Your food truck business may fill an entrepreneurial passion, but if it’s not profitable it simply won’t last, no matter how much customers love your food. It’s crucial food truck owners understand their break even point; the point when it becomes a profitable business.
And even more importantly, you need to put a dollar amount on what it will take to get there so you don’t run out of money before you turn a profit.
What Is Break Even Analysis
Break-even analysis tells you the point at which costs equal revenues. Revenues after that point become profit. It’s considered one of the most important calculations in a business plan, because it allows you to understand when the business will become profitable, and what that will require in terms of capital.
How Can Food Truck Businesses Benefit From Knowing Their Break Even Point
Unless you inherit a food truck business, it won’t be instantly profitable. You’ll have to cover numerous up front costs before you make your first sale.
Understanding your break even point can help you make better business decisions along the way to profitability, and as you continue to grow your business. It can help you:
Make menu pricing decisions. Setting selling prices is tricky. You can’t price items solely on what your competition charges, or a gut check. You need to fully understand all your costs so you can price each item appropriately. You don’t want to have to discontinue a popular item because it will never be profitable. And once you’ve set a price it can be hard to raise it, so this research can be crucial.
Manage expenses. Without a full analysis you may overlook expenses that cut into profitability. Expenses generally fall into two categories: fixed expenses and variable expenses. We’ll talk more about those in a moment, but keep in mind that if you don’t manage and monitor expenses from the beginning, your food truck could become a money pit.
Set sales targets. How much revenue do you want your food truck business to earn? How many sales of various menu items do you want to make? What will you have to do to reach those targets?
Get financing. If you are going to get startup financing, the break even analysis can help you understand how much you need to borrow to make your food truck business successful.
Break Even Analysis Formula
The basic break even calculation based on units is:
Break-even point (unit) = fixed costs ÷ (sales price per unit – variable cost per unit)
Or you can calculate it in terms of sales dollars:
Break-even point (sales dollars) = fixed costs ÷ contribution margin
Contribution margin is the difference between the sale price and total variable costs. Let’s say you have a menu price of $12 and variable costs total $4. The contribution margin is $8.
Contribution margin = (sale price per unit – variable cost per unit) ÷ sale price per unit
For a food truck, a simplified break even point may look like this:
Break-even point = total fixed costs ÷ (average ticket price – variable costs per ticket)
You can use accounting software, business planning software, or even a simple spreadsheet to calculate your break even point.
But to calculate your break even point, you’ll need to be clear on costs, including your total variable costs, fixed costs and mixed costs.
Common Food Truck Business Variable And Fixed Costs
Fixed costs don’t tend to change based on how much you sell. You need to pay these costs regardless of total sales volume. Many food truck start-up costs will fall under this category.
Common fixed costs for a food truck business:
- Truck (rent or purchase)
- Renovations, repairs and/or retrofitting
- Smallware (such as pots and pans)
- Licenses and permits
- Event fees
- Commissary kitchen
- Point of sale (POS) system purchase
- Insurance premiums
Variable costs are often tied to sales. They are costs you must absorb with sales. Common variable costs for a food truck business:
- Card swipe fees
- Food & beverages
Some costs may be semi-variable. There is a fixed minimum cost, but beyond that it can vary based on volume. For example:
- Labor costs
- Commissary kitchen
- Website hosting
- Email provider
- Mobile phone
Certain costs don’t always fall neatly into the category of fixed, variable or even semi-variable costs. The main point is to make sure you don’t overlook expenses that will cut into profitability and move back your break-even point.
New food truck business owners may not be aware of the myriad costs that go into starting a food truck business. Taking time to research expenses and creating a solid food truck business plan can be crucial.
How To Find The Profit In Break Even Analysis
Anticipating expenses can be scary, but don’t let it deter you. The fun part of the break even analysis is figuring out how to make your business more profitable. There are numerous ways food truck businesses may be able to increase profitability, including:
Focus on high-profit menu items. Stretch your creativity by looking for menu items with lower food costs and higher margins.
Get creative with marketing. Social media marketing in particular may be a low-cost way to drum up business for your food truck. It’s not without cost, but that cost may be largely your time to create posts and engage with your customers.
Target profitable events. Some food trucks find great success with events such as corporate events or weddings, for example. Others may target events with high foot traffic such as fairs or festivals.
Financing Your Food Truck
If you find you don’t have enough money to get your food truck business to the break even point you’ll need to consider a small business loan or other types of financing to cover costs until you get there. The analysis you’ve done to understand your break even point will help you understand how much you need to borrow.
If it’s a relatively small amount, a 0% APR business credit card may work as a short-term loan. If you need longer repayment terms you may consider a term loan. Or you may want to use a mix of financing, for example, a long-term loan to purchase the truck and a short-term loan or line of credit for working capital.
Nav can help you find financing options for your business. Nav will use details about your business to help you find the financing you need for your food truck business.
This article was originally written on August 14, 2023.