Identifying Your Solutions to Becoming Profitable
Over the last year we have explored the variables and issues related to achieving business profitability. We’ve talked about controlling cost of goods and expenses, and increasing sales by attracting new customers, and extracting additional revenue from existing customers. With those tools, you should be able to move your business towards the profitability you desire, but first you must determine where to direct your efforts.
Your efforts can be directed with lazar precision, if you have accurate numbers to look at. You must produce an accurate cost of goods calculation, and an income statement, every month! If you have no numbers to look at, then in reality you’ll only be guessing as to where your business problems lie. You can waste a lot of valuable time “fixing” things that aren’t broken, and you may overlook other areas that are costing you greatly! In essence, you’re “flying blind” without numbers to look at.
On the other hand, if you are confident that your cost of goods is within an acceptable range, and you have earnestly cut all your expenses as far as you can (without sacrificing service or store cleanliness), then increasing sales is where you’ll need to concentrate your efforts. So, how do you determine how much you will need to increase your sales by, to reach your profitability goal?
Start off by taking the last monthly income statement you produced for your business. You are going to need to duplicate this on paper multiple times, making changes to sales and expenses on each version. For each new version, increase monthly sales by $5,000, and add $1,000 to expenses. You don’t need to break down sales into beverage, food, etc., nor do you need to itemize expenses, projected totals for those categories are fine. Cost of goods should always remain consistent as a percentage of sales. So for example, if your cost of goods on monthly sales of $30K equals 33.3% ($10K), then if sales reach $45K your cost of goods should still equal 33.3%, in this case, $14,985.
As you produce each sequential income statement, you will notice that as sales increase, bottom line losses decrease, and eventually yield profits. What is the difference in sales between your first income statement and the one that moves you to your desired profitability? Maybe at $30K monthly sales you lost $5,800, but at $50K you are projecting break even performance, or even slight profitability. Your goal now becomes immediately apparent! Increase your sales $20K per month, and you’ll stop losing money!
Now, as a consultant, if I told you, “just increase your monthly sales by $20,000 and everything will be great,” you’d probably think, “that’s easier said than done!” Almost doubling your sales might be viewed as a monumental, if not an impossible, task!
The key to making this happen is to break down the goal into “baby-steps.” Certainly, increasing sales by $20K in one month is impossible for the vast majority of coffee businesses out there. However, what if you took 8-months to accomplish this task? $20,000 ÷ 8 = $2,500; increase your monthly sales by $2,500 each and every month over the next 8-months, and your monthly sales will have increased by $20K. If you break it down even further, and you average 30 business days per month, then you would need to increase your daily sales by $83+. If you are open 12 hours per day, then ultimately you need figure out a strategy to increase hourly sales by $6.92 over the previous month’s hourly sales. This is a goal that you can plan for and succeed at! Your cashier alone can probably help you achieve this goal by upselling and suggestive selling, example: “would you like a big mocha? need some cookies to take back to the folks in the office? Be sure to think of us for lunch, we have some great panini!”
If you’ve read all the articles in this “profitability” series, you now have the tools necessary to move forward. Next month, we’ll wind up this series by gaining an understanding of how to coordinate and administer all the actions necessary, to drive your business to your profitability goal.
Ed Arvidson is a 25-year veteran consultant to the Specialty Coffee industry, and President of E&C Consulting. Elements of this article are from his new book, “How to Get Profitable in the Coffee Business.” www.coffeebizhelp.com