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The break-even point of any business is when revenue equals costs. There are several ways of calculating this, and the best way is usually based on your industry. For a restaurant, the most effective way is to look at the average price and the average cost of the items on your menu. To do this, you will need to first separate fixed costs from variable costs. Once you have the break-even point calculated, you will know what you need to do to make a profit.
TL;DR (Too Long; Didn't Read)
The break-even point formula for a restaurant is Fixed Costs + (Avg. Revenue per Menu Item – Avg. Cost per Menu Item).
The Break-Even Point Formula
The break-even point for a restaurant is the number of menu items you need to sell each month so that your costs equal your revenue. To calculate this formula:
- Add up all of your fixed costs. These are the costs that don't fluctuate every month, such as rent, utilities, payroll and licenses and permits. For a restaurant, this should generally exclude your ingredients. Most labor costs are fixed costs, since kitchen staff, managers and most servers must be at work when the doors are open.
- Add up all of the costs of the items on your menu and divide that by the number of items you offer to determine the average revenue per item.
- Add up the cost of ingredients for each item and divide this by the number of items on the menu to get the average variable cost.
- Subtract the average variable cost from the average revenue per item. This number is called the "contribution margin."
- Divide fixed costs by the contribution margin. This represents the number of menu items you need to sell each month to break even.
Break-Even Point = Fixed Costs + (Avg. Revenue per Item – Avg. Variable Cost per Item)
Break-Even Analysis of a Restaurant
Suppose you have calculated your fixed costs to be $2,000 per month. Your average cost per unit is $2, and your average sales price per unit is $4. Subtracting the average cost per unit from the average sales price is $2.
Dividing your fixed costs by your average contribution margin gives you 1,000 units ($2,000/$2 = 1,000). If you sell less than 1,000 units per month, your restaurant is operating at a loss. If you sell more than this, your restaurant is making a profit.
Break Even Analysis: Excel
Microsoft Excel or another spreadsheet program like Google Sheets is an easy way to calculate your break-even point. You can download a break-even cost analysis template to make it even easier. To do a break-even analysis from scratch, just enter the formulas yourself. In column A, write:
- Avg unit price
- Units sold
- Cost per unit
- Variable costs
- Fixed costs
Enter the number of units you sell in cell B2, the cost per unit in cell B4 and your fixed costs in cell B6. With these numbers in place, you can now enter the formulas you need to populate the remaining empty cells in the second column:
- Type "=B6/B2+B4" in cell B1 to get the average unit price.
- In cell B3, type "=B1*B2" to get the monthly revenue.
- Type "=B2*B4" in cell B5 to get the total variable costs per month.
- Type "=B3-B5-B6" in cell B7 to determine the profit. If it is a negative number, costs are more than revenue, and you are losing money. If it's a positive number, you're making a profit.
Adjust the number of units sold until the profit is at zero (or close to zero) to determine how many items you need to sell to break even. The beauty of Excel is that you can easily tweak the numbers as needed to see how your restaurant can make a profit. For example, if you could ask your servers to recommend dessert or coffee after a meal with more enthusiasm, you could increase the number of units sold each month and see how that increases your monthly profit.
A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.