Guide: Calculating Break-even point for your Restaurant business
Not all restaurant owners are good with financial numbers. But in order to ensure the success and continued growth of your restaurant, you need to be good with the numbers as well. And one important number is the break-even point. In this article, we are going to tell you about the break-even analysis, why does it even matter and how can you perform this analysis by yourself. Yes, you read that right. You don’t need to be a financial expert to be able to calculate the break-even point!
What is break-even analysis?
A break-even analysis is used to figure out how much product your business needs to sell to cover the costs of doing business. Break-even is the point at which a business’s total costs and total revenue are exactly equal. With an analysis, you can figure out when your business will begin to make a profit.
Why is it important for your restaurant business?
Break-even analysis is useful in the determination of the level of production or a targeted desired sales mix. It tells the restaurant owner clearly how many orders he needs to fulfill given a certain amount of desired profit. It also shows, importantly, the point at which sales revenue breaks even (hence the name) with the total costs of the restaurant. This information is quite critical for a restaurant owner as he would like to know if he is even breaking even with his setup. You can have a great customer base and the best menu in town but if you are not able to cover all your cost then it’s not a good sign. Sooner you would be looking for loans to meet your bills and the worst case can a total closure of your restaurant!
But do not fret! In this article, we are going to show you exactly how you can calculate the break-even point for your restaurant and stay one step ahead in this number game.
How do we calculate the break-even point?
Before we dive into the nitty-gritty of calculating the break-even, let us learn the major types of cost that a restaurant can face. Every restaurant business owner should be familiar with these terms and they should be comfortable at identifying various different types of cost that they encounter on a daily basis. Once we are comfortable with these terms, we can move onto calculating the break-even point of our restaurant. So let's begin!
Fixed Cost per month
Fixed costs are all those costs that do not change with the level of sales/output. As a restaurant owner, you will encounter these costs even if you are serving zero customers. So in the case of the restaurant business, the following would be considered as a fixed cost.
- Fixture and Furniture which also includes the point of sale solutions. Innowi is offering model M that comes at 1/4th of the cost of traditional POS thus saving you a lot of money on infrastructure.
- Cooking equipment
- License Fee
Variable cost per order
Variable costs are all those costs that vary with the level of sales/order served. So these costs increase or decrease with the level of orders fulfilled. Also, it’s important here to note that not all orders would incur an equal variable cost. Some would incur more while others are less. It's perfectly normal and for our calculation purpose, we can take an average figure. In our restaurant business, the following can be categorized as variable costs:
- Food and beverages
- Other Raw Materials
- Delivery cost
- Card processing fee: Innowi is offering payment processing services that treats credit and debit cards differently. Innowi charges 0.88% on each debit card transaction as opposed to 2.75% charged by other companies, thus saving 1.87% on each debit card transaction.
These are fixed costs plus the variable cost added together. In essence, this figure is the total outflow that any restaurant business owner would incur.
Once we have clearly identified the various cost heads, we can continue to use the below formula to calculate the break-even point for our restaurant.
Average selling price/order
This is the last one, I promise. This is simply the total sales revenue you derive from your restaurant business divided by the number of orders fulfilled.
Break-Even Point in orders= Fixed Costs / (Sales Price Per order– Variable Cost Per order)
Too much to handle? Don't worry. We will go through a hypothetical example to clear out any confusion.
Let’s suppose the following numbers for your restaurant business:
Fixed Costs = $35000
Variable Costs/order = $25
Average selling price/order = $40
Break-Even Point in orders= $35000 / ($40 –$25)
So on average, you would have to serve 2334 orders just to cover all your costs, otherwise, you will lose money. We hope that now you know how to calculate the break-even point.
Author: Muhammad Waqar Majeed