Break Even Analysis for Restaurants: How to Calculate B.E.P
Seventy-eight percent of restaurateurs check their financial metrics every day, according to Toast data. Even so, many owners and operators say they aren’t always clear on how to interpret the data, and how to use it to help optimize their businesses.
Analyzing your costs and manipulating financial formulas and calculations can be intimidating. But it doesn’t have to be, because once you understand how to interpret your data, you’ll be able to more proactively manage your financial health, taking control of restaurant costs and day-to-day operations.
Restaurant break-even analysis involves analyzing a key restaurant financial metric: break-even point. Operators can use this analysis to set sales targets, control costs, and hit target profitability and business growth.
Read on to learn how to determine a break-even point helps bring the overall health of your restaurant into perspective.
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What is restaurant break-even analysis — and why is it important?
Break-even analysis is simply the practice of calculating and analyzing your break-even point: the point where total revenue equals total cost (fixed and variable costs).
The break-even analysis helps you find out how much revenue your restaurant needs to generate or how many units (covers or average guest value) you need to sell to exactly cover your costs or make a $0 profit.
You can use this analysis to set sales targets, determine menu pricing strategies, and control restaurant costs.
Defining the costs required to conduct a restaurant break-even analysis
There are a few key terms restaurateurs should understand in order to conduct break-even analysis. These include fixed costs, variable costs, and mixed costs.
Restaurant 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
Restaurant 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
Disposables and garbage bags
Credit card processing fees
Restaurant Mixed Costs
It’s worth mentioning mixed costs, which are costs that waver between being fixed and being influenced to a degree by factors like sales volume.
Break-even calculation requires grouping mixed costs with fixed costs. Two examples of mixed costs are power and water, which may vary month-to-month but typically don’t drift too far from the norm.
What is the Break-Even Point Formula?
Here is how to calculate the break-even point in units of the 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 the 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 to accurately conduct a 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 ÷ Contribution Margin Ratio
Contribution margin is simply your total sales minus your total variable costs over the same period. You simply divide that dollar amount by your total sales to get your contribution margin ratio.
Here's what this looks like in formula form:
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 answer the question, “At what point did I break even and start adding profit — growng 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 finding the 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
How to use restaurant break-even analysis
So we know that a break-even analysis helps us determine the sales needed to cover costs. But how do we use this data in our restaurant? What business decisions can we make to improve overall profitability?
In a nutshell, the break-even point lets you map out your path to profitability in two distinct ways:
Knowing your break-even point helps you set realistic business goals to reach this point so you can start making a profit. You can set sales and cost targets based on actual historical data (and not a hunch).
Because you have an actual number to aim for, you can be more intentional about key areas like pricing and recipe construction to align with these sales and cost targets.
In fact, by making a few key strategic decisions like increasing your selling prices or better managing food costs, you can reduce the break-even point.
How to lower the break-even point and make a profit sooner
There are multiple ways to reduce your break-even point. You’ll likely use a combination of the ways to increase profitability.
For quick wins, focus on your low-hanging fruit: controllable restaurant operating costs that account for the majority of all your expenses. These are your food and labor costs (prime costs) and account for 60% of your operating costs.
Lowering them is what will really move the day-to-day profitability of your restaurant.
Here are a few concrete ways to help lower controllable costs and improve your break-even point:
Invest in better recipe management to simplify plate costing and maximize margins
Successful plate costing is an ongoing process, but many operators do it only once or not at all because of the effort and complexity often involved.
They ignore dynamic ingredient price changes, which don’t get accounted for in menus, leading to a lower contribution margin and a longer time before breaking even.
Consistent recipe costing and standardization, such as what xtraCHEF by Toast offers, simplifies plate costing and helps you maximizes margins.
A key feature includes automated invoice processing. Following a simple invoice scan, the software automatically routes your general ledger data to your accounting software while pulling line-item invoice data into the system for accurate costing.
Any ingredient price updates automatically flow to adjust recipe prices. For example, if chicken’s cost goes up by 10%, it will automatically show in all recipes containing chicken.
Use this information to shop for new suppliers or increase selling prices to account for cost increases and maintain your contribution margin.
It also frees up literal labor hours that your team can put to use elsewhere.
Programmatically track vendor price fluctuations
An analysis of over 35,000 invoices and 400 restaurants confirm that vendors overcharge restaurants at least once 35% of the time. If you’re not staying on top of changing vendor prices, you’re not staying on top of rising costs and your profitability.
The vendor hub in xtraCHEF by Toast provides a complete list of all your vendors, what you’ve purchased from them and how much you’ve paid. You can also see how vendors’ prices track over time and who has the most volatile prices. It’s a fantastic way to track cost changes, keep vendors honest, reduce your food costs, and lower your break-even point.
Take charge of your restaurant’s break-even analysis today
Restaurant break-even analysis maps your path to profitability, helping you set sales targets and be more intentional about strategic decisions.
Taking charge of it may not seem like the easiest thing, but it really isn’t hard when you get down to it. Get to grips with your fixed costs, variable costs, and total sales, use the break-even formula, and invest in the right tools to reduce it so you can become profitable much sooner.
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 regularly, including food cost percentage and cost of goods sold. Download a free copy of our restaurant metrics calculator — including an interactive restaurant break even analysis template — to easily calculate your restaurant's metrics.
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