Will a second location pay for itself?
Divide the opening cost by what the new location adds to the business each month. That is its own result, plus or minus costs it changes elsewhere, such as cover at your first site, minus any fall in what that site's sales leave. In the example, a $30,000 opening that adds $1,200 a month pays back after 25 months.
Principle and explanation
Count only what the second location changes in the whole business. The opening cost is all it takes to open, such as fit-out and equipment, whenever and however you pay it. Its own result is what its sales leave after their own costs, minus its rent, wages and other fixed costs. Monthly addition = own result − costs it adds elsewhere + costs it saves − any fall in what the first site's sales leave. Payback in months = opening cost ÷ monthly addition, the book's own arithmetic.
The first site, slow early months and the trap
A fall at the first site can come from customers who switch, staff who move or less of your time there; with no fall, it counts as zero. Leaving out a real fall or cost makes the location look faster than it is. When the early months add less, keep a running total month by month until it reaches the opening cost. When the monthly addition is zero or below, it never pays back. Payback must come before the site might close, such as when its lease ends.
Worked example
Illustrative scenario. These are fictional inputs, not customer results.
Ana runs a bakery café alone and plans a second. Fit-out, ovens and first stock would cost $30,000. She expects the new café to sell $16,000 a month, with $6,000 of ingredients, packaging and card fees. Its rent, wages and the taxes on those wages would be $8,000. A helper covering her hours at the first café would cost $500, and regulars who switch would leave $300 less there.
| Each month | Amount |
|---|---|
| New café: $16,000 − $6,000 | $10,000 |
| Its rent, wages and taxes on wages | −$8,000 |
| New café's own result | $2,000 |
| Helper at the first café | −$500 |
| Fall at the first café | −$300 |
| Monthly addition | $1,200 |
Payback takes $30,000 ÷ $1,200 = 25 months. Judged on its own result, it would seem to take 15. If the first six months add only $600 each, the remaining $26,400 takes 22 more: 28 in all.
What this does not show
- It is a quick count that treats money a year or two away as worth the same as money today, and gives no lending, lease or legal advice.
- Amounts leave out sales tax you only collect and pass on to the state; taxes the site pays on its wages are its costs; income tax stays outside.
- The figures are estimates to check against real months once it opens; whether the business can spare the opening money now is a separate question.
First step
Total the opening cost from quotes. Estimate the new site's sales and their own costs from your first site's records, its rent from the listing, its wages from your pay rates, and any change elsewhere. Then divide.
Sources
- Penn State Extension: Partial Budgeting for Agricultural Businesses (opens in a new tab)Penn State Extension's guide for agricultural businesses counts only the changes in income and expenses a decision would cause: added returns, reduced costs, added costs and reduced returns. It does not account for the changing value of money over time. For effects more than a year or two ahead, it points to net present value, which discounts later amounts.
- Introduction to Business (SUNY OER on Lumen Learning): The Break-Even Point (opens in a new tab)Contribution margin is the portion of revenue not consumed by variable cost. It goes to covering fixed costs and then profit.