Are you out there looking for the restaurant break even analysis to increase the success of your independent restaurant? Have all the rising costs been gobbling up your profits like a flock of pigeons on the boardwalk outside a roasted peanuts store? Are you exhausted because you've been working harder than a squirrel in a nut factory to reduce your labor costs? You feel like if you could just break even for the next six months or so, things have got to get back to normal. But you're running out of expenses you can cut. Well, you've got the right idea when it comes to knowing and lowering your break even point. Click below to hear me explain why or keep scrolling to read why.
Here’s why it’s important to understand why you should know how to lower your break even point to find a path to success to get through this pandemic. I don’t want to bore you with the math, but I am going to tell you how it all fits together.
Your break even point is when every dollar that comes in goes out. You don't make any money. You don't lose any money. You tread water. Now, it may be a little bit of a cash flow nightmare because, you know, if you only have enough money coming in and it's going out at the same rate, that feels like a struggle.
The break even point is the balance of your fixed expenses and variable expenses. No matter what your sales, whether you do a $100,000 or $1 that month, you owe that bill, like an SBA loan payment, a manager salary or rent. That’s a fixed expense. Then you have variable expenses, things like prime cost, which includes labor costs for hourly employees. As your sales go up, you use more labor. As sales go down, you use less. As you sell more food, food costs go, you use more food. As sales go down, you use less food.
If you’re following the 55 percent prime cost target that I teach (total cost control, plus total labor costs, including taxes, benefits, insurance) and not the national average at 65 percent, and you’re hitting that 55 percent, plus another 15 percent or so in other variable expenses like advertising and paper supplies, then you have 70 percent variable expenses. That’s 70 cents of every dollar spent on variable expenses. That pays just the bills as sales go up and down.
That means there are 30 cents left over. Here’s where knowing your break even point is so valuable. At first, those 30 cents stack up to pay the fixed expenses like rent and loan payments. Each month your Herculean effort to bring in sales covers those three dimes, stacked up one by one until you cover the fixed expenses. Then when you cover all of your fixed expenses, every dollar after that is at a 30 percent profit margin. It is the most incredible way to increase your profits.
The sooner you can become more efficient, the sooner you can become profitable. And this is why you work so hard to reduce your variable expenses? For example, if you can get those expenses down from 70 percent to 65 percent, there are five more cents on every dollar to put toward your fixed expenses, giving you 35 cents left every time you bring a dollar in to cover fixed expenses. After fixed expenses have been covered, you’re making a 35 percent profit margin.
If you can get rid of a bill, a fixed cost, the sooner you get to your break even point and then the sooner you start making money. And that's the real value of knowing your break even point. When you have this number in mind, you can actually see what impact changes you make in your business have on your profitability.
Let me make your journey as easy as possible. If your bookkeeper or CPA is worth their salt, ask them to do the calculation for you. Then you can quickly identify what you can do to become more efficient and start making money sooner.
I cover Restaurant 101, putting systems in place and more in my book. Order your copy of Restaurant Prosperity Formula: What Successful Restaurateurs Do here.
You can also complete a free restaurant evaluation. It's a great way to identify immediate opportunities where you can make things better in your restaurant.
Be sure to visit my YouTube channel for more helpful restaurant management video tips.
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