Know your Break Even Point

Knowing your restaurant’s Break Even Point is the most fundamental number that you must know.  As you assemble your business plan and budgets prior to opening your restaurant, you must calculate your BEP so you know exactly when your restaurant will begin to show a profit.     

These steps, before you serve your first guest, will give you a very good idea of the revenue you must have to generate a profit for your restaurant.  The Break Even Point is literally the dollar amount that covers all the expenses and the profit begins.  If your BEP is $21,836, the first dollar beyond that amount is profit.

Knowing the Break Even Point will help your planning.  You will be able to make adjustments to your business plan, budget or your operating plan before you get your restaurant into a fiscal hole that will be difficult to get out of.  If your menu plan and day part plans will not generate revenue sufficient to get the restaurant to BEP, then you must reduce your expenses to generate profit.  It is better to know that before you incur long term expenses, than to try to increase revenue later to overcome your expenses. 

Restaurants are tremendous cash flow generators, and many owners get seduced by the cash flow, believing that cash flow is the same as profit.  Unfortunately using your cash flow to solve problems means that you risk spending beyond the revenue and you will lose your business.  Without sound fiscal management, cash flow spending can continue until a crisis exposes the cash flow short fall or the expenses over run the cash flow.  

 

So how do you determine the Break Even Point?

The formula is Fixed Costs / (1-(Variable Costs/Sales))

To calculate your Break Even Point you must know your total fixed expenses, your total planned variable expenses and your planned net sales.  You probably have these numbers already available in your budget or in an Excel workbook. 

If you don’t have these numbers available in a workbook, you can get one here:

http://www.docstoc.com/docs/82061341/Break-Even-Point-Calculation-Template-for-Restaurants

This template is easy to use, quick to fill out and does all of the calculations for you.  Just enter all of your expenses in the correct budget category, and then let the workbook do all of the calculations for you.  The second page shows all of your results and the BEP that you must hit to profit. 

If you don’t use the template, just get the total dollar amount for your fixed expenses, your projected variable expense and your projected net sales. 

Step 1)   Calculate the variable expense cost percentage (Primarily Food and Labor Cost of Sales) by dividing the variable expense dollars by the projected net sales.

  

                        Projected Variable Cost of Sales = $52,769

                       

                        Projected Net Sales = $91,489

                        $52,769 / $91,489 = .5768 (57.7%)

Step 2)   Determine the Variable Cost remainder by subtracting the Variable Cost Percentage from 100%

                        1.000 (100%) - .5768 (57.7%)  = .4232 (42.3%)

Step 3)   Divide the Fixed Cost total dollar amount by the Variable Cost Remainder

                        Fixed Cost Expenses = $31,659

                        Variable Cost Remainder = 42.3%

                        $31,659 / .4232 = $74,809

Step 4)   The Break Even Point is $74,809

Remember that the BEP is simple to calculate and will help you determine exactly the steps that you must take to make (and keep!) your restaurant profitable. 

You should keep the figures necessary for calculation handy so that you can effectively evaluate any strategic decisions regarding your operational plan or (adding day parts or menu changes) any capital expenditure decisions and how they will affect your BEP.  You will also be able to track any changes to your variable expenses and how those will affect your BEP.  If there are changes to your restaurant cost structure, you will want to be able to react quickly and preserve your profit.    

Three Key Performance Indicators

Every restaurant operator needs to monitor the key performance indicators, to evaluate the fiscal health of their restaurant and to make strategic operational decisions.

We tell operators if they keep track of nothing else in their restaurant they need to keep track of these three key performance indicators, because they are critical to understanding your revenue stream and predicting what steps you must take to keep revenue on track. 

If you combine these three Key Performance Indicators with your Break Even Point, you will have the very fundamental information to make strategic decisions on your revenue. 

These three key performance indicators are essential to evaluating restaurant revenue performance. 

            1) Net Sales

            2) Guest Count

            3) Guest Average

These three key performance indicators are usually easy to validate and the source numbers are usually close at hand.  If they are they are not easily available from your point of sale system, make sure that you have the paperwork in place to make it easy to track and harvest these numbers on a daily and weekly basis.

If your restaurant is using a computer POS system, this information will be readily available from the POS system.  It may be in a report format that is different than what you will need but usually the hard numbers can be used and reformatted into an informative system for your monitoring and evaluation.

If your restaurant is not using a computer POS system, it may take a little more time to assemble the three Key Performance Indicators, but it is still possible using the paper trail that usually exists in some degree in almost every restaurant.  If you don’t have this critical paper trail, start it TODAY! 

Additionally, these three KPI numbers are usually easy for a restaurant operator to track and share.  You may not be willing to share detailed income statement information, but these key performance indicators should be shared with your entire team. 

Your service team should be tracking their contribution to the daily and weekly restaurant KPI numbers, because you certainly will be tracking their contributions to the success of the restaurant.  While your production team may have other targeted numbers to evaluate their contribution to the success of the restaurant, they also should be aware of these KPI numbers because these numbers are so critical to the evaluation of the revenue.  Basically, the more people on your team that are working to move the numbers, the better your restaurant will be.    

Ideally, you should be able to assemble a report of the three Key Performance Indicators that covers at least the last year of restaurant operations.  A shorter period can be used, but it may not demonstrate a full range of variances of seasons and operating conditions.  The longer the time period you obtain, the better you can evaluate and analyze the trends in reports that you generate. 

First – Net Sales 

The first key performance indicator that you must gather for your evaluation is Net Sales.  Net Sales is all revenue from sales of food and beverage minus tax that is collected on behalf of a government entity.  The Net Sales is frequently obtained directly from the POS system, usually in the end of day or end of week report.   

Second – Guest Count

The second key performance indicator that you should gather for your evaluation is the Guest Count.  The Guest Count is the number of people that are served in the restaurant.  This key indicator is usually available from the POS system, again in the end of day or end of week report.  Occasionally the POS system will not track the Guest Count, by not requiring the input of that information as each check is opened.  Contact your POS vendor to make sure the POS system is set up so that your service team can enter the number of guests for every guest check that they open.     

Third – Guest Average

The third key performance indicator that you should gather for your evaluation is the Guest Average.  The Guest Average is the amount that each guest spends in the restaurant.  The per Guest Average is sometimes available directly from the POS system however we have noted that many POS systems track the Guest Check Average.  

Again, you may have to ask your POS vendor to adjust the programming in your system so that you can get the information to output correctly.  For some odd reason most computer programmers believe that Guest Check Average is the same as Per Guest Average.  They are wrong!  It is also helpful if the vendor will format the information into the individual server reports so that they can track their personal contributions against the group average and against your established team goals and expectations. 

If the POS vendor cannot adjust the information in their system, you can fall back on a paper tracking system.  It would make most sense to require your servers to track each Guest Check that they open and tracking the number of guests for each check.  At the end of their shift, they can turn in the report to management for entry into a tracking spreadsheet, that will calculate the Guest Check Average for your due diligence tracking. 

How to Evaluate the Key Performance Indicators

These three Key Performance Indicators can be used to determine a lot about the operation of the restaurant.  Using these numbers you are able to track the business of the restaurant and critical trends of the business.  They are also the primary source of many of the other numbers used in the fiscal analysis of your business.  As we said earlier, if you track nothing else, these KPI numbers can provide some of the very fundamental information that will serve you very well.

As you gather these numbers, you should be able to put them into a system (i.e. computer spread sheet) so that you are able to do some analysis and manipulation of the information.  You should begin gathering at the daily level and then use the spread sheet to gather the information into larger blocks of time for your analysis.  

The first KPI number is Net Sales.  You should know this number for every business day, with a time span of at least 3 months, if not longer, for valid trend analysis and decision processing.  It is helpful to be able to break the net sales number into dayparts, if that is essential for your restaurant.  The daily net sales must come from the POS or cash handling system.  The number should be validated by checking it against the daily bank deposits or the guest check register.

The second KPI number is Guest Count.  You should know this number for every business day, for a minimum of 3 months for valid trend analysis and evaluation.  This number can also be broken into dayparts, if that is required for certain decisions.

The third Key Performance Indicator is per Guest Average.  You should know or be able to calculate this number for every business day, for a minimum of 3 months to make effective decisions.  Of course this number can also be broken into dayparts, to make effective evaluations of the business going forward. 

Once you have this information on hand and you are getting used to evaluating it and using it to drive your every day operations decisions, your restaurant will get easier to manage.

Let’s review three decision examples:

You note that net sales are off by 5% each of the last three weeks.  This downward sales trend is very alarming and you need an action plan to reverse the trend.  But an effective action plan requires knowing why net sales are trending down.  The Key Performance Indicators will help you hard target the problem. 

If Net Sales is down because the Guest Count is falling, you can do traffic builder marketing to get the Guest Count back up.  The problem is quite different if the falling Net Sales trend is from a declining Guest Average, you must action plan to get each guest to spend more, usually by focusing your service staff on upselling and adding on to each guest. 

Either way, you can make a decision that hard targets the problem and makes the most effective use of your time, your action plan and any marketing that you do.   

In the second decision, you must evaluate who are the contributors are on your service staff.  By tracking and monitoring the Key Performance Indicators for each server you can focus your coaching for each server on the challenges that each server must concentrate on to improve.  You can use the information as an opportunity to reward your high performing servers, and use the information to get the servers with lower numbers back on track. 

Again, you can target your feedback to each server.  The message is going to be different to a server that has the highest Guest Average on your service team but has handled the fewest guests.  They may be stuck with a lot of deuces or they might be working their tables for too long and not turning them.  The server that has a lower Guest Average but has a higher Guest Count may be missing sales opportunities by turning tables too quickly or by taking a section that is too large, with the mistaken belief that the table handles or table turns are their key to earning better tips. 

In the third decision, you must make your marketing decision for the next Quarter.  You might see the opportunity to build your lunch day part, because of certain market factors you have identified.  You should find a menu special that will attract enough guests so that your promotion is revenue neutral marketing. 

Your goal should be to build Guest Count at a smaller Guest Average, with a carefully planned sales effort that sells the convenience of your location, the speed of your service, your great tasting menu and friendly atmosphere.  If you handle the promotion correctly, you will retain Guests after the promotion.  Properly managed, the after promotion Guest Count remains at promotional levels, but the Guest Average returns to pre-promotion level.  This means that you have effectively increased sales in the lunch day part. 

In each of these scenarios, it is critical to have the Key Performance Indicators so that you are able to examine trends and make valid decisions that will impact your restaurant’s revenue and fiscal management. 

As a restaurant owner you have a lot to keep track of every day but you must be aware of these three Key Performance Indicators, because they tell you so much about your revenue and give you information necessary to plan for effective sales and profit increases.  Restaurant owners know that these Key Performance Indicators are the very foundation of running your restaurant By The Numbers!

Welcome to By The Numbers!

I love the restaurant business!

I can’t think of another business that is such a dynamic mixture of working with people, creating a product and hands on management.  The feedback from your efforts is nearly instantaneous and the pace of activity is non-stop fly by! 

My philosophy of the restaurant business is very simple.

First - Take care of your team.  Unless you are running a food cart, you will need a team to help you run your restaurant.  Take care of them, train them, coach them, pay them, praise them and celebrate them.

Second - Take care of your guests.  Every interaction must give your guests a reason to come back.  The competition is way too strong and the marketing is way too expensive, so it is a sin to waste a single opportunity to dazzle your guests every minute of their visit.

Third - Take the money to the bank.  As the saying goes, if it isn’t fun and it isn’t profitable, what the heck are you doing here?  If it is fun but it isn’t profitable, it’s a hobby.  If it is profitable, it will support you and it will be much more fun!   

This blog is about the third part, take the money in the bank.

Almost every person that gets into the restaurant business is a “people” person and is gregarious enough to take care of their guests and to manage team members.  And if they are following a dream to a have a certain concept with favorite menu items, we are not going to be able to change their mind.    

Taking the money to the bank is an entirely different manner.  The bookkeeping and accounting for a restaurant is tedious at best and overwhelming at the worst.  Far too many operators quickly discover that as long as they write a few checks every week, the guests keep coming, so they can have the fun without the tedium of keeping track of the financial aspects of their restaurant. 

Unfortunately, this is the prime reason that 90% plus of restaurants fail in the first year.  If you don’t know what it costs you to operate and you don’t keep track of the money that you are spending, you will lose everything.   And it happens over and over again, year after year.  Sadly, the operator doesn’t believe that it is preventable. 

We certainly know of restaurants that will have challenges to be successful, either from odd concept choice, lack of guests or poor menu choices, but if a smart operator understands exactly how revenue they need to keep their restaurant alive, they can formulate a plan to make the restaurant profitable.  And still have fun!

That is the purpose of the information presented in this blog.  We talk about the tools and knowledge that have guided success in the restaurant business, both for us and the thousands of operators that we have worked with over the years.  The topics we present and the tools we discuss will work, they are tested and refined, often over years of real life use.  They are proven drivers of success, in all different types of concepts.

We are not accountants, nor are we attorneys, so don’t expect dense subject matter or deep theories.  We hope that you are already using an accountant to help you comply with regulatory agencies and banking convents.  We also hope that you have an attorney for legal matters, from the simple contract review to the complex lawsuits.

If you are smart, your accountant will be producing key financial documents, at least quarterly.  If you are the ambitious sort, you may even have setup an accounting software package, to help you manage some of your restaurant’s financial matters.  If you have taken these basic steps, congratulations, you are getting a handle on what it takes to be successful. 

If not, stick around, because we will be helping you!

What we will present and coach is how to use the every day numbers that come out of restaurant operations to manage, build and monitor the fiscal health of your restaurant.  The things that we do, the tools that we use, are relatively simple to use.  Our experience shows that the average operator will have less than 10% of their workday to devote to fiscal administration.  We have designed our tools to give you calculations very quickly, once they are setup. 

If you are an excellent time manager you might be able to get more administrative time over the course of your work week.  As soon as you are able, you should plan and set up your work week so that you can devote the time necessary to build the profits of your restaurant.  It will rarely be a time without interruption, but with discipline you should be able to get several hours a week.  We have lots of hints and tips to help you get the valuable time set aside.  

Some of the tools that we discuss require you to invest some time to establish information for your tracking and calculations, but once you have invested the time to get things set up, maintenance is usually pretty simple.  The first time that you set up the inventory form, it will take you a while.  But once it is set up, it is very quick to enter the numbers and calculate your food cost.  It is definitely worth it to invest the time in setup of your inventory control and food cost sheet, because the pay off is to quickly calculate your total food cost of sales for the accounting period.    

Other tools are a lot simpler to set up and monitor.  You just harvest the numbers from your POS system or your invoices and you can quickly calculate the baseline number that your should be a part of your tracking. 

So if you are interested in running a profitable restaurant, you are in the right place.  There may not be a lot of AHA! moments but there will be some solid information on things that you can do to make sure that your restaurant is profitable.  

Thanks for visiting Restaurant Ownership By The Numbers.