Break-Even Analysis: Calculating the Break-Even Point for a Restaurant

Wondering how to calculate the break-even point for your restaurant? Look no further!

A break-even month! This moment when the outflows and inflows match exactly have their own finance term, break-even. 

In this post, you will learn and become an expert on break-even analysis.

So, the next time when you are worried about a sales decline, your accountant is quizzing you on these concepts, or you simply need some help sleeping at night, shake your head knowingly, and with pride as you will have mastered your break-even. Here is a list of all things this post will cover:

1. What is a break-even analysis? 
2. How to calculate it? 
3. How to proceed with the information you derived? 
4. When do we really do it? 
5. What can we really do with all this information? Also, in other words, the benefits of the practice? 

So, let’s get smart.

Read Also: Restaurant Purchases Vs Cost of Goods Sold

Understanding Break-Even Analysis

Mathematically put, a break-even point is when total revenue = total cost.

It is a measure that tells you how much revenue is required to cover up all the fixed and variable costs that your restaurant business will incur over a specific period of time. It is the scenario when the restaurant does not make or lose money, a simple equilibrium.

This break-even sales figure helps you, the restaurant owner, with planning daily and weekly sales goals, salaried employees headcount, hourly employees hourly allotment, investments, large expenditures, and much more.

The break-even metric is one of the most important financial analysis metrics for your small, medium or large restaurant. It essentially sets the bar, you know quickly where you have excelled or fallen short. This can be calculated by the week, day or shift (lunch, dinner or breakfast).

Knowing what your break-even is before a slow month or Friday night ensures you can set realistic performance goals for your bar or restaurant. Knowing what your break-even ensures that you can close on Monday’s when it is a money loser. Knowing what your break-even is keeping you out of delusion about your business and closer to realistic expectations.

So know your break-even and lucky you, this post helps you figure it out.

Let’s Breakdown the Break-Even Components and Do the Math

There are some concepts we need to first fully understand in order to be able to do the break-even calculation.

So we can start by getting familiar with the components.

Fixed Costs

Ask yourself this, “what are the expenses I need to incur irrespective of if I get 0, 5 or 100 customers?”. List these items as your fixed costs.

Some fixed cost items that come to mind are the following:

• Rent
• Cleaning services
• Equipment lease agreements
• Contracted services
• Software subscriptions (dues and subscriptions)
• Insurance
• Loan payments
• Salaried employees (management employees)

Fixed cost refers to an amount that you need to spend no matter how many customers you have. These costs do not depend on factors like production or efficiency. If you served 1 customer or 1,000, these costs would be the same.

If you had 1 employee working (yourself) or the entire team of 100 working, these costs would not fluctuate. I like to include salaried employees as a fixed cost, as even if the restaurant has a bad week, month, or quarter, these employees are rarely let go and treated as variable.

Variable Costs

Now there will be many expenses that change based on your output, how many restaurant customers you serve.

For instance, the busy season (for example those who operate in a tourist town see peak sales in the summer) would call for additional staff, more food and beverage purchases. Variable, as the name suggests, refers to costs that are dynamic in nature.

These cost items will vary according to factors such as production, headcount, opening hours and so on. 

Some variable cost items that come to mind are the following:

• Food purchases
• Beverage purchases
• Credit card processing fees
• Supplies (restaurant, office, and cleaning)
• Franchise royalties (for franchised restaurants)
• Hourly labor (front of house and back of house)

When you are starting out new, it could get tricky for you to understand the variable costs.

So, if you are stuck, look at the financials of comparable restaurants, ask here in the comments, or email me directly.

Mixed Costs

Another thing you could be wondering about is the mixed cost (costs that are variable but rarely fluctuate). For example, when we say utilities, it could include electricity or water. Now, these are fixed costs, but also vary based on consumption (or the production of your restaurant). 

Some mixed cost items that come to mind are the following:

• Utilities
• Advertising
• Insurance

However, for the break-even analysis, it is smart to take the average of such mixed cost items and include it in your fixed costs. Simply take your annual expenditure for said category, divide by 12 and use for our analysis.

I usually tend to include these in my fixed costs section as they follow the same logic when generated this break-even analysis.

Break-Even Calculation

Equipped with these details about your restaurant, we now can jump into the calculation. We list out a couple of variations for you to get the full picture.

You can try one or all of the methods for break-even analysis depending on what suits your restaurant better. 

Break-Even Point With Units (Guest-Count)

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

This formula tells you the headcount of guests you need to serve in order to break-even.

This is the less preferred method though.

The reason being that obtaining these formula components is not an easy task. It is feasible, but finding these precise figures makes this process prone to error.

For example, if you take your average sale price from your point of sale (POS) and your average cost of goods for both food and beverage (from your most recent accurate income statement), you can quickly use these averages to help with your calculation. 

The other approach is to use your financial data to reverse engineer the above figures. You then can divide the total revenue with the number of items, and you arrive at the average revenue per item. Then estimate the number of items per guest to get the average revenue per guest.

To get the variable cost per guest, you can take the total cost of goods sold for food and/or beverage for a set period dividing by the number of plates or drinks sold. This gives you the average variable cost.

But the actual practice of such methods is as difficult as it sounds and needs very organized and updated accounting at all times. Further, even if opted, this is suitable more for experienced players than new venturers. 

Lucky for us, we have our second method, which is easier to follow through. You need to categorize your fixed and variable costs and then the following formula is easy to go ahead with.

Break-Even Point in Dollars

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

You can get your fixed and variable costs and sales from your reports and arrive at this break-even point figure. With this formula, focus on using percentages as a broad sweeping point, this is not as precise as the other methods, but I find it accurate enough for the break-even exercise.

Break-Even Point With Contribution Margin

The textbook formula for the break-even point with contribution margin is as follows: 

Break-Even Point = Total Fixed Costs ÷ Contribution Margin Ratio

The contribution margin is nothing simply your products selling price minus variable cost. In other words, it is the cost of an entree minus the cost of the ingredients and labor used to prepare the plate. Under this calculation, we do not consider the fixed costs.

When you have the contribution margin, you can easily calculate the ratio by dividing it with total sales. Basically, it works like this: 

Contribution Margin Ratio = Contribution Margin ÷ Total Sales

You can think of the contribution margin as a measure of the ability of the company to cover variable costs with revenue. Whatever amount is left after the contribution margin is used to cover up fixed costs and then filters down as profits. 

The benefit of adopting this method is the intricacy you can reach with your pricing, menu item selection and other similar tasks.

For instance, if you want to reset your menu with the goal to increase your profitability, it is useful to see products with the lowest contribution margin and adjust your menu accordingly.

Restaurant Pro Tip

Specials and house recommended dishes and drinks should always be your high contribution margin items. Why sell one dish where you make $5, when you can sell another where you make $10! 

Proceeding after the Break-Even Figure

We will delve into the benefits of the restaurant break-even analysis further in the article, but this piece should help explain how to use the derived numbers for your business.

The best way to understand this is via an example. Let’s think of us as a coffee shop. 

Break-Even Point With Units (Guest-Count)

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

So when we did the break-even analysis in terms of headcount, we found out that we need to serve at least 65,780 customers to break-even.It could just seem like a random figure, maybe over-ambitious or easy to achieve.

So we discussed again and decided that within 3 years, this seems doable and that is when we need to reach break-even, and this will also make our investors happy, and some profits for ourselves.

To begin we divide 65, 780 by (3×12), and set a monthly goal of 1827 customers approximately, 261 weekly, or roughly 61 customers a day. Our entire team knows this goal, and that helps with setting sales targets and planning marketing and so on. 

Calculation Summary

Break-even HeadCount: 65,780 guests 

Break-even Period: 3 years 

Weekly Guests Needed: 261

Daily Guests Needed: 61

Break-Even Point in Dollars

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

In reality, our coffee house customers have different spending behaviors. Some prefer just a coffee and pastry, while others prefer a lunchtime tea and sandwiches, while others prefer an afternoon cookie with a cappuccino.

With this trend, the consumer spends anywhere between $3-$20. So when we say 1827 customers per month, it does not give us a clear picture of how much we can really make, as it does not account for the variability of the ticket price. So we need to do the break-even in terms of dollars also. We find out that we need to generate $328,900 in sales in order to break-even.

This comes to making an average of $5/customer in order to keep up with the above set goals. This figure now helps us make a better strategy, that we need to price our coffee at least, for instance, say $3 and above to reach a $5/customer average. 

Calculation Summary: 

Break-even Figure: $328,900 

Break-even Period: 3 years 

Spend/customer: $5

Now with our prices and goals set, next we use the break-even also as a benchmark to track our performance.

We know that in order to reach our above goal, we need each customer spending on an average $5. Unfortunately, we noticed that every Monday, it is mostly students coming in to study and use the free wife. The most they buy is one coffee and this results in bringing down the average.

So we introduced a Monday discount offer to motivate them to spend more, increasing our ticket price, so we can still reach our daily goal. 

To summarize, break-even analysis is a starting point. It helps us with restaurant business metrics and benchmarking. Here are items that you could look into after your break-even analysis

1. Margin Overview: Push items of higher margins to reach that break-even point within your goal and deadlines.
2. Costs: Review costs to see if you can outsource cheaply, negotiate better vendor pricing, implement new technology to bring it down or just eliminate certain expenses to reach your goal.
3. Pricing: You can adjust your pricing or your promotional offers as per your goal.
4. Hours of operations: Adjusting hours or days of operation can save you significant money when your only variable cost is labor and sales are lacking.

When to Use Break-Even Analysis (aka Our Newfound Math Skills)

Now that you know how to derive your restaurant break-even figure, the next thing to know is how exactly do you use this newfound information.

Obviously, when you start a new restaurant or bar business, you will want to use this analysis, but there are a few more situations that call for this calculation.

Let’s take a look at them all. 

Starting a New Restaurant or Bar Business

At this step, it is more of an “must-do” than “have time, should do, could help”.

The break-even helps you determine whether it even makes sense to enter into a new restaurant or bar venture because if you cannot recover your costs or make profits, the business is not attractive. In reality, if you cannot recover your costs or make profits, if the analysis is questionable, you should run far away from it.

Additionally, it helps us analyze different location opportunities, return on investment of our capital, and sets us up for success from day one. As a starting point, it also helps you understand realistic costs, optimal pricing, and sales plans.

Changing the Restaurant Business Model

For instance, you are considering extending hours and/or starting deliveries.

Perhaps you want to renovate the bar and develop a new regular bar crowd. The possibilities of evolving the restaurant business model are endless. These changes will adjust your cost structure significantly, and you want to do this analysis to check and see if it makes sense.

Also, this break-even analysis helps you know the kind of business volume you need to bring in for your new plans to be successful and helps you understand what it takes to recoup your investment. 

Introducing a New Product (Revising the Menu)

This depends on the scale and the impact it brings in, but it is a good practice to do the analysis when you plan to introduce a new product or revise your current menu.

For instance, say you are a coffee shop, and you only offer coffee, cookies, and pastries. Since your customers spend a good time at your nice coffee shop, you also introduce fresh sandwiches. These sandwiches come with some additional costs such as grill, toaster, new menus, extra labor, and so on.

Doing the analysis will help you figure out if you are able to recover these extra costs within a reasonable time. This analysis also helps you ensure this endeavor will drive further profitability.

Tracking Daily Performance

Easy and crucial, is the ability to track break-even analysis daily to better understand your restaurant performance.

Having a break-even figure and period (as we saw in the coffee shop example a bit earlier) gives you a goal you need to reach in order to keep your business loss-free. When you know this goal, it becomes easy to track your performance down to the daily level.

It also allows you to see if certain seasons or days repeatedly underperform expectations, so you can adjust labor or hours accordingly.

Doing the Break-Even Analysis is Essential

All your learning and implementing of this concept will definitely come with a multitude of benefits. Here is a brief look at some of them: 

1. It helps you determine whether your business is really making profits with the present sales volumes
2. It helps you figure out how many units you need to sell to keep afloat and to go beyond, so you can make profits. 
3. It helps you set-up optimal pricing and promotional strategy. 
4. It gives you an idea if you are on the right track and if your business is healthy. 
5. It gives you an accurate measure of your growth and gives you an insight into future growth plans. 
6. It helps you with the valuation of your business and can help you communicate effectively to your investors and partners.
7. It is possible that you forget some expenses, especially when you are planning a new business or even a new product. Doing this analysis forces you to think of all these miscellaneous expenses and catch your errors.
8. It helps to determine and quantify the potential loss that can occur in case of downturns or economic collapse.

Time for You to Take Over the Break-Even Analysis for Your Restaurant

I hope that this read helped lay a foundation for your future restaurant break-even analysis. Though some of these concepts may seem a bit intimidating at first, you should have a good grasp now. To help, feel free to read my ‘restaurant daily report’ post to get a good example of how to calculate a daily break-even analysis.

I am always available for a consultation and will be publishing a few more articles about break-even analysis in the coming months to help you conquer your restaurant analysis.

Good luck making a profit!