Map your path to profitability with restaurant break-even analysis

Restaurant break-even analysis is a critical performance metric. It highlights how much you need to sell to cover all your restaurant costs over the same timespan. It’s the literal point at which your operation becomes profitable.

Operators can use this analysis for setting sales targets and optimizing costs to accelerate profitability.

It can be tough to consistently track the metrics needed for monitoring break-even analysis—especially if you’re using outdated methods to manually track key costs. That’s why we’re here to help!

Read on to learn:

  • What exactly restaurant break-even analysis is
  • How to calculate break-even point
  • Key fixed and variable costs you should track
  • How to use break-even analysis to map your path to profitability
  • How to lower it so you can become profitable sooner

DISCLAIMER: This content is provided for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You are responsible for your own compliance with laws and regulations. You should contact your attorney or other relevant advisor for advice specific to your circumstances.

What is restaurant break-even analysis—and why is it important?

Break-even analysis calculates your break-even point or the point where revenue equals total cost (fixed and variable costs).

The break-even analysis helps you find out how much revenue your restaurant(s) needs to generate to cover all your costs. You can use this analysis to set overall sales targets, quantify daily/weekly customers or table covers, determine menu prices, and manage expenses.

How to calculate the restaurant break-even point

Calculating break-even points can be tricky. You need accurate cost accounting and historical cost data that considers all your fixed and variable costs. Here’s a breakdown of all these costs as well as the formula you can use to calculate break-even points for your operation.

Restaurant fixed costs

Your fixed costs are those costs that remain the same regardless of your sales volume. Common fixed costs include:

  • Business licenses and permits
  • Marketing expenses
  • Phone, internet, media subscriptions
  • Rent, insurance, and taxes
  • Labor costs (salaries)

Restaurant variable costs

Variable costs vary based on how much you sell. Common variable costs include:

  • Food and beverage costs
  • Labor costs (wages)
  • Packaging, serving, cleaning supplies

Take note: Some costs are mixed costs. For example, labor can be both variable (hourly wages) and fixed (monthly salaries).

Restaurant break-even analysis formula

Your restaurant break-even formula is pretty straightforward. Here’s what that looks like:

Break-Even Point = Total Fixed Costs ÷ Contribution Margin Ratio

Your contribution margin is Total Sales minus Variable Costs over a given time period. And then your contribution margin ratio simply divides that by the Total Sales. The full formula looks like this:

Break-Even Point = Total Fixed Costs / ((Total Sales – Variable Costs) / Total Tales)

Let run through an example to see the full break-even analysis formula in action.

An example of calculating break-even point by sales

Imagine you own a burger joint and want to determine the volume of sales needed to break even.

Start by classifying and calculating your fixed and variable costs for the same period (e.g., monthly, quarterly, etc.).

We’ll set it to one month for this example and assume these costs are $25,000 and $20,000, respectively.

Next, calculate your total sales. You can grab these figures from your POS. Let’s assume they’re $120,000 for the same month.

Finally, input the numbers into your formula:

Total Fixed Cost / ((Total Sales – Total Variable Cost) / Total Sales)

$25,000 / (($120,000 – $20,000) / $120,000)

$25,000 / ($100,000 / $120,000)

$25,000 / 0.8333

$30,000

In this example, the amount of sales required to break even on all your costs is $30,000.

Suppose you have a quarter’s worth of data and want to work backward. In that case, you can calculate moving averages by taking the total quarterly amount and dividing it by three. This will still provide a relatively accurate gauge of your break-even point and account for any incidental expenses.

You can also reconfigure the break-even formula to look at the number of customers or covers/tables required for reaching the break-even point. This requires you to have an accurate average value measure per customer, table, ticket, etc. With that, you can simply divide your final break-even sales amount by your average sales value to quantify how many customers you need to break-even over the given period.

Let’s use the example above to explore this. If $30,000 is the break-even point and the average value per customer is $15, then 30,000 / 15 is 2000. That means this burger restaurant needs to average 2000 customers per month to break-even.

How to use restaurant break-even analysis

So we know that a break-even analysis helps us determine the sales needed to cover costs. But how do we use this data in our restaurant? What business decisions can we make to improve overall profitability?

In a nutshell, the break-even point lets you map out your path to profitability in two distinct ways:

  1. First, knowing your break-even point helps you set realistic business goals to reach this point so you can start making a profit. You can set sales and cost targets based on actual historical data (and not a hunch).
  2. Second, because you have an actual number to aim for, you can be more intentional about key areas like pricing and recipe construction to align with these sales and cost targets.

In fact, by making a few key strategic decisions like increasing your selling prices or better managing food costs, you can reduce the break-even point.

Ready to stop getting cooked by your food costs? 🔥

How to lower the break-even point and make a profit sooner

There are multiple ways to reduce your break-even point:

  • Reduce fixed costs. Downsize to reduce the amount of staff or even adjust your marketing budget.
  • Reduce variable costs. Source more inexpensive ingredients from new vendors to reduce food costs
  • Raise menu prices. Increased prices will stretch your margin and shorten your break-even point. But be careful, as increasing your prices by too much can actually have an adverse effect and reduce your demand.

You’ll likely use a combination of the ways to increase profitability.

But for quick wins, focus on your low-hanging fruit: controllable restaurant operating costs that account for the majority of all your expenses. These are your food and labor costs (prime costs) and account for 60% of your operating costs.

Lowering them is what will really move the day-to-day profitability of your restaurant.

Here’s two concrete ways to lower your controllable costs and break-even point:

1. Invest in better recipe management to simplify plate costing and maximize margins

Successful plate costing is an ongoing process, but many operators do it only once or not at all because of the effort and complexity often involved.

They ignore dynamic ingredient price changes, which don’t get accounted for in menus, leading to a lower contribution margin and a longer time before breaking even.

Proper recipe management software like xtraCHEF by Toast simplifies plate costing and maximizes margins.

Invoice processing and AP automation are major contributors. Following a simple invoice scan, the software automatically routes your general ledger data to your accounting software while pulling line-item invoice data into the system for accurate, updated costing.

Any ingredient price updates automatically flow to adjust recipe prices. For example, if chicken’s cost goes up by 10%, it will automatically show in all recipes containing chicken.

Use this information to shop for new suppliers or increase menu prices to strengthen or at least maintain your contribution margin.

2. Track vendor price fluctuations

An analysis of over 35,000 invoices and 400 restaurants confirm that vendors overcharge restaurants at least once 35% of the time. If you’re not staying on top of changing vendor prices, you’re not staying on top of rising costs and your profitability.

xtraCHEF’s Vendor Hub provides a complete list of all your vendors, what you’ve purchased from them and how much you’ve paid. You can also see how vendors’ prices track over time and who has the most volatile prices. It’s a fantastic way to track cost changes, keep vendors honest, reduce your food costs, and lower your break-even point.

Take charge of your restaurant’s break-even analysis today

Restaurant break-even analysis maps your path to profitability, helping you set sales targets and be more intentional about strategic decisions.

Taking charge of it may not seem like the easiest thing, but it really isn’t hard when you get down to it. Get to grips with your fixed costs, variable costs, and total sales, use the break-even formula, and invest in the right tools to reduce it so you can become profitable much sooner.

Learn how xtraCHEF by Toast can help you take control of your costs to break even much sooner.

Let xtraCHEF do your dirty work.

See how our platform sets restaurants of all sizes and service levels up for success by scheduling a demo with a Product Specialist.