Breakeven Analysis For Your Café/Espresso Bar
A Breakeven Analysis For Your Café/Espresso Bar
This Financial Figure Could Be Your Best Friend
Before we get too far into the discussion of breakeven analysis for your business it should be noted that to explain everything involved in financially figuring out the viability of your café is way beyond the scope of this article. A CPA will be an invaluable partner when it comes to preparing your financial statements especially if you are using a bank or some other form of financing. What you should understand, however, is the concepts behind the financial lingo so that when you do prepare your statements you can grasp the information they are telling you. Nothing will shoot you down quicker with a bank than walking in with a projected profit margin of 5% and unproven sales estimates. There is too much room for error and banks will recognise that risk.
A breakeven analysis is one of the quickest and handiest tools to figuring out the potential profit or loss of your café/espresso bar. Before you buy your first piece of equipment, stock your shelves and open your doors it will tell you whether or not you can reasonably expect to make money. Learn this concept and you and your banker will be more comfortable when that grand and glorious day arrives that you are open for business.
Figuring out a breakeven analysis is really quite simple but it is dependent on the quality of information you plug into the formula. To get started, examine each of the things that go into your breakeven analysis. Fixed costs, things like rent, utilities and insurances tend to be fairly stable over time. You can easily plan for these expenses and they are costs incurred regardless of your amount of sales.
A detailed budget will tell you your fixed costs very easily. Variable costs are the actual costs of your goods that are sold and will vary by item on your menu. These are not hard to figure out but you’ll spend quite a bit of time with a calculator as you go over each hot or cold coffee drink, each sandwich or each piece of dessert. Nevertheless you need these numbers. In time you’ll be able to take an average of the variable costs and come up with one figure which represents the variable costs overall of each unit sold. That way if you sell “x” units, whether they be sandwiches, espressos or whatever else you offer you’ll be able to figure that one unit costs you a certain average price. Ten units will cost you ten times that amount. This average will vary, however, by season, changes in your menu and the like so plan on finding this average often. In the summer, for example, if your customers switch from caffe lattes to frappes, how will this impact that average variable cost?
Total cost is nothing more than the addition of fixed costs and variable costs over time. Let’s imagine that your financial backer is giving you a loan on the condition that you show a profit over twenty-four months. You will want to know, for purposes of a breakeven analysis, what your total costs are over 24 months. Simply add your fixed costs for 24 months to your variable costs times the number of expected units sold [Fixed Costs + (units sold x variable costs)] = Total Costs.
Your expected unit sales are simply the total number of cups of espresso, the number of sandwiches and whatever else you serve added all together over that same amount of time, in this example twenty-four months. This is where most plans fail. New ventures are notorious for inaccurately predicting sales. Because of this your bank will probably want to see an estimate that includes at least a +/-20% room for error in this figure. Plan on showing your breakeven analysis in this way and you should be ok if you can show a profit at these points.
Once you have all of these figures you can begin to play around with your breakeven analysis. Your breakeven analysis will show you the number of units or items you must sell to neither loose or make money. It is the point in sales after which you’ll turn a profit and make your banker happy. To figure this let’s assume that you’ve determined that your fixed costs over 24 months is $100,000. Let’s also assume that your variable cost average is .97/unit and your expected sales volume for the same 24-month time period is 175,000 units at an average retail price of $3.50. How many units do you have to sell to break even? Take the expected total costs (fixed and variable) and divide it by the expected total income (number of units sold x retail price) and you will come up with a percentage, in this case 44%. Take that percentage and multiply it by the total number of expected sales volume (.44 x 175,000) = 77,000. This is the number of units (espressos, sandwiches, etc.) you’ll have to sell to breakeven. Everything sold after that in the twenty-four month period will be profit as long as your costs remain the same. If you expect to sell this amount at about your first year anniversary you are in good shape. If your figures show that it would take you twenty or twenty-two months to hit this point you had better find ways to reduce your fixed and variable costs, raise your prices (if your clientele can stand an increase) or somehow raise your expected sales figures. Remember that sales volume estimates are easy miscalculated. If it takes you twenty-two months to break even and your sales projections were overly optimistic by even 10% you could be in trouble. Be careful. Don’t use unrealistic numbers or you’ll be setting yourself up for failure. Here is another way to view the example above:
- 100,000 Fixed Costs + (.97 variable cost x 175,000 units sold)
175,000 expected units sold x 3.50 retail price
- 269,750
612,500
- Answer = 44%
- .44 x 175,000 units sold = 77,000 units
77,000 units is your breakeven point
Now make alternative projections by decreasing sales volumes, raising sales volumes and raising or decreasing variable costs. See how you come out. If in all scenarios you are still making money you should be able to take comfort in the projections. So will your financial backers.
