Break-even Analysis
"Too many people spend money they earned..to buy things they don't want..to impress people that they don't like." --Will Rogers
Recently I worked with a company that expanded rapidly over a short period of time, opening many sites in short succession...then reality set in, half the sites are not profitable. This is a reputable company with resources and some good educated minds. What went wrong?
- Projections were only done on best case scenarios. NEVER EVER WORK ON THE BEST CASE SCENARIO! There are twelve months in a year, the world is a dynamic place #COVID
- Assumptions were made that the bigger the site and the longer the trading hours the more turnover there will be, which justified a larger staff compliment.
- Models and benchmarks while a good starting point can not be carbon copied from one site to the next, many factors have to considered. (See my earlier article on site selection)
How to calculate break-even
You have to know this! If you don’t you will be a rudderless ship in the Arctic Ocean it’s dark out there and there have been reports of icebergs and your ships name is the Titanic II.
The Good news is that it is an easy calculation and I will supply you with some handy formulas and a crayon drawing (see figure)
!Tip
It’s good practice to plan ahead. The restaurant industry can be seasonal and turnovers will vary throughout the year. So, save some of those hard earned profits for a lean month. (Don’t snort it or get a mistress!)
But what is this break even turnover? Break even turnover is when your gross sales income is enough to cover your fixed costs and variable production costs. After this magical event you will actually be making a profit.
Fixed costs are: Rentals, finance charges, wages etc. the bills that stay pretty much the same from month to month.
You will have to work out your average sales price, sales mix and food cost in order to calculate the number of heads you would have to serve during the month in order to calculate this number. (if you bought a franchise make them do it if they haven’t produced it for you. But check it anyway!)
So let us say for arguments sake your fixed costs come to a total random number of $ 50000.00 and a meal contribution of $15 (amount of profit after you have deducted the cost of producing the meal) $50000.00 ÷ $15 = 3333
That means you will have to serve three thousand three hundred thirty-three customers during a month to break even. By increasing your selling price, reducing fixed costs or improving your fixed costs you will be able to reduce the number of customers required to achieve BREAK EVEN TURNOVER.
