Break-Even Point: A Restaurant’s Most Important Calculation
Published November 16th, 2021
A restaurant’s revenue stream fluctuates, in somewhat of a predictable fashion, throughout the year, from month to month, and through the week. Continuing to run a successful business whilst contending with this endlessly moving target is one of the magic tricks every successful restaurant owner and manager performs on a regular basis.
There are many metrics that can be used to analyze a restaurant’s financial position, and there are many meaningful figures that can be drawn from these calculations. But a singular indicator that can help restaurant owners and managers manage their location’s finances in real time is their break-even point.
Conducting a break-even analysis for a restaurant provides those running the location with a method of tracking their financial performance in real time, and allows them to set goals that can tell them when, maybe if, they’re going to produce a profit over a given time period.
What is a Break-Even Point?
A break-even point is the point at which a business is not making a financial loss or gain. It is the point where the total revenue generated covers all the fixed costs of that time period, along with all the variable costs incurred up until that moment. It is the moment when revenue equals costs. When a break-even point is surpassed a location begins to realize profits. It is worth noting that not everything past the break-even point is profit, variable costs are still being incurred and should be deducted from the revenue amount past the break-even point. The remaining amount is realized profits.
A break-even point is one of many excellent restaurant KPIs, and is called a forecasting figure because it uses data from the past to approximate what might happen in the future. Break-even points can be viewed as either a dollar amount or as a guest count so long as reliable data is on hand.
A break-even point is the point at which a business is not making a financial loss or gain. It is the point where the total revenue generated covers all the fixed costs of that time period, along with all the variable costs incurred up until that moment. It is the moment when revenue equals costs. When a break-even point is surpassed a location begins to realize profits. It is worth noting that not everything past the break-even point is profit, variable costs are still being incurred and should be deducted from the revenue amount past the break-even point. The remaining amount is realized profits.
A break-even point is one of many excellent restaurant KPIs, and is called a forecasting figure because it uses data from the past to approximate what might happen in the future. Break-even points can be viewed as either a dollar amount or as a guest count so long as reliable data is on hand.
A break-even point is the point at which a business is not making a financial loss or gain. It is the point where the total revenue generated covers all the fixed costs of that time period, along with all the variable costs incurred up until that moment. It is the moment when revenue equals costs. When a break-even point is surpassed a location begins to realize profits. It is worth noting that not everything past the break-even point is profit, variable costs are still being incurred and should be deducted from the revenue amount past the break-even point. The remaining amount is realized profits.
A break-even point is one of many excellent restaurant KPIs, and is called a forecasting figure because it uses data from the past to approximate what might happen in the future. Break-even points can be viewed as either a dollar amount or as a guest count so long as reliable data is on hand.
What is Needed to Calculate a Break-Even Point
The more accurate a restaurant’s accounting is the more accurate their break-even calculations are. To use the break-even analysis formula the following figures are needed for the given period:
- Fixed Costs (current and historical data)
- Variable Costs (historical data)
- Total Sales (historical data)
- Guest Count (historical data)
- Average Guest Check (current data)
Break-even points can be run over multiple time periods, provided the data is available for the specific time periods. But one of the hardest variables to get correct is a guest count, which is essential to calculating an accurate average guest check value.
The more accurate a restaurant’s accounting is the more accurate their break-even calculations are. To use the break-even analysis formula the following figures are needed for the given period:
- Fixed Costs (current and historical data)
- Variable Costs (historical data)
- Total Sales (historical data)
- Guest Count (historical data)
- Average Guest Check (current data)
The more accurate a restaurant’s accounting is the more accurate their break-even calculations are. To use the break-even analysis formula the following figures are needed for the given period:
- Fixed Costs (current and historical data)
- Variable Costs (historical data)
- Total Sales (historical data)
- Guest Count (historical data)
- Average Guest Check (current data)
Break-even points can be run over multiple time periods, provided the data is available for the specific time periods. But one of the hardest variables to get correct is a guest count, which is essential to calculating an accurate average guest check value.
Obtaining an Accurate Guest Count - One of the easier ways to monitor a break-even point in realtime is by looking at guest counts. Having an accurate guest count is crucial for this to work and essential for calculating a restaurant’s average guest check; which is an insightful restaurant metric in itself.
There are multiple ways of obtaining an accurate guest count. The easiest is by training employees to enter the correct guest numbers into the POS system for each ticket. Another method is to have hosts tally the total amount of covers, and another method is to use entrée sales volume data. Some restaurants will use multiple of these data points; but, in reality, each restaurant and manager is different and it is up to them to decide which is the best way to get the most accurate numbers for their location.
How to Calculate A Break-Even Point
As mentioned, there are two ways of calculating a restaurant’s break-even point: by dollar amount, and by guest count. Working out the first creates an easy path to the latter.
Calculating a Break-Even Point By Revenue
Break-Even Point =
Total Fixed Costs
(Total Sales - Variable Costs) ÷ Total Sales
Break-Even Point =
Total Fixed Costs
(Total Sales - Variable Costs) ÷ Total Sales
Example: Over a given period a location’s Fixed Costs were $36,000, Variable Costs were $16,000, and Total Sales equaled $70,000. During that period the Average Guest Spend was $35.
Break-Even Point = $36,000 = $36,000 = $36,000 = $46,666.76
($70,000-$16,000) ÷ $70,000 $54,000 ÷ $70,000 0.77143
Break-Even Point
=
$36,000
($70,000-$16,000) ÷ $70,000
=
$36,000
$54,000 ÷ $70,000
=
$36,000
0.77143
=
$46,666.67
Break-Even Point =
$36,000
($70,000-$16,000) ÷ $70,000
=
$36,000
$54,000 ÷ $70,000
=
$36,000
0.77143
=
$46,666.67
Meaning that only once this location surpasses $46,666.67 in revenue do they begin making a profit.
Calculating a Break-Even Point by Guests Served
To convert a dollar value break-even point into a guests served break-even point simply divide the above Break-Even Point by a location’s Average Guest Spend:
Break-Even Point
Average Guest Spend
Break-Even Point
Average Guest Spend
=
$46,666.67
$35
=
1,334 Guests
1,334 Guests
So this location will break-even once it has served 1,334 guests in this time period.
Break-Even Point Calculator
Using a Break-Even Point
First and foremost, break-even points allow managers and owners to know when they cover their costs, break-even, and begin to turn a profit. Beyond that break-even point calculations can also be used to assess the efficacy of various cost saving, and profit creating tactics.
Potential Profitability of Upgrades - There are many upgrades available to a restaurant: from automatic bathroom lights, to low wattage bulbs, to purchasing high efficiency kitchen equipment. When upgrades like these are on the table the “potential savings” figure is always a part of the decision. Implementing these “potential savings” into break-even calculations allows restaurant owners and managers to calculate how quickly they can recoup the outlay for these items, and how much larger a profit they will realize in their location.
First and foremost, break-even points allow managers and owners to know when they cover their costs, break-even, and begin to turn a profit. Beyond that break-even point calculations can also be used to assess the efficacy of various cost saving, and profit creating tactics.
Potential Profitability of Upgrades - There are many upgrades available to a restaurant: from automatic bathroom lights, to low wattage bulbs, to purchasing high efficiency kitchen equipment. When upgrades like these are on the table the “potential savings” figure is always a part of the decision. Implementing these “potential savings” into break-even calculations allows restaurant owners and managers to calculate how quickly they can recoup the outlay for these items, and how much larger a profit they will realize in their location.
Advertising or Average Check Increase? - When trying to increase a restaurant’s profitability owners and managers have two main options available to them: advertising and menu price increases. Choosing which one to invest in can be treading a fine line, but imputing the potential impacts of both into the figures used for making break-even calculations will provide an insight into which is best for the location at that current moment in time.
Guests Served Insights for Increasing Profitability - When a break-even point is calculated using guests served it is a tangible number that can easily be tracked every day. Using the guest served break-even point, owners and managers can get a better feel for how certain changes, such as the above mentioned profitability upgrades and choice between advertising or menu item increases, can affect their business. Using the guests served break-even metric can also help managers tailor their variable costs so they can be sure to hit their break-even point every period.
A Final Word
Break-even point calculations offer managers and owners an easy and insightful metric that can be used to monitor a business’s financial status across multiple time scales simultaneously. It also allows these people to understand what benefits manipulating their variable costs can bring to a business. As well as how check averages can be best used to determine the best direction for increasing a business’s profitability.
Whilst also being a great way to keep a check on themselves and their own efforts, managers and owners can use break-even points as an insightful metric when pitching location expansions, or even new business ventures, to potential investors.
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