AHi everyone, me and my friend want to start selling cupcakes, I am a stay at home mom and are experienced in baking and decorating, she has a full time job. Our first order we divided the cost of the ingredients 50/50 and divided the profit 50/50 since we both worked on the baking and decorating equally and together since she dosnt have that much experience, but we have a large order coming up and since she works she will only help me like 30 to 40% of the time, it sounds logical to ask her to spend only 30 % of the ingredient cost and give her the 30% back of the profits but here is the dilemma, I am going to spend 70% of ingredient cost and work 100% of the time only to get 70% of profit, can someone help me to figure out how this works? It sounds to me I might be the one loosing money

Take another 10%.

Or you could buy all of the ingredients and pay her hourly at a set amount.

You really should have a good business plan in place before going into business. This just sounds like it is going to lead to resentment and hurt feelings down the line.

A

Agreed, you really should have a formal business structure in place with clear roles and responsibilities defined. For example, you would both contribute X amount into your business account for startup costs, ingredients, etc. If you both have a 50% stake in the business then all profits (sales after ingredients, labor, and allocated overhead are paid for) would be split down the middle, but the profits would remain in the business account to fund future operations unless you both agree to disburse some of those profits to your personal accounts.

To determine the labor split, you should both record how many hours each of you spends on both production and administration. At certain intervals (biweekly, monthly, etc.) you would each make a transfer from the business account to your personal accounts based on how long you each worked and the hourly wage you agreed on.

The other alternative is to assume full ownership of the business and pay your friend based on the number of hours she works. Since she would be your employee at this point you would need to make sure payroll is set up, all payroll taxes are accounted for, and workers comp is in place if necessary. If you will be handling most of the administration and supplying the startup capital this is probably your best choice.

It's not really logical, and thats mainly because you are not buying a set of supplies specifically for each order.  Things like cupcake liners, baking powder, salt, etc are something you will buy infrequently but use for a number of orders.  How would you price that out to divide it based on how much time each of you is spending one each project?

The best thing to do and has already been suggested, is to pay yourselves hourly.  If you're going to be business partners, then you need to figure out what percentage of the business each of you will own.  Based on the percentage, each of you should then pay for all supplies, ingredients accordingly (for example, 30% her and 70% you) and then divide the profits accordingly as well.  Profit is not the same thing as an hourly wage though.  You should be paying yourselves hourly based on how much time each of you spends on a project.  Profit is something over and above your time spent.  Profit is what your business would make even if you hired other people to do all the work and should be factored into each order.  

For a much better explanation of this, you should visit Jason's blog.  He goes into a lot of detail as to what a business should do and why: http://jasonkraftblog.wordpress.com/  

lol I see Jason replied as I was typing  :p

AThank you so much, your replies really helped me understand this better

Lots of smart people on here....I love this place. Welcome to CC