Understanding Your Restaurant's Break-Even Point: A Step-by-Step Guide
Knowing your restaurant's break-even point is crucial to understanding how much you need to sell just to cover costs — and when you start turning a profit. By calculating your break-even point, you can set realistic sales goals, price your menu strategically, and make informed financial decisions.
Here’s a step-by-step guide to calculating and using your break-even point effectively.
Step 1: Understand the Break-Even Formula
Your break-even point tells you the amount of sales revenue required to cover your fixed and variable costs.
Break-Even Point (in Sales Dollars) = Fixed Costs ÷ Contribution Margin Ratio
Where:
Fixed Costs are expenses that stay the same regardless of sales, like rent, insurance, and manager salaries.
Contribution Margin Ratio is calculated by dividing your contribution margin by total sales.
Step 2: Identify Your Fixed Costs
Fixed costs are consistent expenses that must be paid each month, no matter how busy your restaurant is. These typically include:
Rent or lease payments
Insurance
Manager salaries
Equipment lease payments
Subscription software (e.g., POS systems, accounting tools)
For example, if your fixed costs total $20,000 per month, this figure will be used in the break-even calculation.
Step 3: Calculate Your Contribution Margin
Your contribution margin is what’s left from each sale after covering variable costs.
Contribution Margin = Sales - Variable Costs
Variable costs change based on sales volume and may include:
Food and beverage costs
Hourly wages
Packaging and to-go supplies
Credit card processing fees
For example, if your total monthly sales are $50,000 and your variable costs are $30,000, your contribution margin is:
$50,000 - $30,000 = $20,000
Next, calculate your Contribution Margin Ratio:
$20,000 ÷ $50,000 = 0.40 (40%)
Step 4: Calculate Your Break-Even Point
Now apply your numbers to the formula:
Break-Even Point = $20,000 ÷ 0.40
Break-Even Point = $50,000
In this example, your restaurant must generate $50,000 in sales each month to break even.
Step 5: Use Your Break-Even Point to Guide Decisions
Knowing your break-even point can help you:
Set realistic sales goals
Determine whether your menu prices are covering your costs
Identify when labor or supply costs are cutting into your margins
Plan for seasonal sales dips by adjusting expenses accordingly
For new restaurants or those considering expansion, understanding break-even can also help evaluate whether your sales projections align with your expected costs.
Step 6: Review and Adjust Regularly
Your costs and sales will fluctuate throughout the year, so reviewing your break-even point regularly — especially when expenses change — helps you stay on track financially.
Final Thoughts
Understanding your break-even point gives you a clear financial target and helps you make data-driven decisions for your restaurant. Whether you're launching a new concept, adjusting your menu, or planning for growth, this calculation is key to long-term profitability.
If you’d like guidance on tracking costs, improving margins, or managing cash flow, ACE'd Accounting Solutions can help. Reach out today to learn how we can support your restaurant’s financial success.
