Know your break-even point
This Break-even point Info Guide explains what break-even point is and why it pays to know your break-even point.
Break-even point is the level of sales at which you are making neither a profit nor a loss. If sales are achieved above this point, you are making a profit; below this point you are making a loss.
top
top
Fixed costs
To be open for business, you must incur certain fixed costs, regardless of the level of business you do.
Fixed payroll costs
Direct costs of sales
Additional staff costs
top
Sales, less direct costs of sales, provide a contribution towards paying overheads and fixed payroll. Once overheads and fixed payroll are covered, any remainder is your profit. If this contribution cannot cover overheads and fixed payroll, you make a loss.
top
Use this Break-even point formula to find out at what level of sales you are making neither a profit nor a loss:
top
Break-even Point: Fáilte Restaurant Example
|
| Profit and Loss Account: Failte Restaurant |
| |
€ |
| Sales 6,000 guests spending €20 each, excl. VAT |
120,000 |
| Cost of Sales (food and beverage costs) |
48,000 |
| Gross margin |
72,000 |
| Other variable costs (eg, linen, tableware & variable pay costs) |
18,000 |
| Contribution to fixed costs and profit (45% of Sales) |
54,000 |
| Fixed costs (including fixed payroll and costs) |
40,000 |
| Profit |
14,000 |
| |
The Fáilte Restaurant will break-even at a sales level of €88,889, calculated as follows:
top
In the Fáilte Restaurant example, the minimum average spend per customer for the expected 6,000 covers or the minimum average price, is €14.81:
If the number of covers falls to, for example, 5,000, the minimum average price will need to be revised upwards to €17.78 in order to remain at break-even point:
top
In the Fáilte Restaurant example it is assumed that a target-profit of €30,000 is required. The minimum sales value needed to achieve this €30,000 target-profit is €155,555:
If the average spend is €20 per cover, then the Fáilte Restaurant should aim to achieve 7,778 covers, calculated as follows:
If the average spend per cover could be improved to €25 each, then the restaurant would need 6,222 covers in order to achieve the target-profit, calculated as follows:
Remember!
In the Fáilte Restaurant example it is assumed that cost of sales and other variable costs remain in proportion to sales value. If these change, or if the total fixed costs change, the break-even pricing calculation will need to be re-done.
Calculate the minimum sales value you need in order to break even or to achieve a target-profit
top