I have been working on my business plan for 6 weeks now, off and on, but have come to a small snag, and would like to know the best way to handle it. Thanks in advance to anyone who helps. I have a great outline that my state sent me to kind of follow and one of the things they ask is for me to break down the costs of my different flavored items I will sell.
I plan on doing cake pops, cake truffles (pops without sticks) mini and regular size cupcakes, and after awhile, cookies and brownies. I was not going to list the last two yet, but I added that I hope to expand to other from scratch bakery items in the future.
My ? is this: am I supposed to take every single ingredient used in a recipe and cost it according to per dozen? I may not be stating this right, I need to know how to properly do this so there is no misunderstanding. What is the best way to let them know what each flavor will cost? Any help is appreciated.
You need the magic word in accounting: COGS
This is cost of goods sold.
First, how will you sell them? It would help to know if this will be retail or a home business because the depth of the business plan is directly related to the investment.
For example, a retail store will sell individually and a home based business will sell by the dozen.
Your costs for a business plan can be an average, as this is how you will be selling.
First, you said scratch. This is actually easy. I have a master list of eggs, butter, flour, sugar, etc. I also have the total price for each item. I'm not going to look it up, but make a column of the breakdown beside the price. Eggs divided by 12, butter divided by 4, flour and sugar divided by the total number of cups.
For every recipe in my menu of about 200 items, I have a tiny calculation in the upper right corner of the recipe. This is very easy once you get started. I'm going to make this up:
1 c milk .40
2 c flour, 2 x .45, .90
4 tbsp butter, $1.00 divided by 2, .50
1 c sugar, .50
1tsp vanilla, .35
2 eggs, 2 x .14, .28
cost for recipe: $3.13
Compare all cupcakes and you will probably find two or three price points to sell, plain, $2.50, filled, $3.00, gourmet $3.50. You can also average your cogs in the three categories.
Remember, this will be a close estimate. Your receipts and sales will be the true numbers.
Once you arrive at these numbers, you can find your market price based on competition, and decide if your business is viable by whether you can work within the difference. This is oversimplified, but exacts again will depend on the size of the investment.
You can do this for all categories. You will see a pattern start for final pricing.
Ingredients fluctuate, but I have see them go up and down. If we have a significant ingredient increase, lets say sugar, you only need to add the difference to the recipes, not start over.
If you sell by the dozen, most dozens will cost 1/2 the recipe cost. If individual, divide that by 12, but if it's retail, you won't be making one dozen at a time. You actually have to determine how much of the items you need to sell to make your numbers and be sure to know the man hours it takes to produce and if your equipment and space can do that volume.
Not fun right? But a true business plan will be a lifesaver on whether your plan will work and how much work you have to do to get there. When it all comes together, you have a business. Don't get discouraged. It took me about 6 months to do my retail plan, about a month to do my commercial kitchen plan, and I'm an old pro at it. So take your time.
If you are stumped again, pm me. I can tell you how to get real demographics, something most people make up and don't research. Plus you will need competition breakdowns including their estimated COGS and profit margins. When you come onto the market, your competition could adjust their prices. You will want to know by how far they can move.
Yahoo, that is what I have done to three recipes already, do I need to do this to all of my recipes? I will also be a commercial based kitchen, and will only sell cupcakes by the dozen. I have a cost of goods sheet, but can't quite figure it out. If I need your help again, I will definitely pm you, thank you SO MUCH for this info. I just printed it up.
Yes, you should definitely know the cost for any item you sell, and any variants on that item within reason (e.g. labor costs required for a simple, intermediate, and complex decoration).
Thank you thank you for that great example...But, I have another question if you can help.....how do you figure overhead....rent, utilities and employee paychecks into all of this to be sure the end result is going to pay you enough for your own time...
But, I have another question if you can help.....how do you figure overhead....rent, utilities and employee paychecks into all of this to be sure the end result is going to pay you enough for your own time...
To allocate overhead you'll need an idea of your order volume. For example, let's say you have 4 orders per week (200 per year) and fixed overhead of $5000/year. Each order will include an overhead cost component of $25, regardless of the size of the order.
Re paying yourself, your fixed overhead should include compensation for the time you spend handling administrative tasks not associated with any specific product. You will also pay yourself if you work directly on a product via the labor cost component. (Be careful not to double-count here.) In addition, the difference between your cost and the selling price (your profit margin) will flow into your business account.
Thank you so much....I have had this explained before...But, you really make it understandable....
Jason and I get the calculation differently, but we both get the same correct number.
I get the cost as above and yes, I have it for all of my recipes, but soon you will have the numbers memorized and you can do the calculation in seconds. I found, even in my extensive menu, that recipes start to fall in patterns, like cream pies, cheesecakes... they are similar. This starts to make planning easier and after awhile, you will find that you can group similar items with the same price, like my four different cupcake prices vs every one based on individual cost.
First and most important, I want to pay myself. I base the next cost, me, on what I need to make, per hour, to even do this business. You can pick any number, but that does not mean that the end result will be a viable business. I'll go over pricing farther down.
You must get the realistic numbers as Jason said, not just a guess. This again will be more in depth depending on the capital investment.
Get the rundown on all of your competitors and be brutally honest with yourself about where your items fit in price. This will be your true price. Deviate from this and you will get too much work with too little profit or you will get no work. Finding a way to set yourself apart will be good here.
Take your product costs, the total output you plan, your overhead as Jason shared, and add them up. This is COGS without your pay. Now add up output at your true retail prices. You need to know how many hours it will take to make that output. Now what is the difference? Is that difference where you wanted it to be or much less? Is it enough to make you persue this venture or is it just not worth it?
This is not easy and is why many people just skip it. Maybe that helps to account for the high failure rate of new businesses.
Let's say you found the number for your income to be too small. Now you can start to adjust. You have two ways to go... lower your costs or up your skills, or a combo of both. Work to get that number where you need it and do not go into business until you make sure you can pay yourself what you need.
There are other factors you can add to up your price. These are your competitive advantages. I'll share a few of mine to give you an idea. I have very nice packaging. An order from me is a ready-made gift-wrapped present. I deliver daily. I can usually fit in a last minute order because I bake late at night anyway. I offer more choices than competitors. I offer gourmet, from scratch, made-to-order quality. Now my competitive disadvantages... you cannot place yourself in the market properly unless you also know what you don't do best. I can't offer a variety box of cupcakes. I'm expensive, I don't have a storefront. I do not offer super sweet desserts. I am not a great cake decorator.
Now the big one, not related to this thread, but one of the most vital to viability... with the above information, determine your niche market. Who will buy your products? If you are low cost, you are mainstream, a place with the most competitors. If you are gourmet, you will need to target upper income, a significantly smaller group, but usually with less competitors. Other niches are vegan, GF, allergy-related like Jason, organic, or anything that sets you apart. That may be a mobile truck, kiosk on a boardwalk or mall, specializing in kid parties... this can be anything you think of. Now you have to find avenues to reach your market. Without this step, it will be difficult to meet your numbers.
I just check WB's book out of the library so now I will have to try his yellow cake!