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If you’re starting a new business, it’s important to assess its financial ratios and overall performance regularly so you can make appropriate adjustments for its stability and growth. One key assessment involves conducting a break-even analysis.

A break-even analysis determines how much revenue must come in to cover the business’s expenses. It shows how many products must be sold (or alternatively, how much revenue must come in) to bring the business to the point at which there isn’t a profit or a loss. This is known as the break-even point. Read on to learn more about this important business metric.

Why Conduct a Break-Even Analysis?

The results of a break-even calculation can help you set or adjust pricing, create or modify your budget, and determine or tweak production goals. They can spur on cost-controlling measures and you can show them to your employees to demonstrate the benefits of reaching sales targets. They might also reveal that you could benefit from taking out a small business loan or otherwise accessing more funding.

Here’s a look at one example of how break-even analysis can be an important part of the small business budgeting and price setting processes. Some business owners don’t account for all of the costs that are involved in making a product when they set their prices. Direct costs — such as materials used in a product, manufacturing supplies, and direct labor costs — may be relatively obvious. But indirect labor costs, overhead costs, marketing expenses, and others that are less obvious might not be properly accounted for.

The result could be an under-priced product and a company that struggles to keep its books in the black. Break-even analysis can help you identify that situation so you can rectify it.

So how do you calculate break-even points accurately and use them appropriately? To help you find the answers, here are some useful definitions and some strategies.

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How to Calculate Break-Even Points

To understand this calculation, it can help to know the meanings of all of the factors used in it.

•   Fixed costs: These are the company costs that stay the same over a defined period of time. They are costs that have to be paid even when your company isn’t producing anything, like rent payments for building space, salaries, insurance payments, utilities on a budget, fixed loan payments, and so forth.

•   Variable costs: Compared to fixed costs, variable costs can change based on business activity. One example might be sales commissions. If a team sells more products, then its commission amounts would increase. If it sells fewer, then this amount would decrease. You may need to estimate what these will be to arrive at a number to use in this equation.

•   Product sales price per unit: This is the cost that a business would charge a customer to buy one of its products.

•   Contribution margin: This is the unit’s sales price minus its variable costs.

Example of Break-Even Analysis Calculation

The formula to calculate break-even point is:

Fixed costs ÷ Contribution margin = Break-even point (expressed in number of products)

Let’s say that a company sells a technical guide and the fixed costs associated with it total $75,000, the variable costs involved in producing one guide equal $3, and the guide sells for $20. This is how this example of break-even analysis plays out:

The break-even quantity = $75,000 ÷ ($20-$3) = $75,000 ÷ $17 = 4,411.8. This company would therefore need to sell 4,412 copies of the technical guide to reach their break-even point.

Recommended: Inorganic Business Growth Explained

Leveraging Break-Even Calculation Results

Picture discussing these results at a work meeting. The response may be that this is a wonderful break-even point. It could also be discouraging — or something in between. If results are deemed less than desirable, then a review of the business cash management plan, including pricing and more, may make sense.

Solutions can include:

•   Raising prices

•   Finding ways to cut costs

•   A combination of cost cutting and price adjusting

Here’s more information on these actions.

Pricing Strategies

When considering a price change, you’ll probably also want to think about what competitors are charging to make sure your company doesn’t price itself out of the market. If your prices would be higher than those other companies are charging, is your product more valuable in ways that can justify the higher prices?

In certain industries, surge pricing (also known as dynamic pricing) could apply. In this situation, prices rise and fall based on market and customer demand. Concerts and other events might charge higher ticket prices if a certain performer is in high demand, for example. And hotel room prices can go up if the hotel is near a popular event. Assuming that company costs remain relatively stable, it will take fewer units to reach the break-even point when demand is high and prices are higher. It will take more units when demand and prices go down.

A similar strategy called discount price strategy focuses on charging more for popular products. For example, the technical guide company may come out with another publication on a topic that’s highly relevant at present. At that point, the company may be able to sell this new publication at a higher price. The idea behind this strategy’s name is that the product is eventually put into clearance or otherwise discounted after a period of time. This strategy may work especially well with seasonal products or products that go in and out of style, such as clothing.

If a company is just entering the market with a product that already has competition, it might use a penetration strategy in which it prices its offering very low so that the company can “penetrate” the market before raising prices. A break-even analysis would quickly show how larger numbers of products would have to be sold before costs could be covered. That’s why this is typically a short-term strategy to draw attention to a product and start earning revenue from it.

Penetration strategy is related to loss leader pricing, where a few products are priced exceptionally low to grab attention, but other products are still sold at full price.

Cost-Cutting Strategies

Can materials needed for a product be purchased for a better price? What kind of discounts can the company get if the materials are bought in greater quantities? What impact could changes based on these factors have on cash flow management, overall?

Ways to reduce fixed costs might include cutting back on rent, either by negotiating for better rates, moving to a smaller and/or less expensive space, or shifting to a partly or all-remote working model. This last option could help the business save money on rent, as well as on taxes, insurance, utilities, and so forth. If this seems like a possibility your business would like to pursue, check to see what local zoning and other codes may apply.

If your cost for office space can be lowered, check to see what impact this has on the break-even points of your product(s).

Returning to our earlier example of break-even analysis, let’s say that a new rental agreement will reduce the fixed costs of $75,000 by $15,000. Here’s what the break-even analysis would now look like:

$60,000 ÷ ($20-$3) = $60,000 ÷ $17 = 3,529.4. This savings in rent lowered the number of technical guides that would need to be sold from 4,412 to 3,530.

Other cost cutting measures that can lower the fixed costs include:

•   Cutting back on vehicle expenses

•   Strategically using freelancers in the business

•   Price-comparing supplies

Plus, as the proverb has it, time is money. Finding ways to work more efficiently can be real money savers, too. Strategies include improving organization, using productivity apps, and outsourcing strategically.

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The Takeaway

When you own a small business, you want it to make money. Understanding what your break-even point is is crucial to your bottom line. And using that tool to figure out what changes you might want to make in producing your products and in the fixed costs you pay may also be very valuable to your company’s bottom line.

One more useful strategy: when your business needs to borrow money, one option that may be beneficial is to get a small business loan that offers the best deal for the company, from the interest rate to the fees charged.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/Dima Berlin

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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If you’re seeking funding for your small business, you may have heard about bridge lending. A business bridge loan, also known as a commercial bridge loan, can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, commercial bridge loans can save a business in a pinch, especially when it comes to purchasing real estate.

Keep reading to learn more about what a commercial bridge loan is, how they’re typically used, their pros and cons, and more.

What Is a Commercial Bridge Loan?

A commercial bridge loan is a type of short-term financing that effectively bridges the gap between the time of application and when another form of cash or funding will be available. That’s why bridge lending can also be called gap financing or interim financing.

Because of their purpose, bridge loans have short terms, typically up to one year. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans also generally have higher interest rates compared to traditional loans.

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How Do They Work?

Say that a business wants to buy a piece of property that’s located next to their building to expand parking spots. They won’t have the cash necessary to make the down payment on that property and pay the closing costs for another four or five months. They’re afraid that, if they wait that long to make an offer, someone else will snap up this prime piece of real estate. The solution could be a commercial bridge loan.

This business could take out a bridge loan by using the equity in their current building to fund the purchase of the new property. This type of loan can also combine the mortgage of both of these properties, at least in the short term, so the business only needs to manage one real estate loan.

Then, the business would likely refinance their properties in more traditional ways, looking for an affordable, long-term mortgage.

Just like with any other type of loan, different lenders will have different lending programs. When comparing commercial bridge loans, two aspects to consider include:

•   Speed of funding: Businesses typically seek these types of loans because they have an urgent funding need. Check a variety of lenders to find one that can meet your timeline.

•   Incentives to prepay: This is a short-term form of funding — in other words, a temporary loan. Ask lenders if you can receive a prepayment discount or otherwise save money by paying it off even earlier.

Also, ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates, offering more flexibility. These may come with higher interest rates and make it more difficult to get approved, though. Closed loans, on the other hand, have a set payoff date and, in return, can be easier to obtain with lower interest rates.

How Are They Different From Traditional Loans?

People typically take out a bridge loan because they need fast access to cash for a short period of time. Traditional loans usually have a longer approval process and almost always have a longer term.

Sometimes, repayment of a bridge loan resembles that of traditional loans, with a monthly payment required. Other times, the borrower would make interest-only payments until the end of the loan term, and then make one final payment to pay the loan off. And in other cases, the interest owed is taken from the loan amount at the time of closing.

As mentioned above, bridge loans also tend to be more expensive than traditional loans. Not only do they usually have higher interest rates, but bridge loans also tend to have hefty origination fees.

Pros and Cons of Commercial Bridge Loans

Now, take a look at the benefits and downsides of these small business loans.

Pros

•   Businesses can get cash fast for immediate needs, typically real estate investing.

•   To facilitate the fast need for funds, the application, underwriting, and funding processes are typically streamlined.

•   Can be used to cover day-to-day expenses while a transaction is in progress.

Cons

•   Interest rates are higher than many other loan types.

•   This is a secured loan with property serving as collateral.

•   They often have high origination fees.

Recommended: Mezzanine Financing

Common Uses for Commercial Bridge Loans

Although commercial bridge lending is often used when purchasing real estate, there are other reasons that a business may look into a bridge loan.

Fix-and-Flip Project

A fix-and-flip project involves purchasing a property, fixing it up or renovating it, and selling it for a profit. This is typically done over the course of a few months. Because bridge loans are short-term financing options, they can be used to purchase and fund these types of projects. Once the home is resold, the money can be used to pay off the loan.

Delay in Customer Payment

If a business offers services to other businesses (meaning it’s a B2B company), they invoice their customers for payment. The company would then use the money paid on these invoices to cover payroll, rent, utilities, and other expenses. If customers don’t pay on time, they still need to pay their own bills — and so they could use this type of loan to bridge their cash flow issues.

Expanding Your Business

A small manufacturing firm, for example, may have an opportunity to expand their services but need to buy new equipment to do so. Perhaps they’ll go to an auction to get the best pricing, which means they’d need to have funds without knowing exactly what they’ll purchase. This would make it challenging to obtain conventional financing ahead of time. Bridge lending can offer a solution in this scenario.

Insurance Claims

When a business leverages bridge lending, they can use the money in ways they see fit. So, if there’s some sort of disaster (a fire, flood, or tornado, for example), then a business could use the funding to take care of immediate expenses while waiting for business insurance claims to be processed.

Buying Inventory

Sometimes, businesses use bridge lending services when they need to buy inventory to sell. For instance, they may need to restock their shelves after sales increased or get ready for the holiday season. The business could then pay off the loan through sales proceeds or by refinancing to another type of business loan.

Recommended: Business Loan Brokers

Where Can I Get a Commercial Bridge Loan?

You can get a commercial bridge loan through a bank, credit union, private lender, or online lender.

Banks and credit unions may offer lower rates than direct and online lenders, but it may take longer to get approved and the requirements may be more stringent. Direct lenders typically have less strict requirements. Also, they may offer interest-only payments for the first few years until the final payment is due.

Like with other types of small business loans, you’ll want to shop around to find the best rate and terms for your situation.

Recommended: Comparing Personal Loans vs. Business Loans

Alternatives to Commercial Bridge Loans

If a commercial bridge loan is not right for you, there are other options to secure small business financing, including:

•   Small business grants: Small business grants are lump sums awarded by federal, state, or local governments or by private corporations that do not need to be repaid.

•   Small business loan: Traditional small business loans can be short or long-term, be backed with collateral or have no collateral, and can come with competitive interest rates for those with good credit scores.

•   Business line of credit: A business line of credit gives a business access to funding where interest is charged on the outstanding balance, not on the amount that’s available to use. Businesses can use the funds as needed and repay them in a revolving manner, as long as they don’t exceed the approved limit for the line of credit.

•   SBA loans: SBA loans are guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loans are available up to $5 million to cover a wide range of business needs.

•   Invoice factoring: With invoice factoring, businesses can use their unpaid customer invoices as collateral. This helps B2B companies to manage their cash flow with the factoring company, which is then responsible for collecting the outstanding amount.

The Takeaway

Commercial bridge lending can provide businesses with a fast influx of cash on a short-term basis. Business owners can leverage this funding to buy real estate, expand operations, and manage cash flow. There can be cons, though, to bridge loans, such as higher interest rates and shorter repayment terms.

If this type of lending isn’t right for you, there are other types of small business funding to consider, including SBA loans, invoice factoring, and long-term small business loans.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What is a commercial bridge loan?

A commercial bridge loan is used to secure funding while you wait for long-term funding to come through. It’s used to “bridge the gap” between the period of time it would normally take for a normal business loan to close. In most cases, commercial bridge loans are used when purchasing real estate.

What are the cons to a commercial bridge loan?

Cons to a commercial bridge loan include higher interest rates, additional and/or higher fees, and shorter repayment terms.

How is a commercial bridge loan different from a traditional loan?

A commercial bridge loan is a short-term form of funding that allows you to purchase a property while you wait to secure a traditional financing option. Traditional loans, on the other hand, typically have longer repayment periods and lower interest rates. These loans do not close as fast as bridge loans, though.

Photo credit: iStock/alvarez

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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If you’re looking to grow your small business, you have two main financing options to choose from: installment loans and revolving credit. Installment loans give you a lump sum of cash up front that you pay back (with interest) in monthly payments. Revolving credit, on the other hand, provides a source of funds you can draw on and repay (with interest) as needed. Each has its own features, pros, and cons to consider as you research your business financing options.

Below, you’ll find the basics about installment loans, revolving credit, and the differences between the two so you can make an informed choice about which financing makes sense for your business.

What Is an Installment Loan?

A business installment loan is a type of small business financing that provides a fixed amount of capital you can use to cover business expenses. You then pay back the loan in fixed monthly installments that include both principal and interest for the duration of the loan term. For example, if your company takes out a $20,000 loan with a 7.5% annual percentage rate (APR) and a five-year term, your monthly payment will be $400.76.

Within the category of business installment loans, there are both long-term business loans and short-term business loans. Both are offered by banks, credit unions, and online lenders.

Qualification requirements for installment loans will vary depending on the lender. Bank and Small Business Administration (SBA) loans tend to have higher requirements in terms of time in business and credit scores, while online lenders may rely more on your sales and revenues to determine your eligibility. If you own a startup but have bad credit, there may be loan options for your business as well.

Recommended: What to Know About Short-Term Business Loans

Features of Installment Loans

Also known as installment debt, installment loans give you access to the working capital you need, whether it’s to expand your business or to get through a slow period. The downside to these loans is that they involve an ongoing commitment to regular payments that you’ll have to make for the duration of your loan term. Here are some features of installment loans to consider.

You’ll Make Monthly Payments

When you sign your loan agreement, you’re agreeing to make a payment (which includes both principal and interest) each month. If you choose a fixed interest rate, the amount you pay will be the same each month. This can make it easier for you to budget that loan payment among your other monthly business costs. Most installment loans come with fixed rates.

If you opt for a variable interest rate, your interest rate can change depending on market conditions. The small business loan interest rates for variable loans typically start lower than the interest rate on a fixed business loan, but they can go up or down over time. This may make it a little more difficult to budget. However, the loan terms typically limit how much it can fluctuate from one period to the next.

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You’ll Get a Lump Sum

Many times, you know you need a certain amount of money to cover a business expense, such as renovating a building or purchasing costly equipment. An installment loan, unlike revolving credit, gives you access to the amount you are eligible to borrow in one lump sum. Having that working capital may allow you to take advantage of business opportunities you wouldn’t otherwise have been able to afford.

You May Get a Tax Deduction

If you’re concerned that taking out a loan would mean you have to pay more in taxes, don’t be. The money you receive as a loan doesn’t count as part of your revenue. And a potential plus is that the interest you pay on the loan may be tax deductible.

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What Is Revolving Credit?

Revolving credit provides working capital or credit to cover small business expenses. It can include lines of credit, tradelines from vendors, and/or business credit cards. With each one, you’re approved to use up to a set amount of credit, but you aren’t required to take it all out at once. You only pay interest on the amount you actually borrow. Once you repay the funds, they are available to borrow again.

For example, let’s say you get a line of credit of $20,000 for your small business. In the first month, you take out $10,000 but pay back $5,000 that same month. That means that you’ll make payments (including interest) on the $5,000 you still owe, and you’ll still be able to draw on the remaining $15,000.

Features of Revolving Credit

Like installment loans, revolving credit has both advantages and disadvantages. It’s important to be aware of both when you’re choosing a way to purchase what you need for your business.

You Can Access Funds When and If You Need Them

Sometimes you can’t anticipate how much cash you’ll need to cover business expenses down the road. If that’s the case for your business, it can be helpful to have access to a line of credit instead of receiving a lump sum that you immediately have to start paying back.

Funds Are Always Available (Up to Your Maximum)

With an installment loan, the account is closed once you’ve paid off your balance in full. But with revolving credit, you can take out additional funds once you’ve paid down your balance. There’s no need to reapply for more funds after you’re initially approved.

You May Have an Option to Earn Rewards

Credit cards, which are one type of revolving credit, often offer rewards and perks that may help offset what you pay in interest. If you earn points for your transactions, you may be able to redeem those points for cash back or travel rewards. And while high interest rates are a potential negative for credit cards, if you pay your balance in full each month, you won’t be hit by high interest charges.

Recommended: How Much Does It Cost to Start a Business?

Revolving Credit vs Installment Loans

While both types of business loans offer companies access to the funds they need, there are a few key differences to be aware of.

Installment Loan vs. Revolving Credit: Which is Right For You?

There are key points to consider as you determine which small business loan is best for your small business.

A good first step is to figure out how much money you need for the specific purpose you’re borrowing for. You may be able to get more with an installment loan than you can from revolving credit. Consider, too, whether you need all the money at once or if your expenses will be spread out over time.

Next, you’ll want to determine how long a loan term you want. Short-term business loans will likely require higher monthly payments, which can eat into your budget. Long-term loans give you more time to pay the funds back, which can free up your cash flow for other expenses.

However, with long-term loans, you generally pay more in interest over the life of the loan.

Also consider whether you need cash or credit. If you’re purchasing a fleet of vehicles for your business, you may want a loan or line of credit, but if you’re just looking for a resource to help you purchase supplies from a vendor, you might just need a tradeline or business credit card.

An installment loan might be good for your business if:

•   You need a lump sum up front.

•   Your small business has a relatively steady income so you can budget for regular payments.

•   Your small business is well-established and/or you have good credit, meaning you may be more likely to get good loan terms.

Revolving credit might be good for your business if:

•   You want to be prepared for future financial needs but don’t require a lump sum right away.

•   You may need access to relatively small amounts quickly to take advantage of business opportunities or pay for shortfalls.

•   Your business has a need for perks offered by business credit cards. If you have to travel frequently for your company, for instance, a card that offers miles could help defray those costs.

Recommended: What Is a Debt Covenant?

Installment Loan and Revolving Credit Options

Once you’ve researched the numbers and determined how much money you want to borrow, either through an installment loan or a revolving credit line, it’s time to start shopping solutions. Here are a few options you may want to consider.

•   Traditional bank loan: This is a small business loan given by a bank or credit union. Qualification requirements are often stricter than with online business loans.

•   SBA loan: Backed by the Small Business Administration, SBA loans typically come with better rates and higher loan amounts than traditional and online business loans.

•   Business line of credit: Similar to a credit card, a business line of credit gives you a maximum amount to draw on. Once you pay it back, you can continue to use the funds up to the maximum credit limit.

•   Equipment loan: An equipment loan is a small business loan used to purchase equipment. The equipment acts as collateral, which can sometimes land you a better interest rate.

•   Merchant cash advance: A merchant cash advance allows you to receive funding in exchange for future credit and debit card sales. Merchant cash advances technically are not loans, and can be one of the most expensive forms of borrowing.

•   Business credit card: Business credit cards may be ideal for those that want to take advantage of credit card perks and rewards. Interest rates are often higher than loans, so if you go this route, you’ll want to make sure you can afford to pay your credit card in full each month.

•   Invoice factoring: Invoice factoring allows you to sell unpaid invoices to a factoring company. You get a percentage upfront, and then once the factoring company collects the payment, you get the remainder minus any fees. With invoice factoring, funding is typically fast but can be expensive.

Each option and lender will have different criteria, so do your due diligence when researching which options you will qualify for at the best rate.

Recommended: What Are Financial Projections?

The Takeaway

Installment loans give a lump sum of cash up front that must be paid back (with interest) in monthly payments. Revolving credit, on the other hand, provides a source of funds a business owner can draw on and repay (with interest) as needed. Each has its own pros and cons.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/PixelCatchers

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Your restaurant is a neighborhood hotspot with constant lines out the door. Local foodie influencers are spreading the love on social media. And your staff is running the show like a well-oiled machine. Is it time to expand and start at your next location?

It could be. The only way to know is to do your homework. Restaurant expansion takes careful planning and consideration. If you’re just starting on your journey, this guide is for you. Read on to learn key signs that it may be time to expand, plus tips on how to grow your restaurant business.

1. Measuring the Profitability of Your Restaurant

Any restaurant expansion business plan begins with the numbers — those being profit margin. If you’re in it for the long haul, strength must precede growth.

The average profit margin for full-service restaurants tends to fall between 3 and 5%. Your restaurant’s profit margins should match or, ideally, exceed these numbers. If not, then you may want to reduce your restaurant’s operating expenses and increase revenue before you look into expanding.

To calculate your restaurant’s profit margins, first determine what you’re spending on cost of goods sold (COGS) and operating expenses (OPEX) each year. Next, you’ll need your yearly revenue.

Once you have determined all three, you are ready to calculate your restaurant’s profit margin.

The formula to determine profit margin is:
(Revenue- (COGS + OPEX)) / Revenue * 100 = Profit Margin

Or

Profit/ Revenue * 100= Profit Margin

Example: Safe Harbor, an imaginary seafood restaurant, makes about $400,000 a year. The owner spends around $380,000 on COGS and OPEX:

($400,000 – $380,000) / $400,000 * 100= 5% profit margin

At 5%, Safe Harbor’s profit margin is around the current national average for a full-service restaurant. If the restaurant is in a large enough area that can support another restaurant, the business owner may want to consider business expansion.

But numbers aren’t everything, you’ll also want to ask yourself some key questions:

•   Why do you want to open another location?

•   What has made your restaurant successful?

•   How much of your success is due to the actual location of the restaurant?

•   Who would run your new location?

•   Can the same success be transferred to another location?

Doing a formal SWOT (strengths, weaknesses, opportunities, and threats) analysis can also be helpful for any business considering expansion.

2. Funding Your Restaurant Expansion

If you consider your first location to be successful and another location is warranted, it’s time to move on to the next step — securing funding. Generally, it’s wise to consider the new location as a completely new venture, and not rely on your current location to fund the new one. That means you may want to explore business loans early in the process.

When applying for a business loan, make sure you understand any lender requirements (such as minimum amount of time in business or business credit score). Doing so will expedite the application process and improve your odds of getting approved.

There are a variety of business loans on the market that can help a restaurant expand. Here are some of the more popular options.

Recommended: How Much Does It Cost to Start a Business?

SBA Loans

Opening a restaurant can be a lot easier with a Small Business Administration (SBA) loan. These loans are backed by the government, which reduces risk to the lender and, as a result, come with some of the better rates and terms on the business lending market. The application process can be long and cumbersome, however. Restaurant owners looking for fast money may want to consider alternative loan options.

Term Loans

Term business loans are offered by banks, credit unions, and online lenders and can be short term (up to one year) or long term (up to 20 years). Long-term loans come with lower monthly payments, which could help a new business building its monthly cash flow. Short-term loans will have higher monthly payments but typically come with lower interest rates, which reduces the total cost of the loan.

Lines of Credit

A business line of credit can be a good option for occasional gaps in cash flow. Unlike loans, a line of credit allows you to borrow up to a certain limit and pay interest on only the portion of money you borrow — similar to the way a credit card works. You then repay the funds and can continue to draw on the line. Compared to a standard credit card, business lines of credit generally come with higher credit limits and lower interest rates.

Merchant Cash Advances

A merchant cash advance is a unique financing option in which a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.

Merchant cash advances can be useful if you need capital immediately to cover cash-flow shortages. And, merchant cash advance companies may work with businesses with bad credit, startups, as well as those with previous financial difficulties. However, interest rates can be as high as 350%, depending on the lender, size of the advance, and how long it takes to repay.

Equipment Loans

Equipment loans can help you buy expensive restaurant equipment, and the item you purchase with funds typically serves as the collateral for the loan, which means you don’t have to put any other restaurant assets on the line. Rates will depend on the value of the equipment and the strength of your business.

3. Looking at What Makes Your Restaurant Successful

If you already have a successful location, chances are you already intrinsically know how to grow a restaurant business. Still, it can be a good idea to look at each of the categories below and consider what you’ve done well, and repeat what you can.

Interior Design

Does your restaurant have a unique design that attracts your customers? What vibe or energy did you purposefully create? If the furniture was unique and sourced from an unusual location, contact the business owner to see if you can order additional staple pieces.

Customer Experience

When are your customers visiting your restaurant? Is dinner your busiest time? Are you primarily getting blue or white-collar workers? Take whatever reason customers are choosing your restaurant over others and expand upon it at your next location to further enhance their dining experience.

Food

If you are opening the same concept in a nearby area, you might want to start off with the same menu as the first location. Over time, you can assess menu item popularity and adjust as necessary. If the potential customers, demographics, and food taste may be different at the new locale, however, you may want to take that into consideration when creating the new menu and pricing.

Branding

Branding is complex and multi-faceted, but if your original restaurant has a unique brand and a clearly defined demographic, that may be one of the secret ingredients to your success. If your next restaurant is a clone in a new location (and not an attempt to capture a new demographic with a different brand), then it’s paramount that your next location meets customer expectations by maintaining the same brand.

4. Finding a Location

The answer to how to grow a restaurant business often comes down to its location, but finding that sweet spot to get the maximum amount of business at a reasonable cost can be difficult.

Restaurants can grow by word of mouth, and so one strategy is to open your next location relatively close to the first one, so you’re not starting at ground zero. Many of your customers will have already eaten at your first location, so word should spread quickly and organically.

However, opening in an entirely new city can also have its benefits, especially if you have a target audience that is untapped in that area. Just keep in mind that it will likely require more marketing, as well as more time traveling between both locations to solve and address problems as they arise.

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5. Writing a Business Plan

Even though you already have one successful restaurant, you will need to write a new business plan for your next restaurant. Some of the information will likely remain the same, such as human resource practices, accounting, and technology. However, there will likely be sections that will need to be tailored to the new location, including:

•   Analysis of nearby competition

•   Amount of foot traffic

•   Peak traveling hours

•   Types of customers you expect to get:

◦   Travelers

◦   Workers

◦   Families

◦   Tourists

◦   Locals

6. Applying for Licenses and Permits

Make sure you research zoning laws for your new location and apply early for any licenses or permits your new restaurant will need. If you’re moving to a new location, don’t assume the area will have the same laws and regulations. You’ll want to research state, county, and city regulations, as all of these can vary. Generally, visiting your state’s website can help you find out which permits and licenses you need.

7. Marketing Your New Restaurant

Even if you have a strong brand, don’t assume your new restaurant will do well from word of mouth alone. It’s important to create a marketing plan unique to each location that includes:

•   Social media strategy

•   Website updates

•   Email marketing

•   Soft opening event

•   Grand opening event

•   Media outreach

Recommended: Starting a Minority Woman-Owned Business

8. Hiring Staff and Managers

Since you can’t physically be in two restaurants at the same time, it’s important to hire managers you can trust to stay on top of day-to-day operations. You may want to hire a new manager for your existing location, to free you to manage the new location.

It’s also a good idea to hire new staff and managers a month or two before opening the new location. That way, you can train them at your existing restaurant with existing staff who already know the ropes. Hire only the best because you’ll need a culture of excellence to ensure your new location makes the best impression possible.

9. Purchasing Equipment, Supplies, and Food

If you plan for your new location to mirror your first, consider getting the same equipment so you can easily train your new staff before opening day. However, you may also want to take advantage of newer tools and technology that could increase efficiency in your new location.

Also review your financial statements related to supplies, and don’t forget to consider whether the new location is larger or smaller than the first.

Also, take this time to buy as much shelf-stable ingredients and liquor (if serving) as possible, so you’ll have less to do the closer you get to opening day.

Recommended: Lease or Purchase Equipment

10. Organizing an Outstanding Grand Opening

To prepare for the grand opening, it can be a good idea to have a soft opening with less than a full house. This gives your staff a practice run for the actual opening and gives you a chance to get some feedback before the restaurant officially opens. For the official big day, invite as many friends, customers, and local business owners (including friendly competition) as you can. Encourage them to leave a review online so that word gets out.

Pros and Cons of Expanding a Restaurant

Is Expanding the Right Choice for You?

Cash flow and profit margins from the first restaurant are the first things you need to pay attention to and analyze. If they are strong, that’s a good sign.

However, you may also want to consider speaking with a CPA before you move forward with any decisions.

Other strong indicators that expansion is the right choice include:

•   Your restaurant has repeat customers on a consistent basis

•   You routinely have a packed house during peak business hours

•   Customers ask if you’re considering expanding

•   There is a low restaurant per capita ratio for your area

•   Other non-franchise restaurants are able to support multiple locations

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The Takeaway

Restaurant expansion takes careful consideration. Figure out first if it’s the right time to expand and then learn how to grow your restaurant business.

FAQ

How can you promote your restaurant?

There are all kinds of ways to promote your restaurant business. They include creating a unique website, posting on social media, getting a Google business profile, and listing your site on common restaurant apps.

Is expanding your restaurant business always a good idea?

No. Expansion should only be considered if the original restaurant’s profit margin is consistently strong and the new location can support another restaurant.

Is expanding a restaurant the only way to increase revenue?

If your restaurant is consistently maxed out, then some form of expansion is likely necessary. However, revenue is not the same thing as profit. You may be able to increase your restaurant’s profits by decreasing overhead costs and optimizing your menu.

Photo credit: iStock/SouthWorks

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A budgeted income statement is a tool that allows businesses to estimate how well they will perform financially in the coming months and year. It looks like a regular income statement except that it estimates the expected revenue, net income, and expenses for an upcoming period instead of analyzing past performance.

A budgeted income statement can help you assess whether your future financial plans are realistic or you need to make some budget adjustments. It also allows you to anticipate (and plan for) any expected adverse changes in the market and determine whether or not you need financing.

Read on to learn more about budgeted income statements, including how to prepare one and how they can help you grow your small business.

What Are Budgeted Income Statements?

By definition, a budgeted income statement (or simply a budget income statement) is a tool to help businesses estimate future expenses, revenues, and profit for a given period. Companies that make use of budget income statements usually create them at the beginning of the fiscal year to help create a realistic budget for all four quarters. Some companies may separate this financial report into smaller monthly sections for a more detailed assessment of what the coming year may look like.

If you have plans to grow your business — say, by investing in new equipment, hiring more employees, or expanding your products or services — a budgeted income statement can help you determine if your plan is feasible. By preparing a budgeted income statement, you’ll be able to estimate your revenue and expenses, anticipate problems, and make decisions accordingly.

Before you can create a budgeted income statement, you’ll need to have created all the other operating budgets, such as the direct materials, direct labor, manufacturing overhead, and administrative expense budget.

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What Is Included in a Budgeted Income Statement?

A budgeted income statement is essentially created by subtracting the projected cost of goods sold (COGS) and other expenses from the projected net sales. It generally includes every section included in a normal income statement:

•   Sales

•   COGS

•   Gross profit (sales – COGS)

•   Operating expenses

•   Operating income (gross profit – operating income)

•   Interest expenses

•   Estimated income taxes

•   Net income

Budgeted Income Statement Example

Below is a budgeted income statement example for fictional company ABC. All numbers are based on forecasts (as well as data from previous years) and the statement represents the estimated profits and losses for the first month in the upcoming fiscal year.

Company ABC

Budgeted Income Statement

For Month Ending June 1

Based on this budgeted income statement, Company ABC estimates they will earn a net income of $9,480. This helps justify their spending and expenses because of the positive net income generated for the company.

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Why Budgeted Income Statements Are Important

Budget income statements are important because they assess if a company’s financial plans look to be feasible. This can lead to a variety of benefits, including:

Risk Management

All growth involves an element of risk. A budgeted income statement helps you limit that risk by determining whether your company has the financial resources it needs to accomplish upcoming projects and plans for growth. It can help you avoid making bad business decisions and/or spending more than you can afford.

This type of statement also forces you to consider any potential pitfalls or added expenses that may come your way and plan for them so they don’t put your company at risk.

Justifying Purchases

“You have to spend money to make money” is the old adage that the budget income statement often verifies. Business owners can use a budgeted income statement to show that if the company is willing to spend X, it could potentially earn Y. This can be useful if you are looking for an outside investment or a small business loan to fund a project that might be viewed as risky.

Inform and Attract New Investors

A well-thought-out budgeted income statement can show any potential investors what your company’s expenses and profits will likely be in the coming months and year. When it’s clear business owners not only have a vision for their company’s future, but also a detailed action plan that outlines every expense and projected revenue, it can give would-be investors more confidence in the company and its mission.

Setting Targets

The projections from a budgeted income statement provides spending and earning targets that people in the company can work together to achieve. If the budgeted income statement sets a lower-than-usual budget for administrative expenses, for example, employees can then look for ways to reduce spending in order to meet the target and, in turn, increase revenue.

Tracking Performance

A budgeted income statement is also valuable to have at the end of the year because it allows you to compare profit and loss projections with actual numbers. Whether the company exceeds expectations or falls short, it provides an opportunity to ask why. For either scenario, the answers can be illuminating and affect the company’s next steps.

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Preparing a Budgeted Income Statement

Preparing a budgeted income statement is similar to a regular income statement. The only difference is that the amounts are based on projections rather than past performance.

The steps to prepare a budget income statement are:

1.    Determine projected net sales. This is the total amount of revenue you expect to bring in from sales (minus any expected returns, discounts, or allowances). You estimate net sales by multiplying the expected number of units sold by price per unit.

2.    Estimate the COGS and subtract it from the projected net sales. The COGS includes the direct costs of producing the goods or services that your company sells, such as materials, labor, and overhead costs. You then multiply the expected number of units sold by the cost of production. When you subtract COGS from projected net sales, you get estimated gross margin.

3.    Estimate selling and administrative expenses and subtract them from the gross margin. Selling and administrative expenses can include advertising, rent, salaries, and other general and administrative expenses.

4.    Estimate interest payments and taxes and subtract them from the remaining number. By calculating interest payments and other deductions, you can get an estimated net income for the projected period.

Recommended: Do Businesses Get Tax Refunds?

Limitations of Budgeted Income Statements

While there are numerous benefits to preparing a budgeted income statement, this type of financial statement also has some limitations.

For one, a budgeted income statement is based on estimates and assumptions. While these assumptions are based on historical sales data and expected market conditions, actual sales and market conditions could turn out to be different than anticipated. In other words, these numbers are not set in stone.

Another downside to budgeted income statements is that they take a fair amount of time and effort, as well as business expertise, to prepare.

These statements are also somewhat inflexible. Because they are based on information from several other budgets, making any change to a budgeted income statement requires making a corresponding change in the supporting budgets.

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The Takeaway

A budgeted income statement can help businesses maximize profits and decrease expenses by forecasting how much they are likely to make and spend. It can be used as a tool for growth and strategic planning to ensure your company has the financial resources needed to have a successful year.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What is included in a budgeted income statement?

A budget income statement often includes estimates for sales, cost of goods sold (COGS), gross profit, operating income and expenses, interest expenses, income taxes, and net income.

Should all businesses use budgeted income statements?

Preparing a budgeted income statement can be a smart move for any business because it helps to justify expenses and verify that plans for future growth are financially feasible.

How do budgeted income statements help investors?

Budgeted income statements help investors by providing a company’s projected revenues and expenses for the coming months or year. It also allows investors to see how the company’s expected performance compares to previous years.

Photo credit: iStock/fizkes

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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