In our previous post we spoke about the Economics of A Food Business. It is a great base to understand the cost of a food business, this is about getting honest about it.
One thing I was guilty with at the start was lying to myself thinking I was making money on a day when the truth was I had lots hundreds. It took me a long time to understand what costs are really involved in running your business - this may seem obvious but I still see people looking confused when I ask them certain questions such as their wastage or how they cost out their own time.
When you start up a business it seems simple - you sell something and someone buys it. You hope you sell it for more then it cost you to produce and that is your profit. On the surface that is very true but if you want to grow a business you need to start looking at things like a big business would.
Principle number 5: Be truly honest about your costs if you want to grow
When you start a business one of your main benefits can be your size because you can do things much cheaper and faster than someone else (sometimes) because you have a lean operation. You could be operating out of your home so your rent and utilities are 0. You may not be paying yourself so your wage bill is 0. You could be using all your own equipment so you don't have to worry about replacing it one day. All these things are great because it means you can operate very cheaply and be agile.
But let's say you want to grow that business one day - how will your costs change? In business there comes a point when you're having some success and it's time to expand and grow. You might need that bigger office so your rent goes from 0 to ££££ overnight. That is the price of growing and scaling you can stay small and lean for longer, or grow and watch the costs increase.
If your ambitions are large then this is inevitable but I think you need to start looking at these costs much earlier then when it comes to signing a lease or moving out. Why? Because I speak to a lot of people and they can trick themselves in to thinking they're running a hugely profitable business, but they're still living at home with their parents, not paying rent or food. They operate their business from home and do not pay utilities. They do a lot of the work themselves and don't hire people. So if you scaled their operations slightly what would it look like? Paying rent/mortgage with monthly bills. Paying monthly rent for a business premises with electricity, gas and water. Then the wage bill of another full time employee. Suddenly their operation you could go from say £5,000 net profit a month to loosing money each month.
To be making money is the most amazing feeling ever and when you go from 2 years of just scraping by to see a monthly 5-figure net profit is the most amazing feeling in the world. However deeply understanding what is the net profit is essential to staying aware of how much more you have to do to scale the operation. It can deflating feeling to realise even after success how far you still have to go but it is so much better to be aware and know what to do then to be deluded and trick yourself you've done it all.
So what costs do you need to get really honest on?
Rent (moving out)
Utilities (Gas, Electric)
A lot of these can merge together - you can pay yourself enough (your time) to cover rent (moving out) and maybe you can still operate from your home. However the key is to just be honest.
Ask yourself if I was to grow and double my revenue, what would my costs look like: Be really honest and then you know what your operation will look like. It will ground you, make you understand what you need to do to get to the next stage of growth.
If you want to listen to more about Food Businesses head to our podcast - Recipe for Greatness