By Dirk Ahlbeck, CPA
The restaurant industry has experienced a challenging 18-month tidal wave of changes and obstacles. In a year of unprecedented tests for restaurant and winery owners alike, the current state of affairs seems promising coming into a new year, and now is the time to focus on a strong financial outlook for growth.
One method for forecasting is to calculate your restaurant’s breakeven analysis. A breakeven analysis is understanding how much of every dollar in sales above the breakeven point should go to the bottom line at various sales levels above breakeven. Simply put, how much costs and expenses should be forecasted for the restaurant to be profitable.
A breakeven analysis also helps owners calculate weekly and monthly sales to identify breakeven points for year-end planning and predictions. If a restaurant has considerably higher volume in the summer months, how can expenses be shifted in the winter months to offset? A solid breakeven analysis can help restaurant owners assess risks to aid in making the most well-informed decision.
What is a Breakeven Analysis?
A breakeven analysis is a calculation of how much in sales a restaurant needs to cover all of its costs for a certain period of time. Consider it the amount of revenue necessary to cover the total fixed and variable expenses incurred within a specific period of time while operating your restaurant.
How does a Breakeven Analysis Help?
Breakeven analyses will give a clear minimum sales number needed to keep the lights on. It can also be utilized to identify early on if the restaurant is losing money and regularly – a breakeven analysis should pinpoint month-over-month volumes to help restaurant owners analyze seasonal trends versus a consistent decline of volume. The calculation can also be used to properly forecast year-end totals without knowing final sales numbers. This could help in year-end financial planning, hiring and staffing allocations, and ordering inventory.
How to Calculate Breakeven Analysis
The basic formula is:
Breakeven sales = Total Fixed Costs/1-Variable Cost %
What are Considered Costs?
Fixed costs are expenses that stay the same regardless of sale volume, such as rent. Variable costs are fluctuating expenses that reflect sales volumes, such as cost for food and beverages and labor. Mixed costs have a fixed and variable cost component, which should be considered fixed costs in the calculation.
Calculation Method
For best results, use a 4-week or monthly profit and loss statement (P&L) from three periods from the last 12-months to calculate breakeven analysis. Using real-time data will take into consideration market changes and seasonal trends for your area. It should include your restaurant’s highest and lowest sales period to adequately calculate a middle of the road view. Owners should assume every expense category or cost that is not truly 100% variable in nature is fixed.
Using the breakeven analysis model can estimate how much money the restaurant is making based on a certain level of sales. This data can be used to determine in-house features, such as sales or special events. This valuable benchmarking tool can help forecast a restaurant’s profitability; one data point among a year of consistent changes.
For expert financial advisory to help grow your restaurant, contact me today to discuss further.
Subscribe to receive our blog and other interest based updates.