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:
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.
