Breakeven point for food businesses
Know what business model to start out with and what level of sales you need to make to pay your bills and make a profit.
Starting and operating a profitable food business involves long hours and a financial injection from a savings, equity and/or loan. No one goes into a food business to lose money, but many do when they don’t take the time to determine what it would take to make their dream a profitable reality.
To ensure a food business will be profitable and not turn into a disaster, a break even financial analysis is needed before the business starts. This analysis will ensure that the business owner and employees know exactly how many sales are needed on a daily, weekly and monthly basis to pay the bills and meet their profit goal.
Using a chosen business start-up model, the business owner must then determine their fixed costs, the price of their product and how much profit they make per item sold. Fixed costs are those costs that remain the same regardless if you sell anything, such as rent, insurance, marketing and salary of management staff. Variable costs are the costs of the ingredients, package, label, salary of those making the product, utilities, delivery, etc. Tools to determine fixed and variable costs can be found at the Michigan Small Business & Technology Development Center and SCORE websites.
Businesses with a variety of products will need to use a forecast and total their sales and related variable costs separately over a period of time to then average the figures that they can use for the variable cost and price/income figure. More information about forecasting can be found at Bplan.
The beauty of the break even point is that it can be determined for day, month, year or more. The formula for a break-even-point is basically this:
Break Even Point = Fixed Costs/(Selling Price-Variable Cost).
Using the results of this analysis, the business owner can then determine if the business model is profitable or whether they need to change their start-up model. Perhaps the businesses need to reduce fixed costs by starting in a smaller location or outsourcing the production of their food to a co-packer. Maybe the cost of the product needs to be changed, as long as it meets market demand for that product, to better cover the costs and produce a profit. Lowering costs may also be achieved through buying ingredients in bulk and increasing their efficiency to lower wage costs.
The MSU Product Center provides business counseling and can guide a future or existing business owner in determining their break even point, finding co-packers, and much more. Sign up today through completing a Request for Counseling.
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