By The Numbers
22 January 2010 Â www.specialty-coffee.com By the Numbers W hile some new co ee business owners open their doors to lines of eager customers who propel them to immediate pro tability, the vast majority will have to work hard, and perhaps even struggle to make money. Sadly, many will never make a pro t, and will end up selling or closing their business a year or two down the road. is is not due to any lack of viability of the specialty co ee business, but rather the result of poor decisions made when setting up of the business, or perhaps the inability to build and control costs once it opens. Prior to opening, those who made poor decisions related to location, lease, or the nancial reserves, may already have sealed their fate. ese mistakes are o en fatal and at the very least will inhibit one's ability to realize any signi cant pro t. Good pre-opening nancial planning is the all-important crystal ball to determine what the future might hold in store. ose who didn't plan well, better hope they're lucky. Reaching pro tability within six to 18 months is realistic if you concentrate your e orts in the three following areas: Build Sales Of all the variables contributing to pro tability, building sales is the most critical. Regardless of how well spending is controlled, without su cient sales, pro tability cannot be achieved. (Is sales your problem? Here's a quick check. Shops with monthly sales 10 times greater than rent typically reach break-even.) Control cost of goods Controlling cost of goods is critical because it consumes 30 to 40 percent of your gross. It's the one expense category that can most easily get out of control. To know if you have a cost of goods problem, you must rst determine what a perfect cost would be for a speci c period of time (typically a calendar month), and then compare that to your actual cost for that same period. To determine your perfect cost, start by compiling the exact cost of every item you serve. At the end of the month multiply the number items sold by its corresponding perfect cost, and then total for all items sold. at total is the amount of product used - if it were a perfect world. Divide this projected cost by your actual monthly sales to discover your cost of goods expense as a percentage of sales. Now, to determine your actual cost of goods for the same month, you will need to know the value of your inventory when the month began, the amount of product purchased during the month and the value of your inventory at the end of the month. When all this information is known run it through the C.O.G. formula (example below): Beginning inventory $9,000 + (plus)Purchases $10,000 -(minus) Ending Inventory $11,092 = (equals) Cost of Goods Sold ($) $7,908 Ã (divided by) Sales $30,416 = (equals) C.O.G. as % of sales 26.0% In this scenario, the actual cost of goods equaled 26 percent of sales. If our perfect cost estimate was 25 percent, then this 1 percent deviance represents a loss of $304 for the month, or about $10.13 per day. is is an acceptable amount for the daily loss of product. If the actual cost of goods is 1 percent higher or more than your projected perfect cost, then there are one or more problems to address. Control labor A benchmark for monthly labor expenses is 25 to 35 percent of total monthly sales. e most important factor in controlling labor is to know how many dollars you have scheduled for each day, and how many were actually spent. When you realize that you are over budget, you can then take action to recover lost dollars during future shi s. Setting goals & making a plan To move your business forward, you need to know where you're at, and where you want to go. Start by producing a business income statement (pro t & loss or P&L) each month. A er producing a P&L for three consecutive months, average sales and expense line items to project probable performance for next month. Try to improve next month's nancial performance by setting new goals in each expense category. Do this every month until you can reduce costs no further. If your future projections predict a serious de cit, then increasing sales is your only option. Start with your most current monthly income statement and duplicate it several times, increasing total sales by $5,000 with each copy. Add 3 How's Business? BY ED ARVIDSON