Break-Even Analysis: How to Calculate Break-Even Point for a Restaurant

You might be an expert in management, staff training, and menu engineering. But do you know how to calculate break-even point for your restaurant?

Not all restaurateurs are business experts right out of the gate, and that’s okay. What matters is the willingness to learn. Once you have a reliable system in place for calculating your break-even point, getting back to your true passion will be all the easier.

Break-even point is a key figure in operating your restaurant, referring to the amount of revenue necessary to cover the total fixed and variable expenses incurred within a specified time period.

Some methods of calculating break-even point can be very subjective. This article will help you understand some standard restaurant accounting metrics, shine a light on why they matter to you, and help you figure out how to start tracking them today.

How to Calculate Break-Even Point for Your Restaurant

Break-even analysis can be challenging for restaurants: You’re measuring today’s business performance with tools and information 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’s important to conduct accurate cost accounting; it’s also important for your restaurant POS system's sales reporting to deliver accurate data on guest averages.

Break-even analysis also focuses on making sense of your fixed and variable costs. Here’s a breakdown of the two.

Fixed Costs

Your fixed costs include expenses that must be paid regardless of production or sales volume. A great way to distinguish between fixed and variable costs is to ask yourself, “What expenses do I still have to pay, even if I don't get a single customer?”

A few common fixed costs include:

• Heating the ovens and powering the walk-ins

• Occupancy expenses like rent, insurance, and property tax

• Communication tools like a phone system and internet

• Marketing costs

• Licenses and permits

Variable Costs

Variable costs vary in proportion to production. Your variable costs also take into consideration anything that gets more expensive as a result of more business. Variable costs may include: 

• Food and drink costs

• Cleaning supplies

• Disposables and garbage bags

• Credit card processing fees

• Labor costs

Mixed Costs

It’s worth mentioning mixed costs, which are costs that waiver between being fixed and being influenced to a degree by factors like sales volume.

For the purpose of calculating break-even point, mixed costs are often grouped with fixed costs. An example of a mixed cost is power and water, which may vary month-to-month but typically doesn’t drift too far from the norm.

Free Resource: How to Measure and Increase Restaurant Sales

Break-Even Point Formulas and Calculations

Here is the textbook formula for calculating break-even point in units of number of guests for a given period of time:

Break-Even Point = Total Fixed Costs ÷ (Average Revenue Per Guest - Variable Cost Per Guest

In the restaurant industry, the 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 in obtaining the “variable cost per guest” component. 

Some restaurants will have worked out their estimated margins on food and drinks based on an expanded analysis of recipes and cost of ingredients. But most restaurants don’t have an entire chart of accounts neatly categorized into fixed and variable costs in order to accurately conduct complete break-even analysis.

As an alternative, this variation of the formula works well. You only need three values: total sales, total fixed costs, and total variable costs:

Break-Even Point = Total Fixed Costs ÷ (Total Sales - Total Variable Costs ÷ Total Sales)

Once you’ve categorized your fixed and variable costs for a given period of time, this formula allows you to quickly calculate your restaurant’s break-even point in sales dollars. All you have to do is gather basic accounting reports from a high level, without yet factoring in guest counts or the dollar averages per guest.

Let's break this down a bit to see how we got to this.

You can think of break-even point in dollar amounts like this: For a given period of time, at what sales volume 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?

Let’s see how you calculate the percentage of each sales dollar that is available to cover your fixed costs and profits using this formula: Break-Even Point = Total Fixed Costs ÷ Contribution Margin Ratio. We can get to this using a series of calculations:

• Contribution Margin = Total Sales - Total Variable Costs

• Contribution Margin Ratio = Contribution Margin ÷ Total Sales

• Contribution Margin Ratio = (Total Sales - Total Variable Costs ÷  Total Sales)

• Break-Even Point = Total Fixed Costs ÷ (Total Sales - Total Variable Costs ÷  Total Sales)

With this formula, we simply remove the guest count component to answer the question, “At what point did I break even and start adding 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 a year

• Started using new vendors that you negotiated into contract pricing

• Brought on a new restaurant management team

• Invested in a new kiosk system, costing you a fixed monthly amount but saving you money on labor

Knowing this information, we should use the last three months of accounting data to reset our way of measuring break-even point. It’s 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 that still impact your bottom line, while still updating your historical numbers with the most recent month's closing figures.

Let’s look at these example statistics from a restaurant’s last quarter:

• The restaurant had $450,000 in sales.

• Their total variable costs amounted to $180,000.

• Their total fixed costs amounted to $200,000.

Now, let’s turn these costs into one-month averages:

• On average, the restaurant had $150,000 in sales per month.

• On average, the restaurant had $60,000 in variable costs per month.

• On average, the restaurant had $66,666 in fixed costs per month.

With these numbers, we’ll first subtract the number of total variable costs ($60,000) from total sales ($150,000). Next, we divide that difference ($90,000) by the total sales number ($150,000). Then, we take one minus that quotient (0.4), which equals 0.6. Finally, we divide the total fixed costs ($66,666) by 0.6.

Ready to see it all made clear? Using this example, let’s crunch some numbers to see how to calculate break-even point in dollars:

• Break-Even Point = Total Fixed Costs ÷ (Total Sales - Total Variable Costs ÷ Total Sales)

• Break-Even Point = $66,666 ÷ ($150,000 - $60,000 ÷ $150,000)

• Break-Even Point = $66,666 ÷ ($90,000 ÷ $150,000)

• Break-Even Point = $66,666 ÷ 0.6

• Break-Even Point (in Dollars) = $111,110

In this example, we calculated that the restaurant’s break-even point was when it reached an average of $111,110 in sales per month.

Let’s say you discovered from your sales records that the average dollar amount per guest for the same previous three months is $45. You can use that number to determine your break-even amount when it comes to the number of guests you need per month. All you need to do is divide your monthly break-even amount by the average amount spent per guest.

• Break-even point (in guests) = $111,111 ÷ $45

• Break-even point = 2,469 guests

• Comes out to an average of 83 guests per day

There you have it. We hope these formulas and breakdowns help you better understand how to calculate break-even point for your restaurant.

Crunching the Numbers for Your Restaurant

While it's crucial to understand the fundamentals of break-even analysis for your restaurant, there are still plenty of other metrics you should be thinking about on a regular basis, including food cost percentage and cost of goods sold. Download a free copy of our restaurant metrics calculator — including an interactive template — for easily calculating your restaurant's metrics.