What is the Break-Even Point?
Your restaurant reaches its break-even point when your revenue covers all operating expenses. The moment your business crosses this threshold is known as the ‘break-even date’. Once you pass the break-even point, your restaurant begins to generate profit.
Your restaurant’s break-even point can be expressed in different ways:
- In pounds sterling (minimum turnover required)
- In number of covers (meals served)
- In number of days of trading required to reach profitability
Calculating your restaurant’s break-even point helps you identify the minimum turnover needed to cover your costs. This is an essential first step for every restaurateur.
Calculating Your Restaurant’s Break-Even Point
You can establish regular financial monitoring using a restaurant dashboard, tracking turnover and covers on a monthly basis. The break-even calculation uses this formula:
Break-even point = Fixed costs / Contribution margin ratio (the minimum turnover required for your restaurant to cover all costs).
Step 1: Determine Your Fixed Costs
Fixed costs are the expenses that remain stable throughout the year, regardless of business performance. These are typically paid monthly and include:
- Property and equipment rental (restaurant premises)
- Insurance premiums
- Business rates and tax contributions
- Employer National Insurance contributions
- Interest on bank loans (loan repayments)
- Permanent staff salaries
- Subscriptions to recurring services (internet, telephone, restaurant management software)
- Licensing and permit fees
- Accountancy fees
- Advertising and marketing
- Professional equipment hire and maintenance
- Waste management costs, including food waste
- Security or monitoring contracts (where applicable)
Add together all these costs to calculate your total fixed costs.
Step 2: Determine Your Variable Costs
Variable costs are expenses that fluctuate based on business activity, unlike fixed costs. They include:
- Food and beverage purchases
- Subcontracted labour costs
- Travel and delivery expenses
- Distribution costs
Add all your variable costs together to get the total.
Step 3: Determine Your Forecast Turnover
Forecast turnover is the total revenue your restaurant expects to generate over a twelve-month trading year. It’s calculated by multiplying the price per meal by the number of meals and drinks sold. Forecast turnover is required for your business plan and break-even calculation.
Step 4: Calculate Your Contribution Margin Ratio
The contribution margin ratio (also called gross margin ratio) is calculated by dividing your contribution margin by your total turnover, then multiplying by 100.
Contribution margin = Turnover – Variable costs
Contribution margin ratio = (Turnover – Variable costs) / Turnover x 100
Final Step: Calculate Your Break-Even Point
A specialist accountant experienced in hospitality can help you calculate your restaurant’s break-even point. As the Office for National Statistics notes, understanding your financial position is crucial for restaurant sustainability.
To recap, the formula is: Break-even point = Fixed costs / Contribution margin ratio (the minimum turnover your restaurant must achieve to cover all costs).
Why Calculate Your Break-Even Point?
Calculating your break-even point is a vital tool for understanding your establishment’s financial health. It enables rigorous financial monitoring and cash-flow management. According to UKHospitality, effective financial planning is essential for restaurant survival. Regular monitoring with an accountant and restaurant management software helps you stay on track.
Calculating Your Break-Even Date
The break-even date is the point at which your restaurant achieves enough turnover to cover all costs and avoid losses. You can calculate this using the following formula:
Break-even date = (Break-even point / Turnover) x 365 days
This calculation shows how many days into the year your restaurant needs to operate before becoming profitable.
Key Performance Indicators and Financial Planning
The Caterer recommends that restaurants regularly review their key performance indicators to stay competitive in today’s market.
For more insights on managing finances effectively, read our article on maximising your restaurant margins. You might also benefit from our guides on restaurant service optimisation, how to be a good restaurant manager, and 9 reasons to adopt online reservations.
