What is a Break-Even Point?
Your exact Break Even Point (BEP) depends on many factors. I’ll mainly be discussing things in terms of percentages and in relative terms to the cost of rent (since this will most likely be your biggest uncontrollable fixed expense).
The BEP for any coffee shop is different MAINLY because of their location. The amount they pay in rent won’t change depending on how successful the business is or isn’t.
Everything else is relative to the revenue the business brings in. Meaning, Cost of Goods Sold (COGS) goes up and down proportionally according to sales, as does taxes and (to some extent) payroll.
A coffee shop in a more expensive area will have a higher BEP, therefore it needs to have more revenues. This can work in your favor either way — in a well-trafficked region or a cheaper, less-trafficked area.
However, if you are starting a brand new business, the startup cost is going to be higher in a more expensive area, as well as monthly rent expenses. With an unknown brand and an unproven business model, it would be safer to open your first shop in a less expensive area.
Obviously high-traffic and cheap rent is the ideal situation. This is atypical, but since coffee shops are able to operate with a very small footprint, finding a situation like this is possible.
Where the COGS Comes In
The Cost of Goods Sold (COGS) is a big factor, but it will increase proportionally with sales. This is why it’s good to think of COGS as a percentage of sales. COGS will include coffee beans, milk, syrups, pastries, and anything else consumed by the customer.
Remember that coffee is your main product, but it’s not the most important thing in your coffee shop. Don’t use the cheapest coffee, but also not the most expensive. A friendly, well-trained staff will do much more for your business than using coffee that is twice as expensive as the next one. Spend your money on people over commodities.
The Payroll Factor
I had training in customer service and one-person coverage clearly defined when hiring new staff. I made sure that the people I put on my team were dedicated to learn and build relationships with customers.
This cut down on turnover and kept customers happy. Payroll is a huge expense, but it’s controllable. Keep in mind that customers love seeing the owner of a new business behind the bar, taking orders, and talking coffee.
Cut down on payroll by watching your busiest hours through your Point Of Sale system and only scheduling enough people to cover that time.
In your less busy hours, afternoons for instance, you can schedule yourself and one other barista.
Use this time to get other work done (pay bills, call vendors, make orders, answer emails, etc.) and be on standby in case the barista-on-shift needs a second hand.
Train your staff to be able to handle and fulfill orders, and engage with customers from behind the bar. This will let you focus on office-work and help the business run smoothly and efficiently.
I had training in customer service and one-person coverage clearly defined when hiring new staff.
I made sure that the people I put on my team were dedicated to learning and building relationships with customers. This cut down on turnover and kept customers happy.
The Coffee Shop Break-Even Point Formula
As you can see in the graph, our equation gets over the horizontal line at $32,727.30. That is the sales revenue required before we get into the positive section of the graph. That's why it's called the Break-Even Point. Then divide that number by the total Cost Of Goods Sold. This will give you the profit margin for your items.
In the chart below, I used $6 for the Retail Price, and $3 for my COGS. Factoring in the tax rate I mentioned above, this gives me a 41.25% profit margin. Meaning 41.25% of sales revenue is “profit”(meaning, we haven’t factored in other expenses yet).
I like to do it this way to include taxes in my margins. Otherwise, you will end up really surprised by how much taxes you’ll be paying on your goods. At face value, it looks like our profit margin is 50% since that would be the retail price minus COGS, but factoring in taxes, we can see that isn’t the true margins.
Fixed expenses include rent, utilities, and taxes (besides sales tax). I call payroll a variable expense because it will go up and down depending on how much you work versus hiring others.
Payroll includes the tips paid out to employees. For this reason, the “Sales Revenue” numbers are actually the Total Amount Collected. That means they include taxes and tips. We’re trying to get a simple, but full picture here.
In my coffee shop, my fixed expenses added up to about $7500/month. Variable expenses coming in at about $6000/month.
If we plug these numbers into the formula, we can come up with our Break Even Point. (I know this is a bit algebra-heavy, did I mention that I used to be a math teacher?).
BEP = .4125*Sales - $7,500 - $6,000 = $32,727.30
This means that I’d have to make at least $32,800/month in sales to break even. This comes out to about $1090 in sales revenue per day. Since we factored in all our COGS, taxes, utilities, rent, and payroll, this should give us a full, accurate picture of our BEP.
As you can see in the graph, our equation gets over the horizontal line at $32,727.30. That is the sales revenue required before we get into the positive section of the graph. That's why it's called the Break Even Point.
Rent Rule of Thumb
A Rule of Thumb for finding your BEP is to look at your daily and weekly sales and compare them to your rent. If you are able to make enough sales to cover your rent in 7 days, you will break even.
Make your rent in 4 days to be profitable. I didn’t break down the Fixed Expenses portion here, but this holds rule of thumb still holds true. I was using a rent rate of $6500/month. And at $1090/day in sales revenue, I would cover my rent in 6 days.
The breakdown of monthly expenses should look something like this.
In this case, the variable expenses include things like maintenance, promotional events, etc.
Use these tools as guides to help you diagnose where you may be overspending and adjust accordingly.
The pie chart above is really great because it also includes a profit goal. Even though it doesn’t show the BEP, it does act as a guide for expense ratios.
This will tell you how many transactions you’ll need per day. Then you can ask the real estate agent what the foot (or car) traffic numbers are, or just count them yourself (if you’re in no hurry).
These tools will also help you when shopping around for a location. I like to use the rent rule of thumb when evaluating how much I’d have to make in sales to turn a profit at a location.
After looking at the price of a location, you can gauge how much your daily sales will need to be. Then divide that by what your average sales ticket is (most likely slightly higher than the price of your most popular drink).
These are not hard and fast rules. They are guidelines.
But the biggest factor to consider is the rent at your location. This one is the most fixed expenses and can have the biggest variation (suburbs vs city center). Whereas labor, COGS, and variables won’t change much depending on your location.
Use these tools as guidelines or goals to shoot for. You can’t expect to hit your target if you don’t know where it is. That’s what these are meant to do: help you find your target.
Want some help?
Shoot me an email at tom@coffeeshopkeys.com and we can discuss how you can find the Break-Even Point of your coffee shop (or have me do it for you), and we can talk about how you can reach and surpass that point. I help coffee shop owners increase their sales, decrease their expenses, and free up more of their precious time.
