Restaurants can be hard to run sometimes. Studies have shown that more than 60% of restaurants fail within the first three years. It is also hard to get right on the financial management of restaurants that run on thin margins. Therefore from this article, you will understand how to calculate the break-even point for a restaurant and how to carry out a break-even analysis among the following:
i. Definition of break-even point and break-even analysis
ii. Necessary business information required for break-even analysis
iii. Importance of conducting break-even analysis.
Definition of Break-Even Point (BEP) in a Restaurant
A restaurant reaches a break-even point when it is neither making financial losses nor profits during the operation period.
Before reaching the break-even point, the business incurs losses. After operating beyond the break-even point, the business owner makes pure profits.
Definition of Restaurant Break-Even Analysis
Break-even analysis involves working around the inputs of the break-even formula including cost and prices, which determines how changes can affect the profitability of your business.
Accurate accounting is good for doing the break-even point analysis well. The results can be used to monitor the financial management of restaurants.
Calculation of Restaurant Break-Even Point
The input of numbers into the Break-even formula should be accurate when calculating the Break-even point. The numbers retrieved from the restaurant's POS system and data including inventories and wastage logs should be correct. Use excel and the most recent data when calculating the break-even point, preferably from the past three months, including the most recent cost changes, such as a rise in food costs or new salaries. Before calculations, gather all monthly expenses including variable costs, fixed costs, and total sales over time.
Determining Restaurant Fixed Costs
Fixed Costs do not change monthly and can rarely change throughout the year. Examples of fixed costs in a restaurant are; trash fees, insurance premiums, marketing budget, rent, phone and internet bills, licenses and permit fees, equipment rental costs, and property taxes. When calculating the break-even point, utility bills are counted as fixed costs because they remain relatively constant yearly, whilst they are variable according to business levels.
Calculation of Variable Costs in a Restaurant
The variable cost depends on the sales volume. These variable costs are:
i. Labor costs
ii. Dry goods
iii. Food and drinks bought
iv. Credit card processing fees
For accurate calculation of a break-even point, know that above factors can be affected by external business volume such as local events or being understaffed for a week.
Using the break-even point formula, you get the total revenue goal for the period when the restaurant should break even. The following is the break-even point formula in sales:
Break-Even Point = Total Fixed Costs/
(Total Sales - Variable Costs) ÷ Total Sales
Average Break-Even Point for a Restaurant
There is no average break-even point for small businesses like restaurants, but the profit margin can be estimated to fall between 0-15percent, with most ranging between 3-5%. This is because of the infinitely variable and wide variety of factors that make up sales revenue and costs in a restaurant.
Uses of Break-Even Analysis in Restaurants
- Making informative restaurant decisions
- Setting of Sales Goals-This can be daily, weekly, monthly or yearly goals related to the number of units of certain items to be sold or the number of customers to be served.
- Setting of Menu Prices- Determining whether to reduce costs or raise prices when the guest quantity sales or unit-based goals seem unachievable. For example, input different prices for pizza slices into the formula and find an attainable sale number.
Reducing Break-Even Point of a Restaurant
Costs, revenue, and inputs of restaurants on the break-even point worksheet, may be adjusted to observe the way changes in certain things can affect the overall break-even point. Factors used to reduce the break-even point are:
- Increase Average Guest Check- drop dedicated dessert menus, raise menu prices, create beverage pairings and encourage upsells by employees.
- Reduction of Fixed Costs – You can negotiate with the landlord or purchase new equipment to reduce rent. Bargain new costs with new phone and internet supplier along with the new utility provider.
- Reduction of Variable Costs- Labor and food costs adds up to around 60% of total costs. Better schedule management and cutting staff are better ways of reducing labor costs. The Use of cheaper produce, reducing food waste, or making portions smaller reduces the food costs.
In conclusion, both veterans and new restaurant members are now well informed on how you can calculate the break-even point and how to apply the results to restaurants’ requirements practically. Before implementation, you know where to reduce the break-even point of a restaurant and see the effects of those modifications.