Running a restaurant may seem easy, but there is more to that. For instance, to open a restaurant, you need to calculate how you will break even. Return on investment (ROI) is the cost of investment and net profit ratio. The higher the ROI, the lesser time it will take to break even.

A standard restaurant ROI takes three to five years. But if you manage to finish the first year without any problems, you can hit the ROI in an average of four years.

How to Calculate a Restaurant ROI

There are many ways to calculate it. However, the following are easy to execute and comprehend. First, identify your cost, but mostly the calculations will consist of:

Startup Cost

If you are a newbie in the business, consider startup costs and add them to the calculations. The startup cost is the money you invest before you open doors for customers. Therefore equipment, inventory, liquor license, and rent cost should be included. In the case of an established restaurant, there is no need to bother about the calculations.

Operational Cost

Once done with the startup calculations, the next step is managing the operational cost. The average money you should devote for the cost of startup and operation depends on your business size. They comprise monthly expenses like goods, entertainment, insurance, utilities, salaries, and taxes.

How to Accelerate the Procedure

Instead of worrying about the average restaurant ROI, think about accelerating the procedure and make profits early. Advertising campaigns with great precision may help since it is every business’s backbone, especially for newbies. Though costly, they help speed up the ROI process. When more people know about your business, the higher your chances of making more profits. However, it is not as simple as it seems; it yields short-term but positive results.

ROI Calculation Formula

Calculating ROI is simple if you have the necessary numbers. All that is needed is deducting the cost of marketing from the gross profit. Afterward, calculate the marketing expense by the results.

For instance, if the amount of annual sales is $300,000 and the startup cost is $250,000, then the year’s gross profit will be $50,000. If the advertising campaign costs you $50,000 throughout the year, it means you did not make a profit, and you broke even.

There are two methods of calculating ROI:

((Net return on investment)/ (Investment cost)) ×100%
(((Final investment value-Initial investment value))/Investment cost) ×100%

Interpreting ROI

When interpreting the calculations, you should consider a few things. First, express ROI as a percentage since it is easier to understand than expressing a ratio. Second, the numerator in the calculation should be the net return since the investment returns can be positive or negative.

ROI Advantages

One advantage of ROI is its uncomplicated metric. It is easy to comprehend and calculate. Its simplicity is used in universal and standard profitability measures. ROI measurement cannot be misinterpreted or misunderstood as every context’s connotations are the same.

ROI Disadvantages

ROI measurement also has some disadvantages. First, it is not responsible for the period an investment is held. This issue can be a problem if you want to compare the investment alternatives. Secondly, ROI cannot be modified in case of risk. If a restaurant owner focuses only on the ROI number and does not evaluate the related risk, the results may differ from expected.