The Break Even Burger - a Lesson in Financial Management
The burger is making a comeback in Brooklyn! In the past year alone nearly half a dozen burger joints have opened in the borough, to much fanfare and acclaim. The upstarts include Moo Burger in Cobble Hill, a creation of two-time “Chopped” winner Chef Marc Anthony Bynum, the expansion of Fort Greene favorite 67 Burger to a second location and the debut of 282 Burger on Atlantic Avenue. The success of these gourmet burger joints has caused larger chains to take notice, with Shake Shack and Smash Burger opening their first Brooklyn locations.
Before you run out to open a burger joint of your own, let’s explore a simple equation that separates these successful restaurants from those that fail. A break even analysis is a quick way to gauge the feasibility of your business idea by calculating how many burgers (or units) you need to sell to cover all your expenses.
Many business owners don’t know their break even point so they don’t know when they are doing well or are headed for a cash flow crisis. Having no clear quantitative goal hampers their financial management and business health.
Let’s cover a few key terms before we calculate the break even for our burger joint:
Break Even: The number of units you will need to sell to cover all your expenses and stay in business.
Fixed Costs: All your monthly business expenses not including inventory/ingredients. Fixed costs should include rent, utilities, insurance, salaries, etc. To keep things simple, we’ll assume Manny’s Burger Joint spends $4K in rent, $1K in utilities, and $2K on its staff: a total of $7K monthly.
Variable Costs: Sometimes called cost of goods sold (COGS), variable costs are the amount the business owner pays for the product he is selling. Our burger joint spends $3 on ingredients for each delicious burger. Keep in mind that some industries, like many services, have minimal variable costs.
Selling Price: The price you charge your customers for your product. Although most businesses have many different products with varying prices, it helps to choose one main product to start. In this case, we will be looking at a $10 burger.
So how do we figure out how many burgers we need to sell?
Break Even = Fixed Costs / (Selling Price - Variable Cost)
Or in the case of Manny’s Burger Joint:
Break Even = $7,000 / ($10 - $3) = 1,000 burgers
Now we know that Manny’s has to sell at least 1,000 burgers every month to stay afloat. We can easily figure out that 1,000 burgers a month means 250 burgers a week, or about 42 burgers a day, if Manny’s is open six days a week. Is this a feasible business? One great way to find out is to visit a couple of similar restaurants to get a sense of their foot traffic at different times of the day. Operating businesses can use this type of analysis to assess their financial health by simply comparing their break even point to their actual sales.
Finally, the break-even equation can always be tweaked to test different scenarios. For example, what if Manny’s finds a cheaper beef distributor? This would reduce our COGS to $2. By saving money on ingredients, Manny’s now only has to sell 875 burgers per month. On the other hand, we could decide to take a bigger salary which would increase our fixed costs and our break even.
I have sat with business owners, rookies and seasoned veterans alike, who are terrified of numbers. The best advice I can give is not to get too hung up on the details. Are our assumptions perfect? No. Will our calculations be dead on? It’s unlikely. Like a good cheeseburger, it’s all a bit hastily put together and sloppy, but the point of this initial analysis is to get a ballpark number. Take a few minutes to calculate your own break even point and next time you eat a Brooklyn burger, think of all those delicious variable costs!
Manuel Dominguez is the Director of the NYC Business Solutions Centers in Brooklyn. If you have a question or comment for Manny, drop him a note below. And, please share this blog entry with your colleagues on Facebook and Twitter.