Do you know how much your sales must be in order for your restaurant to make a profit? Determining your sales break-even point is an important step to profitability. The calculation is simple. First categorize your costs into two groups, variable costs and fixed costs. Variable costs should include your prime costs, which are food and beverage plus payroll costs. All other costs can be included within the fixed costs group.
Based on your fixed costs, calculate your break-even sales. The calculation assumes your prime costs are 60-65% of sales, which is the industry average for profitable restaurants. Now compare the break-even sales and projected prime costs to your actual amounts.
For example, assume the following facts:
Actual Annual Sales = $1,000,000
Actual Prime Costs = $750,000
Actual Fixed Costs = $300,000
Break-even sales = Fixed Costs / (1- Prime Cost %) = $300,000 / (1-.65) = $857,143
65% Variable Cost Actual
Break-even sales $857,143 $1,000,000
Prime costs (65% Variable Cost) $557,143 $750,000
Gross Profit $300,000 $250,000
Fixed Costs $300,000 $300,000
Net Income (Loss) $0 ($50,000)
What does the above calculation tell you?
Since your actual sales are greater than your break-even sales, profitability can be obtained by focusing on lowering your costs instead of increasing your sales. Actual prime costs are 75% ($750,000/$1,000,000) of sales which indicates there is definitely room for improvement. Perhaps some fixed costs can be re-negotiated.
The break-even analysis is a great analytical tool. Do you know your monthly break-even of your weekly break-even sales figure? If you’d like more information on these calculations or have other questions, we can help.