By: Casey Woo
Jul 25, 2018
You're an expert in the magic of management, the skill of staff training, and the meticulous area of menu engineering.
But do you know how to calculate break even point for your restaurant with a break even formula? ?
Your kitchen is not only a distribution warehouse; but it is also a line of manufacturing. It's where you turn raw materials into freshly assembled presentations of food and beverage. Like any business, profiting is good for staying in business, but breaking even is necessary for staying in business.
No matter how much we understand profit and loss, we aren’t all necessarily business experts. Through my experience, I would argue that not every restaurateur wants to be.
With that said, once you have a solid, reliable system in place for how to calculate your break even point, getting back to your true passion for food and drinks will be all the easier. This all ties back to better inventory management, growing revenue, and minimizing expenses - everything a growing restaurant owner needs, right?
"We aren’t all business experts. Through my experience, I would argue that not every restaurateur wants to be."
I find that a lot of restaurant break even methods can be quite subjective, and so my purpose with this article is to help define some standard restaurant accounting metrics, focus on what makes some of them meaningful to you, and figure out how to start tracking them today.
How to Calculate Break Even Point for a Restaurant
Break even can be especially challenging for restaurant operators. You are measuring today’s business performance with tools based on historical accounting data from the past.
Your break even point helps you understand how many people (based on a determined average price point per guest) your restaurant needs to serve in order for the business to make money. To do this, it is very important to conduct accurate cost accounting and for your POS sales reporting to deliver accurate data on our guest averages.
Break even analysis also focuses on making sense of your fixed and variable costs.
Variable costs vaguely represent your most controllable costs, which are often even further generalized as your Prime Cost (the sum of your food costs and your labor costs). However, this is not fully indicative of the true variable cost.
Your variable costs also take into consideration anything else that gets more expensive as a result of more business. This generally includes:
Cleaning supplies, dishwasher soap, etc.
Disposables and garbage bags.
Plates, napkins, and to-go containers.
Credit card processing fees.
Other non-fixed restaurant expenses.
Taking all of these into account beyond your typical Prime Cost is so important. If you cannot turn a positive contribution margin while taking all of these costs into consideration, then it will be impossible for your business to ever make money.
Your operational fixed costs are everything else that are not necessarily influenced by sales volume. A great way to discern the two is to ask yourself “What expenses do you still have to pay, even if you don't get a single customer?” A few that commonly come to mind are:
Heating the ovens and powering the walk-ins.
Occupancy Expenses like rent, insurance, and property tax.
Communication capabilities like a phone system and internet.
Salaried employees whose pay is fixed and does not vary by hours worked or overtime.
It’s worth mentioning mixed costs, which are costs mixed with being fixed and also influenced to a degree by sales volume.
With respect to restaurant businesses, and for the purposes of calculating break even, mixed costs are often grouped with fixed costs. Examples include power and water, which may vary month-to-month but are typically stagnant.
How to Calculate Break Even Point: The Break Even Formula
The textbook formula for calculating your break even point in units of number of guests for a given period of time is:
I call this textbook, because it is the universal way to calculate any business’s break even point. We measure “At how many units sold, will my business break even and start turning a profit?” In our industry, our units are the guest counts (or number of “covers”) themselves. Our unit price is essentially the dollar amount of our “guest average.”
This isn’t always the easiest way to look at things, and that’s mostly because of the difficulty I’ve seen in obtaining the “variable cost per guest” component. Some restaurants will have worked out their estimated margins on food dishes and drinks based on an expanded analysis of recipes and cost of ingredients. However, I don’t usually see a restaurant’s entire chart of accounts neatly categorized into fixed vs variable costs in order to accurately conduct complete break even analysis.
As an alternative, I sometimes like using the following variation of the formula. You only need 3 values: Total sales, total fixed costs, and total variable costs.
This allows you to quickly calculate a restaurant’s break even point (in sales dollars) as soon as you have categorized your fixed vs variable costs for any given period of time. All you have to do is gather basic accounting reports from a high level, without yet factoring in guest counts or $ averages per guest.
Let's break this down a bit to see how I derived that.
You can look at break even (in dollars) as, “For a given period of time, at what volume in sales did my total contribution margin break even my bottom line, offsetting my total fixed costs, after which point each additional dollar earned went straight to contributing to my net income (profits)?”
Break Even is equal to Total Fixed Costs divided by the Contribution Margin Ratio (aka “The percentage of each sales dollar that is available to cover my fixed costs and profits.”)
First off, this is especially helpful for combining multiple months together. Sometimes, you are only looking at P&L (Profit and Loss) statements for a longer period of time, working on identifying any financial trends for that period. Also, it can be difficult to summarize some fixed costs that don’t always occur every month.
With this formula, we simply remove the guest count component to answer the question, “At what point did I break even and start accumulating profit to my bottom line?”
Let's look at an example: Last quarter, let's say you…
Introduced a new menu and slightly raised prices.
Printed new menus which only happens a few times per year.
Started using new vendors that you negotiated into contract pricing.
Brought on a new restaurant management team.
Invested in a new kiosk system which will now cost you a fixed monthly amount, saving you a significant amount of money in labor every day.
As a result, we should use the last 3 months of accounting data to reset our way of measuring our break even. It is a good idea to use a moving average of these expenses and sales figures. Using moving averages allows you to account for the quirks of all the miscellaneous expenses which still impact your bottom line, while still updating your historical numbers with the most recent month's closing figures.
Let’s take these example statistics from a restaurant’s last quarter.
You had $450,000 in sales.
Your total variable costs amounted $180,000.
Total fixed costs were $200,000.
Now turn it all into 1 month averages:
$60,000 variable costs
$66,666 fixed costs
So first, we are subtracting total variable costs ($60,000) from total sales ($150,000).
Next, we divide that difference ($90,000) by the total sales ($150,000).
Then, we take 1 minus that quotient (0.4), which equals 0.6. In other words, 100% - 40% = 60%.
Finally, we divide the total fixed costs ($66,666) by 0.6 . Ready to see it all made clear?
Alrighty - let's crunch some numbers to see how to calculate your break even point in dollars.
In this example, we have calculated that your restaurant's break even point was when it reached $111,110 in sales for the average month.
Let’s say you discovered from your sales records that the average dollar amount per guest for the same previous 3 months is $45. You can use that to determine your break even amount when it comes to the number of guests you need per month by dividing your monthly break even amount by the average amount spent per guest.
Break even (in guests) = $111,111 / $45
Break even = 2,469 guests
or an average ~83 guests per day
And there you have it! That's how to calculate break even point in your restaurant.
Easy peasy, right?
Breaking Even in Your Restaurant
While it's crucial to understand the fundamentals of break even in your restaurant, there are still plenty of other metrics to be using on a regular basis. If calculations like prime cost, COGS, turnover rate, and food cost percentage still aren't your specialty, check out our blog on 7 Restaurant Performance Metrics and How to Calculate Them, or download a free copy of our restaurant metrics calculator and interactive template for easily calculating your restaurant's metrics!
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