The financial realities of running a cafe



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September 29, 2016 0 comments

I haven’t watched a lot of Dragon’s Den in recent years but ended up watching three in a row a few nights ago – partly for fun and partly to see how much has changed since the beginning.

The answer is… not much.

Three new presenters and a variety of good, bad and indifferent businesses but one thing remains a constant.

Very, very few of the contestants (I’m not sure if that’s what they’re called but surely that is what they are?) have any sort of decent financial literacy.

Peter Jones and Deborah Meaden (the two old timers) appeared to have far less patience than usual with this – and rightly so.  In several cases there were decent business concepts, which they were genuinely interested in investing in, but the owners simply couldn’t differentiate between turnover, gross profit and net profit.

They were too concerned with giving a flashy presentation or creating a theatrical entrance, all of which takes a lot of time to plan and implement, to spend real time with their accountants or bookkeepers and really dig into the figures.

It’s almost as if they’ve never watched an episode of Dragon’s Den before.  Since the very first episode I’ve seen good ideas leave without investment simply because the owners didn’t feel that a crystal clear understanding of the figures was important.

It goes without saying that I see exactly the same issues with our consultancy work.  In each book we’ve written we’ve broken down the importance of understanding the figures and sometimes I’ve even felt we’ve overly emphasized this.  In an industry so driven by the passion for producing a great product (but often less obsessed by applying equally great service) you can almost seem like a lone voice wittering on about money and financials.

But I will never stop.  Week in and week out I see owners going through the intense pain of business failure because they haven’t taken the time to understand the importance of the financials to begin with or, at least as common, felt that the rules didn’t apply to them.

The problem can be even more serious than this – in many cases accountants and various business advisors and experts simply don’t know the correct figures for our industry either.  My own accountant (now ex-accountant…) argued that the gross margins we were achieving should be the same as the fishmonger beside us.  Which is, I’m afraid, nonsense.

I was approached at Caffe Culture two years ago by a, clearly well funded and affluent, young man who wanted our help to grow his “chain of ten coffee shops”.  A “business expert” had advised him that our “keep your rent to no more than 10% of your turnover” rule didn’t apply to a new business.  This buffoon was suggesting, for a first site, you should be comfortable to go to 25% of turnover.  A wonderful idea… but only if you wish to go bust within a year to 18 months.

I noticed a couple of years ago, in an online forum, two coffee shop owners discussing one of our books and a recent webinar that I’d produced where I again discussed the breakdown of figures and the importance of keeping wage costs below 35% of turnover.  One of these owners decided that I was wrong with that figure because he wasn’t capable of sticking to it and that clearly my businesses hadn’t involved such great staff as he had.

I tutted (in a sort of exasperated old man way) and chose not to enter the debate.  Arguing on the Internet is never my idea of fun.  But I did check in to see how this person had been doing via his Facebook page during the research for our most recent book.  He proudly proclaimed that, after two years of business, he was delighted to still be trading but had yet to be in a position to pay himself… now, call me Mr superior, but that doesn’t sound like success, in any way at all, to me!

I do not say this to preach, simply to emphasise the critical importance of knowing your figures and not allowing self-proclaimed advisors or your own ego to get in the way.  In the recent joint research we did with Caffe Culture well over half of the more than 500 owners surveyed wished they’d know more about the finances before they started.  And of the 22 that feature in the new book all but one mentions the importance of knowing your figures or having someone else in the business who obsesses over them – and remember, these are 22 of the most successful coffee shops and cafés in the world!

So… enough pre-amble, what are the key fundamentals?

Your food and beverage cost, or cost of sales, should be between 25% and 35% of your overall turnover.  i.e. if your turnover (after VAT is deducted) is £100,000 then your cost of sales should be no more than £35,000.  What you have left after this is paid is your Gross Profit.

Your wage cost should also be between 25% and 35%.
Your Prime Cost is wages and cost of sales added together.  This should not be more than 60%.  This allows you flexibility to, for example, have a higher wage cost because you have more extensive kitchen prep going on.  Or you can have a lower wage cost and a higher cost of sales if you are doing very little food prep.
Your rent and rates together shouldn’t be more than about 15% of your sales.  This is likely to be split 10% to rent and 5% to rates.
If you hit these targets you’ll have about 25% of your sales to go towards everything else.

With those five fundamentals in your mind and being measured regularly (and honestly) you’ll not go wrong.  If you’ve yet to open though you can see how tough it actually is to make decent money and therefore how vital it is to keep on top of these figures.



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