You’d think that opening a café overlooking the famous Bondi Beach would guarantee success. Add to that the name of a highly rating tv show and when Bondi Rescue HQ opened late 2014 at the height of summer it looked set to sizzle! There is a huge wall photo of the stars of the highly rating tv show Bondi Rescue and the café serves a popular, leading brand of coffee and offers a “healthy beach” theme on their simple menu.
I went last Saturday for coffee to be greeted with “Closed for winter” Really?! This is Sydney. Bondi Beach. We don’t really have winter.
According to the locals they have “not been doing so well” and have decided it is “cheaper to just pay the rent for the next 4 months and open again in summer”. I don’t know how much of this is true, what I do know that the staff were friendly and they served great coffee.
In any case it gives us an opportunity to look at some of the Business Basics.
1. Know your costs. Calculate the cost of being in business.
The fixed costs – will remain the same whether you sell one widget* or thousands. In the café this will be rent, insurance, utilities, loan payments, all the costs that remain the same week by week
The variable costs – these change depending on how many widgets* you are producing. In the café this will be coffee, milk, food, wages, all the costs that are different each week
Interestingly for some cafes the food and coffee costs can be fixed. Many of the bakeries, coffee roasters and other food suppliers only provide their goods based on a fixed order i.e. in oder to serve their coffee the cafe contracts to purchase XX kgs of coffee beans each week.
2. Know your margin or mark up. How much profit or margin are you making on every widget* you sell. If each coffee costs $3.70 how much profit is there in every cup? To calculate this you measure the amount of coffee and milk that goes into every coffee and attach a cost to this.
(Years ago I had a really interesting job in a 5 Star Hotel calculating food costs for every single item on every single menu in the hotel. We knew to the cent exactly how much profit was made on every item sold)
Let’s go back to the coffee example. Costs vary of course. For example I have seen café costs that look like this:
Coffee beans = $0.55 – high quality fair trade beans
Milk = $0.40 – organic, ethically farmed
Paper cup and lid = $0.50
Total cost of latte = $1.45
Margin = $3.70 – $1.45 = $2.25 or about 60% without allowing for any spillage, wastage, mistakes etc
This is why people get excited about running a café: 60% margin per cup and even better if they buy cheaper coffee beans, non organic milk and less expensive paper cups. I’ve heard people quote 75 – 85% margin on cafes and coffee!
3. How much do you need to sell to cover your fixed costs? Knowing this is fundamental to getting your product mix right.
Let’s go back to the café. If the rent is $1 500 per week and right on Bondi Beach it might be that much. How many café lattes do they need to sell just to pay the rent? $1 500 divided by $2.25 = 666.67.
Let’s create an extreme example but say this café only sells café lattes.
To pay the rent, they need to sell 667 per week = 95.2 per day. If they open at 7am and close at 4pm = 9 hours so about 10.5 coffees per hour. At this point people get excited and think it will be great to open a café.
This is 10.5 coffees per hour, every hour ….. just to pay the rent. Then there is the insurance, utilities, loan repayments for fitout etc Add to that wages and staff costs.
For the past 10 years I have been working with StartUps and Business owners and when we sit down and do the maths, add up the costs, look at The Numbers! What we find is that many businesses set themselves up to run at a loss – right from the very beginning! Because they do not understand how to calculate costs and profit and/or loss. (Cash flow is a whole other separate issue!)
How long do you think a business can operate running at a loss?
If it is costing more to continue to be in business than it would cost to stop running your business when do you make that decision? Without knowing The Numbers many businesses carry on operating at a loss. Just last week I was listening to a presenter talking to a group of would be Entrepreneurs and encouraging them to “have your bookkeeping done by a bookkeeper about every quarter”
How can you know what is going on in your business if you are only having the accounts prepared every quarter? You could lose a lot of money in 3 months.
Use a bookkeeper, absolutely agree. Track The Numbers regularly; weekly, daily!
Know your costs, fixed and variable, know your margins, understand how much you need to sell to cover your costs. You are in business to be profitable. Know your Numbers!
Want to get started with your own business? Ask us How?!