Break Even Analysis for Restaurants: How to Calculate B.E.P


Break Even Analysis for Restaurants: How to Calculate B.E.P

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Break Even Analysis for Restaurants: How to Calculate B.E.P

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Seventy-eight percent of restaurateurs check their financial metrics every day, according to Toast data. Even so, many owners and operators say they aren’t always clear on how to interpret the data, and how to use it to help optimize their businesses.

Analyzing your costs and manipulating financial formulas and calculations can be intimidating. But it doesn’t have to be, because once you understand how to interpret your data, you’ll be able to more proactively manage your financial health, taking control of restaurant costs and day-to-day operations.

Restaurant break-even analysis involves analyzing a key restaurant financial metric: break-even point. Operators can use this analysis to set sales targets, control costs, and hit target profitability and business growth.

Read on to learn how to determine a break-even point helps bring the overall health of your restaurant into perspective.
Break-even analysis is simply the practice of calculating and analyzing your break-even point: the point where total revenue equals total cost (fixed and variable costs).

The break-even analysis helps you find out how much revenue your restaurant needs to generate or how many units (covers or average guest value) you need to sell to exactly cover your costs or make a $0 profit.

You can use this analysis to set sales targets, determine menu pricing strategies, and control restaurant costs.Your fixed costs include expenses that must be paid regardless of production or sales volume. A great way to distinguish between fixed and variable costs is to ask yourself, “What expenses do I still have to pay even if I don't get a single customer?”

It’s worth mentioning mixed costs, which are costs that waver between being fixed and being influenced to a degree by factors like sales volume.

Break-even calculation requires grouping mixed costs with fixed costs. Two examples of mixed costs are power and water, which may vary month-to-month but typically don’t drift too far from the norm.
In the restaurant industry, the units are the guest counts (or the number of “covers”) themselves. Our unit price is essentially the dollar amount of our “guest average.” This isn’t always the easiest way to look at things, and that’s mostly because of the difficulty in obtaining the “variable cost per guest” component.

Some restaurants will have worked out their estimated margins on food and drinks based on an expanded analysis of recipes and cost of ingredients. But most restaurants don’t have an entire chart of accounts neatly categorized into fixed and variable costs to accurately conduct a complete break-even analysis.

As an alternative, this variation of the formula works well. You only need three values: total sales, total fixed costs, and total variable costs:
Once you’ve categorized your fixed and variable costs for a given period, this formula allows you to quickly calculate your restaurant’s break-even point in sales dollars. All you have to do is gather basic accounting reports, without yet factoring in guest counts or the dollar averages per guest.

You can think of a break-even point in dollar amounts like this: For a given period, at what sales volume did my total contribution margin break-even my bottom line, offsetting my total fixed costs, after which point each additional dollar earned went straight to contributing to my net income?

 

Knowing this information, we should use the last three months of accounting data to reset our way of finding the break-even point. It’s a good idea to use a moving average of these expenses and sales figures. Using moving averages allows you to account for the quirks of all the miscellaneous expenses that still impact your bottom line, while still updating your historical numbers with the most recent month's closing figures.

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