Food business are probably one of the most common businesses to start. This is because there are little barriers to entry, anyone can set up a food business and the costs to do so can be very low. This creates an environment of;
Competition is fierce
Economics are tight
Majority of food business fail because they focus so much on the quality, design even what colour borders to have on their menu they forget the most important thing - the numbers. It is so simple but it is overlooked so quickly, it is business 101.
So I am going to go through this as if I was talking to myself 3 years ago because I needed it!
You have 3 costs:
Sunk cost - Money invested at the start on equipment, training etc when starting up.
Fixed cost - No matter how much you sell, every week, month or year this cost will come.
Variable cost - Varies depending on your output I.e. The more you sell, the higher your costs.
It is incredibly important you control these costs. I have lost counts the amount of food businesses I speak to and I ask them what % their cost of ingredients are or what % a month is their wastage and they look at my with a blank face as if I just spoke in another language. In my opinion if you don't know your numbers and then things start to go wrong you only have yourself to blame. I learnt my lesson the hard way when in one month my wage bills spiralled to 55% of revenue - loosing thousands of pounds because of stupidity was a wake up call for me which lead me to this principle.
Principle 4: Know your numbers like your life depends on it.
Knowing your numbers will significantly increase your chances of success and put you leaps and bounds above the competition.
So I will outline a really simple financial model a food business could follow;
Cost of ingredients (including wastage): 20-25%
Other costs: 20% - 25%
= Net profit: 10%-25%
This is a very simplified model and will change on a case by case basis. However for someone with no experience in a food business this will be a great starting point to think about your numbers.
Lets break down each step:
Revenue = Price x Number of items sold.
Price: How do you decide what to sell for? There are two ways to choose your price.
You can either do this one of two ways:
Look at the market and price similar/competitively to your competition.
Know the product you want to make, price the ingredients up and base that on 20%/25% of the selling price as discussed above you have your price.
It might be useful to do a combination of both because if you're coming up 50% more expensive then your competition then you need to be offering a lot more than just a slightly better product.
Cost of ingredients = How much it costs to make the product.
This is one of the most important things to watch because you have complete control over it. I fell in to the trap of wanting premium ingredients for everything, "I'm all about the finest quality" but when you know your price point is £5 for a pie and your ingredients are coming up at £2.50 you have started off with a loosing formula. It doesn't matter if your product is amazing and you sell out every day, at that price you won't have a successful business. I had to rethink and managed to find a compromise and get back to that 20% range.
Staff = People making and serving the food.
This cost is harder to control because demand is not constant. Some days are busier then others and some days your staff will have the most boring day twiddling their thumbs, wondering if they even needed to be there and the next day rushed off their feet, sweating wondering why you're a slave driver and not hiring more staff. There is a balance to be made and it takes time to learn what the right level is. You have to really watch this because labour is very expensive and if you get it wrong you can end up loosing ££££ very quickly so keep a close eye on it.
Rent = Cost to be at a location
This varies from maybe a market stall pitch fee, rent of a commercial kitchen or a commercial lease on a property. These costs can become astronomically high. When I started I looked to rent a kitchen in central london, I was looking at a minimum of £1500 a month for a small tiny kitchen and £3000 for something good. I found this the hardest challenge at the start, signing up to £1500 a month before I was making money would have been the start of the end for the business. It would of meant before I even started I would need to be turning over at least £8000+ a month which was never going to happen. I actually built my own kitchen, which short term also nearly killed the business to, but long term has saved me thousands. A classic example of not watching this cost was Jamies Italians, they signed expensive leases way above 10% of predicted revenue, thinking they would just keep getting busier and busier and they didn't and actually got less busy. Less customers didn't help Jamie's Italian but what killed it was paying too much rent.
Other Costs = Insurance, Bills, Vehicles, Tax, Stationary, Cleaning Product, Accountant.....you get the idea.
This stuff is all essential and you need it all and under no circumstances skimp on insurance, a time like this in 2020 has never brought home the importance of insurance and here is a great read as to the benefit of it. Again know these numbers, there are lots of little costs and some big ones, together they add up. Also get a good accountant, that doesn't mean expensive, always look for value.
Net Profit: After it all - the money you made....or lost.
If you do not control all the costs - even if you loose sight of one area you can go from profit to loss. Food businesses work on small margins so you need to fight for every bit. A 1% change in each area of your ingredients, wages and other costs can have a huge impact on how much money you make or loose.
There is no right or wrong formula for how to cost out each area of your business, the guideline above is just a rough idea. However it all comes down to the P&L, you don't want to see anything below a 10% profit. If you are at 10%-20% you are doing well. Above 20% and you're in the big leagues.
This is a brief break down of a food business model - specifically restaurant/street food level. When you go to retail, margins get even tighter and net profit even lower - sometimes <5% but that is when you enter the VOLUME game - that story is for another article.
In the next article we will cover how to be honest about your costs, If you're not, you will delude yourself in to thinking you're running a successful business. It was something I struggled with initially - if you want to grow a business you first need to act like one and that means costing out everything properly.
If you want to listen to more about Food Businesses head to our podcast - Recipe for Greatness