Restaurant break even analysis. How to calculate break-even point for a restaurant
March 14, 2022 • 12 minutes
Restaurants are notoriously difficult to run, with studies showing that over 60% of independent restaurants fail in their first 3 years, and the financial management of restaurants, that always run on very thin margins, can be very difficult to get right. But knowing a restaurant’s break-even point and conducting a break-even analysis for a restaurant can help any owner better understand and manage their financial position. Also, BEP should be highlighted in your business plan. Here we’re going to cover everything about the break-even point restaurant calculation, and a restaurant break-even analysis, including:
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What a restaurant break-even analysis and break-even point are
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What information a business needs to have when conducting a break-even analysis
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How to do a break even analysis for a restaurant
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What are the benefits of a break-even analysis – one of the major restaurant performance metric
Whilst these formula and this information can, at first, be intimidating, once you’ve started calculating a break-even point for a restaurant and learn what a break-even analysis is with examples, then you’ll know how useful a break-even analysis can be to a small business and how it can help to inform business decisions.
What is a Restaurant’s Break-Even Point (BEP)?
The restaurant BEP is the point when costs exactly equal the revenue of a given time period. This means that a restaurant is making no financial losses or gains and is breaking even on its investment during that period of operation.
A restaurant’s break-even point is the point at which costs exactly equal revenue. After surpassing its break-even point a restaurant begins to start turning a profit, before it the restaurant is making a loss.
A break-even point is a data point based on historic data that can be used to monitor real time performance. In order for a break-even point to be truly informative a restaurant must practice accurate accounting to correctly inform the data used to calculate their break-even point.
What is a Break-Even Analysis?
Conducting a break-even point analysis for a restaurant business means completing a BEP calculation and then using the results to learn what is required for the restaurant to financially succeed over a given time period (for example, from the date of opening a restaurant). This is the most basic level of conducting a break-even analysis.
A break-even analysis involves playing with the inputs of the break-even point formula: costs, prices, etc; to determine how changes can affect a business’s profitability.
Again, practicing accurate accounting is essential to how useful and informative conducting a break-analysis can be. Later we’ll go through an example of how to calculate a break-even analysis for a restaurant.
How to Calculate A Restaurant’s Break-Even Point?
As with all restaurant calculations the break-even point requires that the numbers inputted into the BEP formula be as accurate as possible. This means that restaurant accounting e.g. wastage logs, inventories, etc; needs to be as accurate as possible, along with the numbers coming out of the restaurant’s POS system.
It is best to use a restaurant’s most recent data, from the past 3 months, to ensure that calculating a break-even point provides the most reliable data point possible.
Using the most recent data allows you to include any of the most recent cost changes e.g. new salaries or a rise in food costs, in your calculation. It is easiest to conduct a restaurant break-even point and restaurant break-even analysis in excel. To calculate a restaurant’s BEP you’re going to need the restaurant monthly expenses i.e. restaurant fixed and variable costs, for a given period along with the total sales for that period.
Determining the Restaurant’s Fixed Costs
A restaurant’s fixed costs are those that don’t change every month, and rarely change every year. These include:
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Rent
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Insurance premiums
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Property taxes
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Trash fees
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Phone and internet bills
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Equipment rental costs
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Licenses and permit fees
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Marketing budget
A restaurant’s utility bills are often called «mixed costs» because, whilst they are variable with business levels, they stay relatively constant throughout the year. For this reason utility bills are counted as a fixed cost when using a restaurant break-even calculator.
Calculating A Restaurant’s Variable Costs
The variable costs of a restaurant are those that are dependent on sales volume. Examples of variable costs for a restaurant include:
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Food and drink purchases
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Dry goods
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Credit card processing fees
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Labor costs
When collecting data to use for a BEP analysis remember that these factors can be affected by things outside of business volume e.g. being understaffing for a week, or local events, etc. Taking this into account helps to improve the accuracy of a break-even point.
The Break-Even Point Formula
The break-even point formula looks like this:
Break-Even Point = Total Fixed Costs /
(Total Sales - Variable Costs) ÷ Total Sales
Using the above formula is how to calculate a break-even point in dollars. This will provide you with a total revenue goal for when a restaurant should break-even. This is also known as how to calculate a break-even point in sales.
How to Calculate a Break-Even Point in Units
To calculate a break-even point in sales take your break-even point in dollars and divide it by the menu price of the item you wish to calculate it for:
Break-Even Point in Dollars / Menu Price of Item
The resulting answer is how many of that product you need to sell to break-even. This break-even calculation works best for venues that specialize in a particular item where the menu items are of the same or a very similar price e.g. a hot dog cart, an ice cream parlor, or a pizza shop.
How to Calculate a Break-Even Point by Guests Served
This is one of the most popular numbers for restaurant managers to have because it is a number they can easily see and track every day. Tracking if they’re on target to hit their break-even point or not. The formula here is:
Break-Even Point in Dollars / Average Guest Check Value
This displays the result of the break-even point in units that a floor manager can tangibly see every day: guests served. **So the result of this formula is how many guests need to be served to break-even. **
An Example of Break-Even Analysis
If we take the following numbers for a restaurant for a given time period:
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Total Sales = $100,000
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Total Fixed Costs = $25,000
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Total Variable Costs = $65,000
Then, using our break-even formula, we find:
Total Fixed Costs /
(Total Sales - Variable Costs) ÷ Total Sales
= 25,000
(100,000-65,000) ÷ 100,000
= 25,000
35,000 ÷ 100,000
= 25,000
0.35
= $71,428.57
This restaurant must make $71,428.57 in this time period before it starts making a profit or, alternatively, so that it doesn’t record a loss.
If we know that this restaurant’s average guest check is $18 then we can work out how many guests this restaurant must serve in this time period to reach it’s break-even point:
Break-Even Point in Dollars /
Average Guest Check Value
= $71,428.57
$18
= 3,969 guests
This restaurant must serve 3,969 guests in this time period to break-even, i.e. neither turn a profit nor a loss.
If we say that this restaurant is a pizza shop selling pizza by the slice, and the average price for a a slice of pizza is $9 then:
Break-Even Point in Dollars /
Menu Price of Item
= 71,428.57
$9
= 7,937 Slices of Pizza
This means that this pizza shop needs to sell 7,937 slices of pizza in this time period to break-even.
3,969 guests served or 7,937 slices of pizza may sound intimidating. But we do not know the length of this time period. If it is one year then 3,969 ÷ 365 = an average of 11 guests a day, or 7,937 ÷ 365 = an average of 22 slices of pizza a day.
When the time period is taken into context these numbers can become much more manageable than the large numbers of 4,000 guests or 8,000 slices of pizza.
What is the Average Break-Even Point for A Restaurant?
Due to the wide variety and infinitely variable factors that make up a restaurant’s costs and sales revenue there is not an average break-even point for small businesses like restaurants. But we can say that the average restaurant’s profit margin falls somewhere between 0-15%, with most falling in the 3-5% range.
How to Use a Restaurant’s Break-Even Analysis
A restaurant’s break-even analysis can be used to inform many restaurant decisions, but the two most popular things it can inform are:
Set Sales Goals - When showing how to calculate a break-even analysis above we showed two ways restaurant managers can use the results of break-even analysis calculations to set goals. They can set themselves, daily, weekly, monthly, and annual goals relating to how many customers they want to serve or how many units of a particular item they want to sell.
Set Menu Prices - If a unit based or guest quantity sales goal seems unachievable then managers can do one of two things, reduce costs or raise prices. For example, the manager of our pizza shop can input different prices for the slice of pizza into the formula to find sales numbers which they believe are more attainable and then add them to pizza shop pos system.
How to Reduce The Break-Even Point of a Restaurant?
A restaurant’s breakeven point focuses around costs and revenue and the inputs on a break-even point worksheet can be adjusted to see how certain changes can affect the overall break-even point. These are three factors that can be focused on to reduce a break-even point:
Reduce Fixed Costs - These are the most difficult to reduce but there are a few ways it can be done: Negotiate new costs with a new utility provider or internet and phone line supplier, or renegotiate rent with the landlord. Equipment rental costs can be reduced by purchasing new equipment. This may result in a high initial outlay but will reduce the related monthly fixed costs.
Reduce Variable Costs - A restaurant’s prime costs (food and labor costs) account for around 60% of its overall costs. Reducing food waste, making portions smaller, or using cheaper produce can reduce food costs, while cutting staff and better schedule restaurant management are ways of reducing labor costs.
Increasing Average Guest Check - There are many tactics to increase the size of the average guest check in a restaurant. These include: raising menu prices, encouraging upsells by employees, creating beverage pairings, dropping dedicated dessert menus, amongst others!
A Final Word
How to determine a break-even point is a question both new and veteran restaurant industry members ask. How to do a break-even point analysis is also a common question, but after reading this you should have a good grasp of what break-even is in a restaurant, how to calculate it and how to practically apply the results to your business’s needs. You should also have some idea of where to look to reduce a restaurant’s break-even point and how to see the effects of those changes before they are implemented.
