How to Save Your Coffee Shop Business

Save Your Coffee Shop Business

Examining The Costs of Operating Our Coffee Business

How to Save Your Coffee Shop Business

Operating a coffee shop can be challenging for even the most seasoned coffee shop owner. Surprise costs, equipment repairs, and additional labor hours can wreak havoc on your budget.

Certainly, debt and operational costs can take over any business if good systems aren’t created and managed well daily.

Uncontrolled costs are one of several reasons why coffee shops fail. This is often because coffee shop owners don’t see the hidden costs of their decisions. Over time, this could ruin a business and siphon any savings or profits.

In today’s post, we’ll discuss typical runaway costs that could potentially destroy your coffee business. You'll want to read further to learn how to avoid costly mistakes and what action steps to take if you’re in the middle of a dire situation.

Coffee Shop Management

Runaway Costs Can Ruin Your Business

Several expected operational costs eat-up profits and drive businesses into the ground. Depending on the size and scope of the problem, the coffee shop can be ruined relatively quickly. However, from what I have seen, the most common scenario is that businesses slowly bleed out their costs, eventually leading to slow but devasting financial ruin.

The most destructive costs are often hidden in plain sight – slowly eating away at the business’s financial health from the inside out.

Typical costs (and other things) that ruin coffee shops:

• Poor hiring decisions
• Over scheduling
• Expensive rental agreements
• Poor inventory management
• Waste
• Theft
• General inefficiencies
• Debt
• Neglecting the paperwork
• Lack of business planning

Poor Hiring Choices

Hiring the wrong person for your coffee business can lead to various issues that could be devasting. When we consider that the average independent coffee shop has a small staff – often with core full-time and half-time employees, the additional one or two poor hiring decisions can decimate a business.

An employee who is unreliable and dishonest can immediately create tension, influence other employees, and generate losses that a small business may never recover from.

Hiring excellent people is essential for your coffee shop's favorable long-term financial prospects. Therefore hiring “just anybody” isn’t going to cut it for your business. Instead, consider cultivating your employees and engaging those who enjoy coffee, will buy into your vision, and are reliable.

Consider reading our post, How to Hire the Best Baristas, for more information.

Scheduling

Having baristas on the clock can be expensive. Having too many baristas sitting around doing nothing can even be more devasting.

Since the independent coffee shop is often insular and close-knit, the owner might be tempted to give away hours because they like their employees and want them to work – even if they are not needed. These extra hours here and there can eat away at profits very fast.

Keep away from making scheduling decisions based on emotions or whether you feel about someone’s personal situation. The best thing to do to help your employees is to stay in a financially sound position. A thriving coffee shop will benefit you and your employees over time.

If you want to hire employees for extra hours, consider other options, such as paying them more per hour than simply giving empty hours that drain your bank account. In any case, base your scheduling decisions on the customer flow.

How to Start a Coffee shop Successfully

Rental Agreement

While your rent or lease agreement is an ongoing fixed cost, it can eat away at your monthly profit margins for years. This is especially true if you are doing business in a high-cost real estate market.

If you spend way more than you should on rent, you’ll always struggle to make the margins you need to run a profitable coffee business. Unfortunately, unlike other costs, your rental agreement may force you to pay a lot for years unless you renegotiate your lease.

Therefore, before you jump into any coffee shop lease agreement, especially a costly one, you will want to estimate your sales forecast and see if your coffee shop will have enough revenue to sustain your monthly rent and other costs.

In addition to the high costs associated with a rental agreement, other unfavorable terms could cost you sales, such as parking availability, outdoor lighting, fixing exterior aesthetics, and limiting your menu and exterior signage.

Your lease is among the most critical success factors for your coffee shop. So, you’ll want to hear our streaming audio interview focused on coffee shop leases. It is available in our Complete Coffee Shop Startups Kit.

In addition, read our post, Things You Should Know Before Signing Your Coffee Shop Lease.

Poor Inventory Management

Your inventory management is vital for your coffee shop’s profits.

For obvious reasons, ordering too many items or too few can wreak havoc on your sales and revenue. If you have too many items – many of them perishable, you’ll be spending money on inventory you’ll never sell.

When you throw away inventory, you are throwing away money.

On the other hand, if you order too few items, you’ll leave tons of money on the table. In addition to lost sales, you may discourage your customers from buying again if they are unimpressed with your selection.

Reaching that sweet spot in inventory management may take a bit of “trial and error,”, especially in the beginning. But with a real focus on getting your orders right, listening to customer and baristas’ feedback, and studying your sales reports, you’ll get better at finding the right balance.

Too Much Waste (Perishable items)

Waste is a common problem that can be difficult to detect in various retail settings, especially coffee shops.

Everything from frequent spills to spoiled milk or stale coffee can lead to significant losses over time.

A common waste is having to remake orders – either because the barista didn’t understand what the customer wanted or the customer was not happy with their order. To fix this problem, you should look into regular barista training to maintain the consistency of the drinks at your coffee shop.

While mistakes can occur and misunderstandings aren’t rare, you can still mitigate waste throughout your entire coffee shop operation. You can do this by paying particular attention to refunds, customer complaints, and how much waste you are generating.

Employee or Customer Theft

Although we may not like to talk about or even acknowledge it, employee theft can be a problem. And it often is for small retail businesses.

Giving away free drinks and food and stealing supplies or cash can quickly impact your bottom line.

In the case of theft, employees may try to hide their actions, and it may be difficult for you to find out if anything is wrong until the problem is too big. That brings us back to hiring decisions. You should start looking for baristas early, have barista interviews, and collect their references.

General Inefficiencies

Minor to significant inefficiencies can occur when running a business. These inefficiencies can create immeasurable costs. For example, whether your employees are 15 minutes late, take an extra 10 minutes for lunch, or take too long on each order. This could lead to money loss, frustrated customers, employee tension, and a poor work environment.

Debt

There might be many people financially invested in your business: these include banks, private investors, friends, and family. You may be expected to have agreements with them that lay out your interest rate and payment schedule. Include these costs in your pricing, and pay your lenders on time.

The debt may also occur with your vendors. Never miss the deadline to pay them. Accumulated debt, fees, and judgments may devastate your coffee business. Avoiding debt or managing it by coming up with a viable coffee shop funding mix will be very helpful.

Neglecting the paperwork

Your paperwork is vital to keep track of your financial situation. Having all your expenses and revenues in one place is essential to pay taxes, control your finances and make necessary changes if needed.

If you don’t know much about accounting, hire an accountant or a bookkeeper to help you. This may be worth it in the long run.

Lack of business planning

The initial research you do before you open a coffee shop will help you uncover the hidden costs that are not on the surface. The more you explore, research, and talk to other coffee shop owners, the more you understand what costs to expect.

A good exercise is to write your business plan. By writing down your business plan, you’ll go through each element of your business cost and other factors and not miss a thing.

Further Reading: Requirements to Start a Coffee Shop

How to Avoid High Costs

• POS systems
• Training
• Hiring Practices
• Better scheduling
• Constant review and assess

Your Coffee Shop POS System

Your coffee shop Point-of-Sale system can be one of your most powerful tools in helping you avoid higher costs.

If used properly, your coffee shop POS system can deliver enlightening data statements, including Profit & Loss Statements, inventory tracking, and hours your employees have worked throughout the week.

Other information may include your busiest times of the day, the week, and sales per item.

Armed with this information, you can begin to adjust your inventory decisions, scheduling, and marketing.

Your POS system is objective. It only focuses on the data –what comes in and what comes out.

Barista Training

Training your baristas can increase efficiencies across the board. Investing in barista training can also dramatically improve safety behind the coffee bar – helping you avoid employee or customer injury. Additionally, better awareness of equipment can improve handling, deliver better coffee beverages, and boost confidence.

An investment in barista training can help maintain your coffee equipment, reducing repair or replacement costs.

More importantly, investing in barista training can improve morale and reduce turnover. This is because the training often empowers your employees and gives them the tools and confidence to work on their beverage-making skills and customer service.

Reducing turnover from good staff can also reduce the hidden cost of hiring, firing, and quitting employees.

Hiring Practices

Better hiring practices would alleviate many of the challenges independent coffee shops face.

Yet, finding reliable, honest, and great employees with positive dispositions can be more challenging than you think.

It might be tempting to hire just the first person to answer your hiring announcement or hire your best friend’s kid. But here’s the deal: you must make every hiring decision based on what is right for your business.

Hiring the wrong person can lead to many problems in your small business. Everything from a disruption in company culture, scheduling, staff congeniality, level of customer service, and possible theft and sabotage.

Therefore, take your time when hiring. Seek out references and talk to those references. Preferably these references can be unbiased and detail how your prospective hires have worked in previous professional settings.

For more information, read our post, How to Hire the Best Baristas for Your Coffee Shop.

Better Scheduling

Labor can be expensive. Over time, your labor costs can lead to significant financial losses. Even a few extra shifts a week can make you lose thousands of dollars every year.

Additionally, too many baristas on a shift create even more deficiencies because employees tend to all slow down together.

If you plan to be the person who schedules your baristas, you will want to understand the busiest and slowest times of the day and week. While peak times can vary, this will give you a better understanding of how many baristas you need to have on the clock during each shift.

Constant Review and Assessment

It’s essential to review your systems for efficiency.  It can be easy to stick to the same old system, causing many problems because you’re too busy to change them.

Actions Steps to

Lower Your Coffee Shop Operational Costs

If you are losing money every day, you will want to take action as soon as possible.

But where should you begin?

While every business is different, there are a few essential things you will want to look at. Below are five action steps to help you control your cost.

7 Steps to Reduce Your Coffee Shop Costs

Step 1: Reassess everything.

That means everything you do to run your business should be looked at critically. This may require a fundamental shift in your thinking. Sometimes, you may need to bring outside help because (1) either you won’t or can’t see where you are experiencing problems, and (2) you won’t be able to admit that how you have been managing has not been working.

Step 2: Take a look at your POS system.

Your coffee shop POS system needs to provide essential data points. These include real-time sales data that report your best and least selling items, when you are your busiest, and when you are at your slowest. Additionally, your POS system can be your employee “clock in” time device.

Step 3: Look at your trash.

What are you throwing out every day? Are you throwing too much perishable food or other items? Perhaps, you are wasting too many cups, lids, or napkins.

Step 4:  Take a look at your monthly bills and organize them.

Go through your bills and put them into three categories: 1. What you need, 2. What you can live without, 3. And finally, what can you cut back on? Try to make those changes as soon as possible.

Step 5: Rearrange your employee shifts to focus only during the day's busiest times.

You may need to let one or more employees go – especially if they are underperforming or unsuitable for your overall mission.

Step 6: Invest in Barista Training.

Train your baristas to create great coffee beverages and be efficient behind the bar. Training increases efficiency, reduces waste, and generally improves morale.

Step 7: Create new systems that force accountability.

When employees are accountable to each other, management, and a shared vision, they perform better, make better decisions, and strive to achieve the stated goals. Systems may include everything from revived opening and closing duties, clearly marking which employees are responsible for what tasks, and proper communication.

Uncontrolled Costs that Ruin Coffee Shop Businesses

Conclusion:

Steering your business in healthy financial waters is a constant challenge. Coffee shops and other small retail businesses must generate efficient systems to survive against other corporate businesses with the funds to take more considerable losses or have substantial marketing budgets that drive sales.

Many small coffee shops can’t sustain losses for any lengthy period of time. When this happens, immediate action is necessary to stem the financial hemorrhaging.

By taking decisive actions – both small and large steps, you’ll likely see progress and increased profit margins.

Good management and efficiently running businesses always start from the top. The change begins with you as the coffee shop owner or general manager. This notion is empowering and favorable to those who decide to make the necessary changes toward profitability.

How to Manage Your Coffee Business Costs

 Additional Questions:

How much does it cost to start a coffee shop?

The expenses to start a coffee vary due to several important factors. Key among them is the type of coffee business you want to start. For example, a full-fledged brick-and-mortar coffee shop may cost less than a mobile coffee truck or an espresso drive-thru business.

Additionally, your region or location may typically have lower or higher costs. For example, you can assume a nearly identical coffee shop in California and Wisconsin will likely have different real estate costs, labor costs, and insurance expenses. This will ultimately impact your startup and operational costs.

Other important factors impact the costs of starting your coffee shop, such as your menu and equipment needs.

We detail these costs in our post, How Much Does a Coffee Shop Cost?

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Based in Seattle, Washington, USA, Coffee Shop Startups is dedicated to providing you with the most relevant information on how to start a coffee shop business successfully. Over the last 11 years, we've helped thousands of aspiring coffee business owners worldwide. We harness the experience, wisdom, and knowledge of many successful coffee shop owners to help you increase your chances of success and profits. We support business owners who want to start a coffee business by providing them with valuable information on starting their coffee business successfully.