Watch our video or read the article below to understand what break even is, why its important and how to calculate your break even figure.
You can break down your Restaurant costs into two categories, variable costs such as the cost of food and fixed costs such as the cost of rent.
Your variable costs will fluctuate with sales, so higher sales would mean higher food costs. However with fixed costs such as rent, these costs will remain the same regardless of your sales and that's why they are fixed costs.
As a restaurant owner, you need to calculate how much food and drink you need to sell in order to cover your fixed costs. Also don't forget, in order to cover your fixed costs you will need to generate sales and so you will also incur a variable cost.
The break even formula allows you to calculate then how much sales your business needs to achieve to cover its fixed costs. Once you have a break even figure, you will know how much sales your business needs to generate to avoid making a loss.
For example, if your break even monthly sales figure is £7,000 - your business would need to generate £7,000 in sales in order to cover the costs of the business.
Importance of Break Even
Understanding your break even sales allows you to set daily, weekly or monthly sales targets. Once you have reached your break even sales figure, you will know that any profit generated above this threshold will generate a profit for the business!
In order to calculate your break even sales figure, you will need to identify the costs in your business. If your break even sales figure is too high, this will give you the opportunity to cut down on certain expenses, increasing the chances of the business making a profit or at the minimum breaking even.
Once you have a break even figure, you can plan for the 'What if's?' What if your rent goes up, how much extra sales do you need to do to break even? or what if the cost of utilities goes up? whatever the cost may be, starting of with a break even figure allows you to plan for this.
Calculating the Break Even Figure
Start of by forecasting your sales. Try to work with an accurate sales figure, one which has considered your market conditions, opening hours, seating capacity, etc.
You will then need a forecast of your variable and fixed costs. (Click here to understand the difference between these costs).
Once you have forecasted your income and expenses, you will then need to calculate your variable cost %. You can do this by dividing your variable cost / forecasted sales.
For example, forecasted sales are £10,000, variable costs £3,000 and fixed costs of £5,000.
Your variable cost % will be 30% (£30,000/£10,000).
Now take 100% and deduct 30% which equals 70%. Take your fixed cost of £5,000 in the example above and divide it by 70%. This will give you a figure of £7,142.86. This is your break even sales figure!
You would need to generate £7,142.86 of sales to cover your fixed costs.
Watch the video above, as we go through a live example.
Use the Break Even Figure as an Aid
So as you can see, calculating the break even figure is quick and easy. However, the figure should be used as an aid rather than a decision making tool. That is because the tool has its own implications such as the variable cost could fluctuate depending on market food prices or another example is where your business is growing, increasing its buying power and there reducing its cost of sale (variable cost).
Anyways the break even tool is great to help you understand how much sales you need to generate to break even.
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