If you’re like MOST people – you’re asking yourself why would I want to listen to a podcast about breaking even, when I’m here to make REAL money. I want a podcast that will tell me how to make money. And, what is so important about this silly little Break Even Point anyway?
Ladies & Gentlemen, it is true that MOST people don’t want to hear stories about breaking even. Most people want to hear stories about making MILLIONS of dollars and working only FOUR hours a week. MOST people want to find the EASY way, the get rich QUICK way.
That’s why YOU like this podcast. This podcast is for you because you are NOT like MOST people. You are a restaurant owner, you are DIFFERENT. YOU have the heart of an ENTREPRENEUR. YOU want the FREEDOM to do YOUR thing. YOUR WAY - on your TERMS. You want the BEST solutions for the LONG TERM health of your restaurant, your people and your customers.
This podcast is for passionate restaurant people like us who are in this for the LONG HAUL.
Another reason that you are NOT like most people is that – MOST RESTAURANTS LOSE MONEY OR BARELY BREAK EVEN. AND THE OWNER DOESN’T DO ANYTHING ABOUT IT, they just struggle and die. YOU are SMART. You are out here looking for answers that will help you get to the next level!!!
80% - of all the restaurants in the world STRUGGLE to SURVIVE.
80% - of all restaurants DIE before their fifth birthday.
14% = MAKE A LITTLE MONEY
ONLY 5% make a 10% PROFIT
And The RARE 1% - earn more than a 10% PROFIT
My goal is to help you get into the TOP 5% of all restaurants and EARN a 10% Profit. If you are not there yet, stay tuned because I am about to show you how close you really are to making it happen.
REMEMBER THIS --- PROFIT IS NOT GREED. PROFIT = FREEDOM.
Huh, what did he just say ??? Profit is Freedom?
How is Profit Freedom? Freedom from what?
REAL FREEDOM is getting up in the morning and having the freedom to do whatever you want to do.
FREEDOM comes from NOT being buried in BILLS that you can’t pay.
FREEDOM is having a team of full time people who know their job and work as hard as you do to build a great restaurant.
FREEDOM comes from having the money to pay the BEST wages in your market.
FREEDOM – comes from building a first class restaurant that will stand the test of time.
FREEDOM – comes from having money in the bank!
FREEDOM – comes from character and integrity, AND doing the RIGHT things RIGHT.
FREEDOM STARTS AT THE BREAK EVEN POINT…
PRE- Break Even is where we Lose Money and DESTROY WEALTH…
Opening a restaurant is like diving into a swimming pool. PRE- BREAK EVEN IS LIKE BEING UNDER WATER. If you stay there too long you’ll DIE. You HAVE TO make it back to the surface. The surface is the Break Even Point – where we can start to breath again.
Life begins at the Break Even Point!
The Break-even point is the point at which your restaurant stops DESTROYING WEALTH. The Break-Even Point is where your restaurant starts to CREATE WEALTH!
And the coolest thing about the break-even point – IS..
Once you reach the break-even point 60 CENTS of every ADDITIONAL dollar that you do in SALES will go straight to the bottom line as PROFIT!
That’s right folks. When you reach the break-even point 60 CENTS OF EACH ADDITIONAL DOLLAR IN SALES will go straight to the BOTTOM LINE as PROFIT!
WOW! – NOW YOU HAVE MY ATTENTION - I WANT TO GO THERE…
The Break Even Point: The first financial goal of EVERY restaurant is to reach the Break Even Point.
Break-even is the point when a business stops destroying wealth and begins to CREATE WEALTH. Once we hit the break-even point, at least 60 cents of each ADDITIONAL dollar in sales should fall to the bottom line as Profit.
Now pay attention to this because it involves numbers and it’s a little tricky to explain without paper or a white board. I’ll do my best to explain it. If you get confused, listen to this part a couple times and you get it.
WE NEED TO KNOW FOUR THINGS TO FIGURE THE BREAK EVEN POINT:
1. Labor Cost
2. Other Cost
3. Food Cost Percentage
4. The we make a Sales Guestimate
To calculate the break-even point, we start with fixed costs. Fixed cost are fixed because we cannot live without them. There are two types of fixed costs.
The first is Labor Cost: Although labor cost will vary slightly from week to week, it is still a fixed cost because, we can't get rid of it.
The second is Other Cost: This includes rent, utilities, insurance, trash removal, office expenses, credit card fees, marketing, plus everything else that is not related to labor or food and beverage purchases.
You should be able to find these numbers on your P&L statement in QuickBooks. You do have a P&L statement don’t you? You do use QuickBooks or some kind of professional accounting software, don’t you?
For this case study we are going to use the XYZ Restaurant that is doing $750,000 in annual sales. Let’s imagine the XYZ restaurant has a labor cost of $250,000 per year and they have other cost of $250,000 per year. That means they have $500,000 in Fixed Cost.
XYZ Restaurant Fixed Costs are… Labor Cost $250,000 +Other Costs $250,000 =TOTAL FIXED COSTS $500,000
Now we have the first two pieces, we know our fixed cost should be $500,000.
The Next piece is cost of goods.
3 – Cost of Goods: is a Variable expense– THAT MEANS - if we don’t have the sales, we should not need to buy the ingredients to make the food or drinks.
We start with the PERCENTAGE that we want or expect our Cost of Goods to be.
For this example we will use 33% because that is what the XYZ restaurant is running.
Now we have three of the four pieces, all we need a SALES number.
When we know what our fixed costs are, and what our cost of goods percentage goal is we can play around with different SALES SCENARIOS to find our break-even number.
4 – Sales Scenario / Guestimate:
If you have been open for a while, you can use your actual sales numbers.
If you are breaking even NOW – you already know the break-even numbers.
For our purposes today, I want to start at the beginning so you understand how we do it. This is a little complicated so pay attention.
Let’s imagine we are a start-up restaurant, We write the menu and take a guess at what we think the average check is going to be based on the prices on our menu. Let’s say we have an average check of $25 per person.
Then, we take a guess at how many meals we hope or plan to serve each day.
Then, we figure out how many meals we will do each week. Let’s imagine we are only open for dinner, six nights a week and we are going to feed 100 people every day (times) 6 days. That’s 600 people.
Then, we multiply the average check goal of $25 times the number of meals per week of 600 and we come up with a weekly sales total or $15,000 per week in sales.
Then, we multiply the weekly total of $15,000 x 50 weeks per year. In this example, we close the restaurant for two weeks every year so everyone can take a break. Hey, it’s not a bad idea, if you can make it work.
Anyway, This gives us a total of $750,000 in sales, a nice round number to work with.
Let’s see how this works… HERE ARE THE NUMBERS
We start with our sales of $750,000 and multiply that x our cost of goods of 33%.
That gives us $250,000 – for Cost of Goods.
Now, let’s build our equation.
Sales = $750,000 COG 33% = $250,000 Labor = $250,000
Other Cost = $250,000 Total Expenses = $750,000.
This is a Perfect scenario for break-even. All our costs are at 33.3% and we are at Break-even point. Now, I want to say that another way. Sales are $750,000 and expenses are $750,000.
The XYZ Restaurant is at Break-Even.
There is even a formula to calculate BREAK EVEN: Here it is.
SALES minus COST OF GOODS divided by FIXED COSTS or in our example.
We have $750,000 in sales - $250,000 Cost of Goods = $500,000
Then we divide $500,000 by fixed costs of $500,000 which equals 1.00 - Anything above a 1 is break even. Anything below 1.0 is NOT.
For this example, the XYZ Restaurant needs to do $750,000 in sales to break even based on this overhead, labor and cost of goods.
Now for the Good News, every additional dollar that XYZ brings in above the $750,000 will put roughly .60 cents on the bottom line as PROFIT! This is because all we have to pay for is the (variable) cost of goods. And we know our cost of good is running at 33%.
I know what you are saying – if our Cost of Goods is 33%, wouldn’t we put 66.6% in the bottom line? And that’s a good question. The reason I use 60% is because in reality, there are always extra costs. There will be a (2%) increase for credit card fees and maybe something for linen or disposables or something else. That’s why I think of it as .60 cents profit for each additional dollar above break-even.
Now that you know how to figure the break-even point for your restaurant, you can use it to figure out what your sales need to be to either stop the bleeding or reach the 10% profit line.
IF you are hovering around the break-even point – that is a GOOD thing.
IF you are above the break-even point that is good too.
Harvey Firestone once said - It is unusual and indeed abnormal for a concern to make money during the first several years of existence. The initial product and initial organization are never right. OK I love that
HOLD ON BECAUSE IT’S TIME TO GO ABOVE THE BREAK-EVEN POINT?
And Now for the fun part…
Let’s see what happens when we increase the sales for the XYZ restaurant.
AS we just discussed The XYZ restaurant is breaking even with…
Sales = $750,000 COG 32% = $250,000 Labor = $250,000
Other Cost = $250,000 Total Expenses = $750,000
Profit = $0
Let’s increase the sales by 10% and see what happens:
Our sales are $750,000 x 10% = $75,000 in additional sales which brings our new sales total to $825,000.
Then we add the 33% for cost of goods on the extra $75,000 in sales - which is $25,000. So we increase the cost of goods from $250,000 to $275,000.
Now we have -
Sales = $825,000 COG 32% goes up to $275,000 Labor is still $250,000
Other Cost = $250,000 Total Expenses = $775,000.
Profit = $50,000
This is a Perfect example of what happens when we hit the break even point, 66.6% of our additional sales hit the bottom line as PROFIT.
Hey, Just for fun, let’s see what happens if we can get another 10% Sales Increase.
Our sales are at $825,000 x 10% = $82,500 = this make sour sales $907,500
Cost of Goods on the new sales at 33% will be = $27,225 which moves COG to $302,250
If we can maintain our labor & other cost at the same level - our profit will grow to over $105,250.
Here’s what we just did:
Sales went from $825,000 + $82,500 = $907,500 COG 32% goes up to $275,000 + 27, 255 = $302,250 Labor is still $250,000 = $250,000
Other Cost is still $250,000 = $250,000 Total Expenses = $775,000 +$27,255 =$802,250
Profit = $50,000 = $105,250
This is an extra $55,250 in profit, which is as you would expect is 66.6% of our additional sales.
I want to take a minute and look at something important – very important. If you recall, When we started this exercise - The XYZ restaurant had $750,000 in sales and was at the break-even point. Then, we had TWO 10% sales increases. We moved the sales needle from $750,000 to $825,000 to $907,500. We were able to keep our FIXED costs of Labor and Other costs the same with ZERO Growth.
The only extra expense we had was for the Cost of Goods on the extra Sales. At $907,500 in sales our NEW Profit is now - $105,250. This is an 11% Profit… WOW!
The point of this exercise is to show you That – Life begins at the break-even point. With TWO moves – we went from breaking even to making an 11% Profit. I’m here to tell you that this can absolutely happen to you and your restaurant – whenever you are ready.
And this brings us to our QUESTION OF THE WEEK…
The question is coming right from your mind to mine and it is really obvious…
HOW CAN I INCREASE MY SALES BY 10% TWICE –
SO I CAN EARN A 10% PROFIT AND START HAVING FUN?
Ok, I’m going to give you the BIG picture real fast so hold on tight…
In all the world there are only SIX WAYS to increase sales in a restaurant and they are:
Keep the Customers you have Today
Increase the Average Check
Get the Customers to Return More Often
Bring in NEW Customers
86 Bad Customers
And my favorite… Raise Prices!
I want you to think about these six ways to increase sale and try to come up with a few ideas that will help you move forward.
Next week our podcast will be about – THE SIX WAYS TO INCREASE SALES…
I can’t wait to sink my teeth into that one, it’s one of my favorite subjects .
I truly hope that today’s episode about the break-even point was interesting and useful,
because my goal is to help you build a better restaurant and achieve the Gold Standard in the restaurant industry – a 10% Profit…
I’m Peter Harman, The Food Guru – Thanks for listening.