Calculating Your Break-Even Point for Your Coffee Shop Business
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Want to start a coffee shop? Before you jump into your very own coffee business, we recommend that you take a few moments to figure out some pretty important financial elements that will have lasting implications on the success of your business.
How much money does it take to open a coffee shop?
The answer always is: it depends on what kind of coffee shop business you want. It also depends on where your coffee shop business is located.
The costs could vary significantly even within your own city limits.
If you are considering starting a coffee shop, among the first steps you should take is brainstorming your business concept. From there you will develop your menu and estimate your location and equipment costs.
From here, you can begin to build out your Pro Forma financials – or estimates. Each coffee shop will require different startups costs. But there is also an important question to be answered before you launch your business:
How much will it take to run and operate your coffee shop business?
Here the answer also depends but you can get a good estimate by doing some calculations.
Your “pro forma” financials are simply your estimated calculations that you expect to make. Now, all of these individually require some thought and planning. Take each one separately and work out from there.
Generally you want to start with:
- Your Business Concept
- Menu Development
- Your Location
- Your Equipment
- Your Financials
Keep in mind, that you shouldn't start at the bottom of this list. It's hard to determine your financials, if you don't know anything about your concept, your location, and your equipment.
Your financial documents will show that you have really thought every aspect of your coffee business through – this includes your break-even point. They require a bit more thought and analysis than simply guessing your expenses and revenue.
Fixed and variable costs could add up quickly against an overestimated level of sales and revenue, which can spell disaster for new coffee business owners. While there is no fool-proof way to guarantee accuracy, a coffee business expert can conservatively estimate projections.
Additionally, before buying a coffee business, you will want to be able to ask questions that provide you information so that you can make better business decisions. The answers you get will ultimately help you arrive at your break-even point.
Facing Your Coffee Shop Specific Startup Costs
Realistically, you may have heard this before: To make money, you're going to need to spend money. But as you know, the real question boils down to, “exactly how much money?”
Your coffee business expenses would include one-time startups costs, regular fixed-costs, and variable costs for up to six months – or until you post your first profit.
Determining just how much money you need will not be important to just you alone, but will also be critical to those that invest in your business in a variety of capacities: your property manager (landlord), banks or investors, creditors, vendors, etc.
The cost of your coffee business depend on many factors that we've written about before. However, if you want to start a coffee business with no money (or very little money), consider our further reading, How to Start a Coffee Business with No Money.
Key Elements of a Financial Plan for Your Coffee Business
To create the financial plans needed for your coffee business, you will need several key pieces of information, many of which are solely anticipated (or estimates):
- Your Sales Forecast
- Your Cost of Sales
- Your Budgetary Expenses (which includes payroll and administrative costs)
Once you have these financial documents determined with your specific coffee business in mind, you can create:
- An Income Statement
- Break-Even Analysis
- Cash Flow Statements
If you are buying an existing coffee business, you will want to ask for the business financials as well as other important coffee business questions that will help you determine the value, sales forecast, etc.
Determine Your Sales Projections
Your sales projects are an important element to your profit and loss statements (P&L's) and projected net income. These projections are critical to determine your estimated break-even point for your business.
There are a number of easy ways to determine your anticipated sales. One way is to simply multiply the “average sale” to the number of customers for a given period of time.
For example, let's say that your average sale or customer check for your coffee business is $4.35 and you average 12 transactions per hour for 10 hours.
This is what the equation would look like:
$4.35 x 12 x 10 = $510
This is your (sample) average projected sales PER DAY for your coffee business.
Sounds pretty good, right? Except, you can't just hit the town with $510 dollars in your pocket! After all you will need to determine your expenses to make that money. These include fixed and variable costs, as well as figuring the repaying one-time big costs that were needed to start your business.
We have an extended discussion on how to increase your profits in our Coffee Shop Pricing Guide, which is included as bonus material in our Coffee Shop Startups Kit.
Your projected net sales will be added to the daily expenses – which you will need to establish by determining your ongoing fixed costs, variable costs, and other costs.
Again, these may include:
- First and One-Time Startup Costs
- Ongoing Fixed Costs (Rent)
- Ongoing Variable Costs (Coffee, Supplies, Labor)
So, stay with us on this example: let's say that your daily fixed costs are $90 per day, your variable costs are $180 per day.
$90+$180 = $270
$510-$270 = $240
The total sum of $240 may be considered your profit for the day. Will this be enough?
It might be.
If you are concerned than you can consider a few options. For example, to raise your income, you may do a couple of things: either increase your transactions or increase the sale price per ticket (or receipt). You can do this by either getting more customers, up-selling or raising your prices. Finally, you can take a look at your expenses and figure out where you might be able to tighten up your costs (cost restructuring).
Determine Your Projected Net Income
Along with your sales projections, your projected net income will help you determine your break-even point. You will need to effectively and efficiently know how to determine what your projected net income is for the following future months.
But, how do you determine the future? There are specific formulas and considerations you will need to be able to understand. (Our business plan kit provides information that will be very helpful in determining these figures for more of an elaborate example in the pricing guide).
Also, remember to…
Determine Your Cost of Sales
Just how much does it cost for you to serve one cup of coffee? Knowing your cost of sales is an important part of your weekly budgetary considerations. Not only will it provide effective snapshots of your financial picture but it will help you make short and long-term business decisions.
Consider for example: Where will you have to cut costs? Where can you afford better quality materials? How can I increase profits over the next six months? Are you spending too much on labor? Do you need to alter your employee schedule? These questions can be answered by knowing and accurately arriving at your cost of sales.
Determine Your Break-Even Analysis
Your break-even analysis should be determined, not just for your awareness but also for your lenders and property manager. Keeping your break-even analysis realistic, you will know exactly where to set your sites – and where to tweak your pricing, your costs, etc.
This analysis is important because your projected sales must be equal to or higher than your break-even point. If it's not even or exceeding your break-even point, you will quickly need to adjust your costs and pricing strategy.
There are a variety of ways to determine your break-even point. First, by breaking your expenses under different categories such as fixed, unfixed, and uncontrollable expenses. You can make your analysis based on your day-to-day expenses or monthly expenses.
Whichever, you choose, simply be consistent so that you can make your decisions accordingly. Remember, while other people may want to see your financials, your break-even point is really just a tool to help you make the necessary adjustments to your business.
Making Your Estimates To Start Your Business
Facing your budget head on will empower you as you develop your coffee business. When you go into business, you will most likely want to see just how profitable you can be before jumping in with both feet.
This yet another reason why creating a coffee shop business plan before you spend any real money on your coffee shop business is strongly recommended. But you already know that, right? After all, that’s why you are here!
One of the easiest ways to calculate expenses is to figure out what your average daily and/or weekly revenue would be. If you are buying a coffee shop at the same location, it should be pretty straight forward to estimating your sales.
When you are buying a coffee shop business from someone else you should:
- Ask to see the existing coffee shop's sales reports for the last year (up to three years). From there, you can determine their average daily, weekly or monthly sales.
- Count customers yourself. Counting customers is essential and should be done as part of your “due diligence”. You owe it to yourself the small investment in figuring out just how much sales will be generated on a daily and weekly basis.
By the way: In the process of your analysis, you should consider a variety of factors including:
- What is the existing business serving (which coffee roaster and what snacks, etc.)
- What are their business hours?
- How many baristas and staff members do they have?
- Who are their customers?
- What are they doing right? What are they doing wrong?
- What are the seasonal factors?
The numbers you get are supposed to help you calculate your break-even point. But they also tell a much deeper story. For you to better prepare for your success, it’s important to get the back story of any existing business.
The focus towards profitability then turns to your overhead costs, your operating budget, and your pricing strategy.
The last point is important. Seasonal factors can weigh heavily on a variety of businesses including a coffee shops. For example, if you plan to open your coffee shop near a ski resort, you may need to add another degree of analysis when it comes to determining your annual income. The winter months may be great, but what about the rest of the year?
Therefore your estimates will need to cover your annual ebb and flows during a particular period in time. Let's do another example of a coffee business below.
Let’s say that your average daily sales are derived from the following sample:
- Monday: $900
- Tuesday: $1100
- Wednesday: $1200
- Thursday: $1300
- Friday: $1000
- Saturday: $700
- Sunday: Closed
Total: $5300 for the week (Or $21,200 per month, or $254,400 per year.)
Okay, once you’ve figured this out, you should come up with your average monthly and yearly estimated revenue. (For simplicity, we’ve simply added them up and multiplied by 4 (weeks) and 12 (months), respectively.)
Next, you will need to determine your fixed costs – or your overhead. This will included rent, insurance, interest, etc.
Next, you will determine your variable costs, otherwise known as the “Cost of Goods Sold” – for a typical coffee shop business, this would include coffee beans, milk, sugar, cups, lids, water, etc.
Finally, you may need to factor in your one-time startup costs – such as equipment, security deposits, etc.
After all of this, we will then add up your total costs up and subtract that with your estimated sales. At what point during the year would you reach your break-even point?
Your Pro Forma Balance Sheet Creation
A pro forma balance sheet is a projected analysis of your financial balance sheet before you start your business. It is an estimated balance sheet to give you a ballpark look at your future financials.
Your Pro Forma Balance sheets are essential to look at. If you can't effectively measure your budget, than you are probably not being an effective manager either.
Knowing and understanding your balance sheet (every month) is essential to being a good manager and business owner. Additionally, your pro forma estimates (or records) are also important to determine the value of the coffee business in general.
We have a bonus sample pro forma balance sheet with information specifically relating to a coffee business. There are many software programs that you can use (and which may be compatible with your Point of Sale system).
Know Your Income Statement
Your income statement is a good snapshot of how your business is progressing. In other words, your Pro Forma Income Statement details what you are projecting to earn versus what you are planning on spending. It determines whether or not you will make a profit this coming month.
Knowing and understanding your income statement can help you understand whether you need to cut back on payroll hours, take a loan, or whether you can take a vacation.
Being able to calculate these financial statements and understand them is critically important for you as a business owner. Such basic managerial skills as calculating your monthly break-even point will be important to master for every successful business owner.
Your income statement will most likely include the following items: Your total revenue, your cost of goods sold, your gross profits, your expenses, and your net profit and loss.
As you start your coffee business:
Determine what your financials are – and make strategic plans to improve them. Our Coffee Shop Business Plan Guide not only offers easy-to-use business plan template for coffee businesses, but it also offers guidelines on how to create all of your financial documents. This guide will save you days of research and hours of work – and steer you in the right direction in terms of what you need to know to start you coffee business.
We’ve created an effective resource for aspiring coffee business owners to learn about the retail coffee business. If you are dreaming about starting your own espresso stand or coffee shop, our unique audio interview series (complete with resources for starting your business plan), will save you time, increase your knowledge base, and help you develop your business concept.
Turn your “Someday” into “Today”! You can take an effective First Step in starting your Dream Coffee Business by learning from experts and getting the advice every new coffee business owner should hear before buying or opening a coffee business.
For more information: Our coffee start up business resources may help you better understand, formulate, and develop your necessary financial sheets.