Break Even Analysis: How to Calculate Break Even Point

How to Calculate Break Even Point: The Break Even Formula

The textbook formula for calculating your break even point in units of number of guests for a given period of time is:

$\fn_jvn \large \text{Break Even}= \left ( \frac{ \text{Total Fixed Costs}}{\text{Avg Revenue per Guest}-\text{Variable Cost per Guest}} \right )$

I call this textbook, because it is the universal way to calculate any business’s break even point. We measure “At how many units sold, will my business break even and start turning a profit?” In our industry, our units are the guest counts (or 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 I’ve seen in obtaining the “variable cost per guest” component. Some restaurants will have worked out their estimated margins on food dishes and drinks based on an expanded analysis of recipes and cost of ingredients. However, I don’t usually see a restaurant’s entire chart of accounts neatly categorized into fixed vs variable costs in order to accurately conduct complete break even analysis.

As an alternative, I sometimes like using the following variation of the formula. You only need 3 values: Total sales, total fixed costs, and total variable costs.

$\fn_jvn \LARGE \text{Break Even = Total Fixed Costs}\ \div\ \left ( \frac{\text{Total Sales} -\text{Total Variable Costs}}{\text{Total Sales}} \right)$

This allows you to quickly calculate a restaurant’s break even point (in sales dollars) as soon as you have categorized your fixed vs variable costs for any given period of time. All you have to do is gather basic accounting reports from a high level, without yet factoring in guest counts or \$ averages per guest.

Let’s break this down a bit to see how I derived that.

You can look at break even (in dollars) as, “For a given period of time, at what volume in sales 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 (profits)?”

Break Even is equal to Total Fixed Costs divided by the Contribution Margin Ratio (aka “The percentage of each sales dollar that is available to cover my fixed costs and profits.”)

$\fn_jvn \large \text{Contribution Margin}= \text{Total Sales}\ -\ \text{Total Variable Costs}$

$\fn_jvn \large \text{Contribution Margin Ratio}= \left ( \frac{\text{Contribution Margin}}{\text{Total Sales}} \right )$

$\fn_jvn \large \text{Contribution Margin Ratio}= \left ( \frac{\text{Total Sales}-\text{Total Variable Costs}}{\text{Total Sales}} \right )$

$\fn_jvn \LARGE \text{Break Even = Total Fixed Costs}\ \div\ \left ( \frac{\text{Total Sales} -\text{Total Variable Costs}}{\text{Total Sales}} \right)$

First off, this is especially helpful for combining multiple months together. Sometimes, you are only looking at P&L (Profit and Loss) statements for a longer period of time, working on identifying any financial trends for that period. Also, it can be difficult to summarize some fixed costs that don’t always occur every month.

With this formula, we simply remove the guest count component to answer the question, “At what point did I break even and start accumulating profit to my bottom line?”

Let’s look at an example: Last quarter, let’s say you…

• Introduced a new menu and slightly raised prices.
• Printed new menus which only happens a few times per year.
• Started using new vendors that you negotiated into contract pricing.
• Brought on a new restaurant management team.
• Invested in a new kiosk system which will now cost you a fixed monthly amount, saving you a significant amount of money in labor every day.

As a result, we should use the last 3 months of accounting data to reset our way of measuring our break even. It is 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 which still impact your bottom line, while still updating your historical numbers with the most recent month’s closing figures.