Restaurant break-even point: how to work out yours

Your break-even point is the sales a month needs to pay every bill, with nothing left over and nothing missing. Work it out in three steps: add up the bills that stay the same, find how much of each sale is left after the costs that rise with it, and divide the first by the second. Then split it into a week and a day: in the example below, it comes to about $2,708 on each day open.

What's fixed, what's variable, and what's in between

Break-even needs every cost in one of two piles. The U.S. Small Business Administration (SBA) describes fixed costs as costs that stay the same when production or service levels rise or fall, and lists rent or lease payments, salaries, property taxes, insurance, interest and depreciation. Variable costs are the ones that move with sales. In a restaurant:

Bills that stay the same

• Rent. Utilities too, in our calculator: the SBA's calculator page counts utility bills as variable, because they change with usage.
• Salaries, with the payroll taxes and benefits you pay on them.
• Insurance, software, marketing, licenses.
• Loan and lease payments, in full (the interest and the part that pays the loan down).
• Your own pay, if you take it and it isn't on payroll. Leave it out and your break-even assumes you work for free.

Costs that rise with every sale

• Food and drink: the more you sell, the more you buy.
• Card fees.
• Delivery app commissions.
• To-go packaging.
• Percentage rent, royalties or ad fund fees, if your lease or franchise has them.

In between: hourly labor, and a few bills

Hourly pay is the cost that sits on either side. If you add shifts when it's busy and cut them when it's quiet, it rises and falls with sales, so count it with the costs that rise. If about the same team works every shift whatever the sales, it's a bill that stays the same. Yours may be a bit of both. The SBA says to split costs of this mixed kind (it names phone service, repairs, fuel and power) into their fixed and variable parts where you can.

Our break-even calculator asks one question: does your hourly staff time go up and down with sales? Yes counts hourly pay with the costs that rise. No counts it as a bill that stays the same. Not sure works it out both ways and shows a range, because the answer moves break-even. It puts rent and utilities with the bills that stay the same, so do the same to get matching numbers.

The math, in three steps

The SBA gives the formula in sales dollars: fixed costs divided by the contribution margin. The contribution margin is the share of each sale left after the costs that rise with sales; the managerial accounting textbook from OpenStax describes it as what's available to cover fixed expenses. In plain words, it's what each sales dollar leaves to pay the rent, the salaries and the rest.

1. 01Take one typical month. Use your POS net sales (before tax and tips, not a holiday rush) and use the same month for every other number.
2. 02Add up that month's bills that stay the same. Call it F. A yearly bill goes in as one twelfth and a quarterly one as one quarter; the SBA's own break-even calculator does the same.
3. 03Add up that month's costs that rise with sales. Call it V. Divide V by net sales, and take that away from 1. The rest is the share of each sale left to pay F.

Two cautions. The SBA calls the result an estimate, and it suggests adding a little extra, say 10%, for costs you can't predict. And it assumes your prices, menu mix and cost shares stay as they were in that month.

Worked example: Casa Lupe

Casa Lupe is an example restaurant, and its figures are invented for this post: they are not industry data. It is open 6 days a week and its guests spend $45 on average. They are also the break-even calculator's opening example, so you can type them in and see the same answers.

Casa Lupe sold $90,000, so it had $19,600 of cushion above break-even (21.8% of its sales). OpenStax calls that cushion the margin of safety: the sales above break-even, where a higher one means a lower risk of a loss. After every bill, about $7,350 was left over, before income tax.

Now the other way round. Suppose about the same team works every shift. Then the $22,500 is a bill that stays the same: V falls to $33,750 (37.5% of sales), F grows to $48,900, and each sale leaves 62.5 cents. Break-even is $48,900 ÷ 0.625, or $78,240. The same month, the same $7,350 left over, and a break-even $7,840 higher.

Not sure which one you are? Use the range. Casa Lupe's real schedule sits somewhere between $70,400 and $78,240. If you add the SBA's 10% to the top of that range you get $86,064, close to the $90,000 it sold. That's a thin month, not a comfortable one.

Turn it into a number for a slow Tuesday

A month is too big to feel. Divide it by the days you're open and you have a number you can see on the register at 3 p.m.: Casa Lupe needs $70,400 ÷ 26 days = about $2,708 a day if its hourly team flexes, or about $3,010 if it doesn't. At $45 a guest, that's 61 to 67 guests a day. It actually sold about $3,462 a day, or 77 guests, on average.

An average day isn't a Tuesday. A slow day sits under the average and a busy one over it, and what matters is the month. So make the number work for you:

• Pull the last 4 weeks of net sales by weekday from your POS. Put each Tuesday next to the daily break-even.
• A day under the number isn't a loss by itself: busier days pay for it. But a weekday that runs far under, week after week, is a shift to look at.
• Look at that day's hours. If it keeps running far under, the hourly shifts are the cost you can change in next week's schedule.
• Total the week. If the 6 days add up to the weekly figure ($16,247 to $18,056 for Casa Lupe), you are at break-even for the week.

What moves it most

Break-even moves when a cost moves, and the same dollar moves it by different amounts. A rule that works for bills that stay the same: divide the change by the share left of each sale. For Casa Lupe, a $1,000 a month rent rise adds $1,000 ÷ 0.375 = $2,667 to break-even. A dollar saved on a cost that rises helps because the share left of each sale grows. OpenStax makes the same point, that break-even may or may not change, depending on the type of cost affected.

Three things stand out. First, a few points of food cost are expensive: 3 points added $6,122 to Casa Lupe's break-even in the first column. Any cost that rises with sales does the same, such as card fees or app commissions. Second, a rent rise looks small next to sales ($1,000 against $90,000) but adds $2,667. Third, every change moves the first column more than the second, because there each sale leaves only 37.5 cents to pay the bills against 62.5 cents in the second: the less a sale leaves, the more sales it takes to cover a cost.

To see where yours sit, the guides cover each side: food cost %, labor cost, rent as a share of sales and delivery app commissions.

If you're below break-even

If your typical month sits under your number, you are short every month, so act in this order. The early steps are cheaper and quicker, and they raise the share of each sale you keep.

1. 01Check the numbers first. One typical month, every invoice in it, your own pay in F. A number from the wrong month, or a missing invoice, makes break-even look better or worse than it is.
2. 02Fix the leaks that cost money at any level of sales: plates priced off old invoices, app orders at menu prices, waste. Each point you recover lowers break-even, as the table shows. Start with the guide to the usual leaks.
3. 03Match hourly shifts to the guests you really have, starting with the daypart that runs furthest under its daily number.
4. 04Look at the bills that stay the same: rent, insurance, software, loan payments. They are slower to change and some can't change at all. If you ask, ask for something specific.
5. 05Add sales last. Each extra dollar leaves only 37.5 cents in Casa Lupe's first column, so the gap is wider than it looks: to close a $5,000 shortfall you would need $13,333 in extra sales ($5,000 ÷ 0.375).

If sales have fallen and that's why you're under, begin with what to check before you cut when sales are down: it splits guests from average check before you decide what to change.

This week

1. 01Pick one typical month and write down net sales, food and drink purchases, hourly pay, card and app fees, and every bill that stays the same, loan payments and your own pay included.
2. 02Enter them in the break-even calculator. If you aren't sure about hourly pay, pick Not sure and keep both numbers.
3. 03Write the daily break-even on a card by the register or in your manager's log. Next to it, put what each weekday sold over the last 4 weeks.
4. 04Find the one cost that moves your number most in the table above, and make one change to it before the next schedule goes out.