The success you have in the coffee business will most likely be impacted by the decisions you make early on in the planning process. Certainly, as you develop the right coffee business for you, you will have made hundreds of small, but important decisions that will impact your success. Let’s quickly take a look at some important topics essential for new and aspiring coffee shop business owners.
Planning and Researching Your Coffee Shop Business Costs, Budget, and Break Even Point
We get many emails and questions that can be boiled down by: “How much will it cost to open up a coffee business?”
It’s a straight forward question. But a smart business owner knows that true answer really depends on every decision you make early in the planning process. Consider the situation where someone wants to buy a car. However, before he can determine how much to spend, he would need to figure out what kind of vehicle he needs. Does he need a truck or a sedan? Does he car about the brand? What are the mileage rates? What he will ultimately pay for a car, really depends on which kind of automobile he needs. Likewise, a coffee shop business can be viewed in a similar light when you are either shopping for one to buy or you want to create a new coffee business from scratch.
When we get the question: how much does it take to start a coffee shop business, the first response we offer is, what kind of coffee business do you want to open? Will you open a brick-and-mortar café? Do you want to offer breakfast or ice-cream? Would you like a coffee stand? What will you be serving? Where will you be located? These might be decisions you have thought about – but thinking through every decision from a financial (cost) perspective is important to your planning.
Let's take one possible coffee shop business scenario:
A Coffee Shop with a Kitchen: For example, if you want to offer breakfasts meals like eggs, bacon, etc. you will need a stove, a grill, grease traps, water heater, adequate storage space, a mop closet, and an exhaust ventilation system. And that's just the beginning. You will need commercial refrigerators, washrooms, etc. You may be required to add several more sinks (for as many as 6 or 7 sinks). Of course, you will also need a commercial refrigerator which is able to hold a certain temperature despite being opened-and-closed often. All of these can add to your opening costs. Finally, making sure your café or space is designed to accommodate all of the equipment you’ll need is important – this design will require a carpenter, plumber, and electrician services.
Controlling your coffee and other inventory costs will be important to your profitability. Your coffee and inventory costs are determined by how much it costs for you to buy them over a period of time, say one month. Also included is any food that is wasted because it doesn’t sell with a day or two.
Often if you order more muffins and bagels than you sell, you will have to either throw them out, donate them, or eat them yourself (and eating your own inventory isn’t the way to make a profit). So, you will have to pay close attention to your inventory, your orders, and what your customers want.
To be sure your coffee and inventory cost should be 30 and 35% of your net sales. This means that taxes, tips, and waste has been deducted. Feel free to play with a variety of scenarios and offerings.
For example, let's decide that you want to only serve coffee and muffins in a small corner place. You will need to determine your sales estimates to see if this type of business (and menu offering) works for you. Let's see how we can do this next.
Projecting Your Numbers for your Coffee Shop Business
The larger the menu the more complicated your estimates will have to be. But for the sake of simplicity here, let’s say that your average purchase at your coffee business is $4.50 (without any tips). This number will need to be multiplied by the number of purchases, say 150 per day. (Of course, your coffee shop might have 100 order slips or transactions per day or 1000.) But roll with us here:
$4.50 x 150 purchases per day is $675 in gross sales
Let’s say that’s the average for 6 days a week.
6 Days @ $675 = $4050 per week or $16,200 per month.
Now if your inventory costs (including waste) is about 30-35%, you’ll have enough margin to cover things, such as your rent, principal and interest payments, insurance, and labor costs. If you determine that you will need more money to take home as a profit and/or to more quickly obtain your break-even point, you will need to either:
Increase your average purchase numbers and….or boost your average bill cost.
For example, let’s say you increased the average purchase to $4.80 and increased the number or daily purchases to 160 per day, what would you make in additional revenue for your coffee business? By the way, great employees (friendly, helpful, and well-trained baristas can boost your average transaction numbers and the number of transactions!) So, let's try it again with a very, very slight boost in your numbers:
Again, let’s do the math:
$4.80 x 160 = $768 (That's an increase of $93 per day)
6 Days @ $768 = $4608 (That's an increase of $558 a week!)
$4608 x 4 weeks = $18,432 (That's over $2200 per month!)
By simply adding an average cost of $.30 cents to each transaction …. and adding 10 more customers a day you will boost your revenue to $2232! (Now of course, your variable costs in labor and inventory may increase slightly but the added revenue will be deliver a powerful added income boost with relatively modest extra effort! In fact, when you include that your labor time is finitely the same period and your current baristas can handle an extra 10 customers per day, you may not have to hire anyone. Additionally, when you include some of the waste your avoiding (throwing old baked items away), you variable costs will be lower than you think. This of course, increases your profit margins for your coffee shop business.
Nevertheless, $18,432 equals just over $221,000 per year! That's not bad for selling a typical purchase at $4.80. But remember, your final sales are determined by volume.
The more planning and playing with numbers is not only fun, but essential to your early planning. Determining these estimates can be based on a number of factors including the research you have already done with existing coffee businesses in the area, other local restaurants (or substitutes), and other demographic data you will need to study.
Getting The Help You Need:
Start Your Coffee Shop Business Successfully With
A Coffee Business Plan Template
Would you like to get your business planning off the ground? We offer an effective coffee business starter package kit to help you get started. The information you will receive will be vital for starting your coffee business. For more information, review our coffee business plan starter kit.