Break-Even Point Part 1: Calculation
When initially planning a bar or restaurant business a break-even point is an important number to calculate and understand. Once you opened your doors a break-even point can be an informative and integral part of your financial analysis. The break-even point of your location is an influential factor in any purchases, costing and other financial decisions you make and the excellent thing about a break- even point is that there are a number of way in which you can utilize it to assist you in assessing your business.
What is a Break-Even Point?
Your break-even point is the point at which you’ve taken enough money in a given time period to cover your fixed a variable expenses i.e. when revenue equals cost. A break-even point is a forecasting figure, meaning that we use data from the past in order to calculate it. In order to accurately calculate your break-even point you must practice accurate accounting, as well as ensure you have an accurate guest count and average guest spend on hand.
Necessary Break-Even Point Data
As mentioned the break-even point can be calculated a number of different ways, giving you multiple angles from which you can use it to assess your business. Firstly you’re going to need a few bits of information about your business.
Guest Count – Your employees enter how many guests are on each check into the POS system. You need to stress to them that these numbers be correct so that you can use them for accurate calculations. Some restauranteurs don’t use this number. Some prefer to have their host count guests as they come through the door so that they reliably know exactly how many guests have come through their building. Others will count how many entrée dishes they’ve sold. Find a method which will give you the most accurate guest count for your location. From this you can then work out a more accurate average guest spend for your location.
Fixed Costs – Rent for your building, computer systems, equipment, advertising costs, license and permit costs, salaries, and any other fixed sums that you have to pay in order to keep your business running. Utilities, although they fluctuate they remain pretty stable, are included in fixed costs because they are not heavily linked to sales in your location.
Variable Costs – Hourly labour, food costs, liquor costs, restaurant supplies, credit card processing fees, dry goods, cleaning supplies, and any other costs which fluctuate depending on your business levels live here.
Total Sales – The amount of money which your business takes in. Note, that this number is not related to profits, it is the total amount of money that passes into your hands from your guests.
You can run your break-even calculation over whichever period you wish, be it a day, a week, a month, a weekend, or a year. It’s entirely up to you. However you need to have accurate data on hand of each of the elements above -calculated for the period you wish to analysis- in order for any resulting figures to be a reliable source of information and analysis for you to make decisions from.
Calculating Your Break-Even Point
The first way we’re going to calculate our break-even point is going to be by guest count. Here we’re going to work out how many guests need to pass through our door in order for us to reach our break-even point.
Break-Even Point (In Guests) = Total Fixed Costs ÷ (Average Guest Spend – Variable Cost Spent per Guest)
Example: Over a given time period last year your average guest spent $30. In the same period you had 2000 guests come through your door and your variable costs were $32,000. For this period your total fixed costs were $22,000.
Firstly, lets calculate the Variable Cost Spent per guest:
Variable Costs ÷ Guest Count
$32,000 ÷ 2000 = $16
Now lets plug that into the equation:
Break-Even Point (In Guests) = 22,000 ÷ (30-16)
= 22,000 ÷ 14
= 1,572 Guests required in this time period for you to break-even.
The next way we’re going to look at calculating your break-even point is by revenue or sales:
Break-Even Point = Total Fixed Costs ÷ (Total Sales – Variable Costs ÷ Total Sales)
Example: For a given period your total sales were $150,000. Your variables costs for the same period were $90,000 and your fixed costs were $40,000.
= 40,000 ÷ (150,000 – 90,000 ÷ 150,000)
= 40,000 ÷ (60,000 ÷ 150,000)
= 40,000 ÷ 0.4
So the first $100,000 earned in this period were purely covering your costs. Once this mark was surpassed any revenue earned was also contributing to your profit margin. From this we can then work out how many guests we need to pass through our doors to reach our break-even point.
If your average guest spends $40 in their visit then:
Break-Even Point (in guests) = $100,000 ÷ $40
Break-Even Point (in guests) = 2500
2500 guests need to visit you in order for you to reach your break-even point.
Note that after you’ve reached your break-even point everything you sell isn’t just profit. It still needs to cover the variable costs used to produce it. In part two of Break-Even Analysis we’re going to look at how you can use your break-even calculations to analysis your business and work out where making saving can give you the most financial benefit.