Published August 8, 2022
It’s no secret that succeeding in the restaurant business is hard. In fact, about 60% of restaurants fail within the first year, but with great risk comes great reward. Running a successful restaurant business can be incredibly rewarding and lucrative if done strategically. One of the first major milestones to getting your restaurant business up and running is hitting your restaurant's breakeven point: selling enough items to cover your fixed costs. Here we’ll learn more about what it takes to break even and discuss some helpful tips to breaking even as quickly as possible.
First, let’s understand the components of a breakeven analysis
Simply put, the breakeven point is a mathematical equation that will tell you the quantity or revenue needed in order to cover a restaurant’s fixed costs. To set this up for your restaurant, you’ll need to understand two major variables: fixed costs and contribution margin ratio. Fixed costs are things like rent or mortgage on the restaurant space, salaries for your managers, utilities, etc. These are costs that your restaurant has to incur regardless of how many sales you conduct. Next we look at the contribution margin ratio which is the difference between your restaurant’s sales and variable expenses, expressed as a percentage. By dividing the contribution margin ratio into the total fixed costs, you can get an idea as to how many revenue dollars your restaurant will need to make to break even. Next, let’s explore ways your restaurant can hit that sales goal in the first year of business by either increasing revenues or cutting costs.
Take a close look at your costs
The lower your costs, the less your restaurant’s revenue dollars have to “cover” to break even and begin making a profit. Start by looking at your cost of goods sold or inventory. It’s important that you track these costs at an individual level over time so that if you see the price of a particular ingredient has gone up, you can take action. You can first negotiate a lower contract with your existing supplier, and if they’re unwilling to decrease the price, you can shop around to other suppliers. While the relationships with your restaurant’s food suppliers are important, you’ll need to keep an eye on gross profit margins to be successful. After analyzing variable costs components, think about ways to keep your overheads low in the first year. For example, utilize low cost forms of marketing such as social media, to limit major fixed costs in your first year of operation.
Optimize your workforce with POS-enabled labor statistics
A key way to keep your labor costs low is to have the right amount of people working at any given point in time. But how do you determine the right number of people for your restaurant? Luckily, POS software today can track day-by-day, hour-by-hour sales data to help you understand and forecast what time periods are busiest at your restaurant. In addition to sales data, your POS can integrate with advanced scheduling software which enables you to calculate your optimum sales and number of customers served per labor hour (sales per labor hour (SPLH)). With restaurant technology forecasting busy as well asand slow nights, you can then schedule staff while keeping your SPLH percentage goals in mind. This way, you can optimize the mix of workers for your restaurant, ensuring that you’re not paying people to stand around and look busy. A key to breaking even is controlling your costs, so it’s important to keep a close eye on the interdependencies between your labor and sales in order to keep your labor costs low.
Related: How to simplify restaurant payroll with labor management software
Use your POS to cost every menu item and promote highest profit options
In addition to using your POS to track your sales, you can also leverage it to track your costs. By creating a master inventory list, you can itemize each ingredient that you source along with its cost and then determine a cost amount for each item on the menu. With this information, you can set appropriate price points for each menu item based on their costs and your restaurant’s target margin. More than setting the right price, your restaurant marketing team can work to promote the menu items that generate the highest profit for your business. Running promotions and specials on the options that are the lowest cost to you can increase your contribution margin which helps you reach that breakeven point.
Promote alternative revenue streams
We’ve spent a lot of time talking about costs, but what about revenues? In your restaurant’s first year, it’s critical that you optimize the channels through which revenue can be obtained because it may take a while for your brand to take hold in a local area. Therefore, it’s important that in today’s day and age, you offer not only in-person dining but pickup and delivery options as well. These are low cost ways to increase your sales volume, thus increasing your revenue and optimizing your chances of breaking even in the first year.
Expect the unexpected
There will always be costs that you never see coming. In your first year as a restaurant, you might face unforeseen permit costs, startup fees or a whole slew of other expenses. It’s simply an inevitable part of starting a business. The important thing is to budget for the unexpected, plan for these unforeseen costs. If you bake a set of extra costs into your financial projects, you’ll be tracking to the right sales number that you need to break even, even with the buffer of the unexpected.
Setting your restaurant up for financial success early on depends on multiple factors, and this is worth mentioning, is not easy. It’s important that your restaurant understands the components of the breakeven analysis, sets accurate financial projections, and streamlines costs and optimizes revenues in order to generate enough revenue to cover your fixed costs in the first year. Utilizing these tips will help set your restaurant up for financial success from the start.