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  1. 091If you were to open a restaurant, the first concern is whether it can cover its costs. A 60-seat restaurant pays rent of Rs 3 lakh, staff costs of Rs 4 lakh and other fixed costs of Rs 1 lakh a month. The average bill is Rs 600 a cover and food costs 35% of the bill. How many covers a day does it need to break even, and how many table turns is that?Market sizing and estimationCoreGeneral AtlanticBeijing · 2014

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    Roughly how many covers a day does it need?

    Show the worked solution

    About 68 covers a day, a little over one turn of its 60 seats. Each cover leaves Rs 390 once food is paid for. Fixed costs are Rs 8 lakh a month, so the restaurant needs 8,00,000 / 390 = 2,051 covers a month, or 68.4 a day over 30 days. That is 1.14 turns. Open 26 days a month and the bar rises to about 79 a day.

    What does each cover actually contribute?

    A tea stall that sells a cup for Rs 15 and spends Rs 5 on milk, leaves and sugar has Rs 10 a cup to pay its rent and wages. Break-even is fixed costs divided by contribution per unit, the price less the cost that rises with each unit, never fixed costs divided by the full price. Here a Rs 600 bill with 35% food cost leaves Rs 390 a cover. The rent, the staff and the other Rs 1 lakh do not change with covers, so they add to Rs 8 lakh a month that the Rs 390s must clear.

    Break-even comes at about 68 covers a day, a little over one turn4812160306090120Covers a dayRs lakh a month1 turn = 60 coversFixed costs: Rs 8 lakh a monthContribution, Rs 390 a coverBreak-even: 68.4 a daylossprofitPer cover600 x (1 - 35%) = Rs 390Covers a month8,00,000 / 390 = 2,051Covers a day, 30 days2,051 / 30 = 68.4Turns of 60 seats68.4 / 60 = 1.14
    Contribution of Rs 390 a cover over 30 days crosses Rs 8 lakh of monthly fixed costs at 68.4 covers a day, so the 60-seat restaurant loses money until it fills every seat a little more than once a day, 1.14 turns.
    The relationship
    c∗=Fp(1−f) d=8,00,000600×0.65×30≈68.4c^{*} = \frac{F}{p(1-f)\,d} = \frac{8{,}00{,}000}{600 \times 0.65 \times 30} \approx 68.4
    c*covers a day needed to break even
    Ffixed costs a month, Rs 8 lakh
    paverage bill, Rs 600
    ffood cost as a share of the bill, 35%
    dtrading days a month, 30
    What it says in wordsDivide the month's fixed costs by what each cover leaves after food, then by the days the restaurant is open.

    Is one turn a day an easy bar or a hard one?

    It depends on the meals the restaurant serves. A place open for lunch and dinner gets two chances to fill the room; at 1.14 turns it needs each seat filled a little over once across both services. The sensitivity matters more than the point estimate: if the average bill falls to Rs 500, the bar rises to 82 covers a day, and if it closes four days a month it rises to about 79. At 90 covers a day it earns about Rs 2.5 lakh a month before tax, which shows how much of each extra cover falls to profit once fixed costs are covered.

    What else would an investor ask about?

    This puzzle leaves out costs that scale with sales besides food: delivery platform commissions, card fees and electricity on busy nights. Each one lowers the Rs 390 and raises the break-even. Then there is the opening cost, the fit-out and deposit, which break-even ignores but payback does not. A growth investor asks the same three questions of a chain: what each outlet contributes per cover, how many covers a mature outlet does, and how long a new one takes to get there.

    Where candidates lose it

    The common slip is dividing fixed costs by the full Rs 600 bill, which gives about 44 covers a day. Food is paid out of every bill before anything is left for rent, so the right divisor is Rs 390, and the answer is half as large again.

    The second loss is giving 68 covers and stopping. The interviewer asked about turns because covers alone mean nothing without the seat count: say 1.14 turns and whether that looks achievable for a lunch and dinner restaurant.

    What the interviewer asks next

    • Delivery is 30% of covers and the platform takes 25% of those bills. What is the new break-even?
    • How many covers a day would pay back a Rs 60 lakh fit-out in two years?
    • What would you want to know before backing a chain of these restaurants?

    Asked at General Atlantic, Generalist, Beijing, 2014 (Wall Street Oasis): If you were to open a restaurant, what are some key concerns?