For all of you biz owners here is my question/scenario.....

I am in the process of getting legal and want to know how to make sure all expenses are calculated into my prices. I have figured out my cost for my cakes and cookies. And kind of gave myself an hourly rate, BUT HOW do I figure in my overhead of rent, electric, water, etc into each cake? Do I take the monthly total of that and divide it per serving? I don't want to charge ridiculous prices nor be too low to cover my expenses.

Again, I am not talking about ingredients. I have that covered, as well as parchments, boxes, bags, ribbon, etc. But unless I use exactly 4 paper towels a day or 10 garbage bags a month...how do you figure it all in?

And then, how much of a profit do you add on to it to get your price? Ex. after all costs are figured, a serving is $2.50....now how much more do I add on to it to make an additional profit? Or is it all just about breaking even?

Any help and guidance would be appreciated. TIA

anyone have any experience or advice on this?

What is the going rate for cakes in your area for the type of business you plan to open? Find some matching locations and then compare prices...If they're all above the $2.50 range, then you could justify going higher.

Paul

There is no easy answer to this one. It's much easier to figure when you have some sales and expense history. At the end of 12 months, you can look at the total spent on "operating supplies" (paper towels, toilet paper, cleaners, etc) and "office supplies" (staples, paperclips, printer paper, etc) .... take those numbers, divide by 12 and get a monthly average.

But let's do some hypotheticals.

Assume you are going to have $4000 monthly overhead. That's EVERYTHING. Rent, annual insurance, office supplies, vehicle expense, everything.

That's $1000 a week. For easy math's sake, assume a 5 day work week. That's $200 a day. You have to PROFIT $200 a DAY ..... above the COGS (Cost of Goods Sold i.e. raw materials i.e. sugar, flour, eggs), above labor expense, just to break even.

Assume you do 20 cakes a day. Every day. Every single day. (That's 100 cakes a week.) $10 of the price of each of those cakes goes toward overhead. (20 cakes x $10 per cake = $200)

If your sales drop and you only do 10 cakes a day, then $20 of every cake price goes toward overhead. (10 cakes x $20 per cake = $200).

Now, to break it down per serving ..... how many servings are you doing in those 20 daily cakes, those 100 weekly cakes, on average? To keep it easy, let's just assume every single one of your cakes are 50 servings. Times 20 cakes a day = 1000 servings. You need $200 a day so $0.20 per serving is needed to cover overhead (1000 servings x .20/serving = $200)

Assuming my math is right ..... if you don't plan on doing 100 50-serving cakes a week ... if you only do 10 50-serving cakes a week, 2 cakes per day, then your overhead cost per serving goes to $2.00/serving. 2 cakes x 50 servings = 100 servings. You need $200/day to cover overhead; 100 servings x $2/serving = $200.

So your overhead costs per serving is totally dependent on the volume you're doing. And it's difficult to determine when you don't really have a track record yet. (And for the record .... we all hate this part. )

Holy Moly! I think I had to reread that about four times to wrap my head around it indydebi! Thank you for sharing that with me. Let's see if I have this right (with a little change in #'s so I don't feel SO overwhelmed and it is more in my $ ballpark.

$2000/month(above COGS) divided by $2.50/serv=800 serv/month JUST to cover expenses.

Average cake @80 servings, thus needing at least 10 cakes/month or 2.5 cakes/week.

Correct? Now this is just to cover expenses....not profit to put in bank to save or use towards extras, right? That doesn't seem too bad. Is that a good thing or a bad thing that I am not scared by it?

looks like you got it! (And don't feel bad .... I had to read it 5 times myself before I hit enter to make sure *I* understood it! )

LMAO! Okay, I feel better now. But is it okay to not be scared by those numbers? I read about so many people being scared by starting out and I'm not. Then again I do consider myself to be crazy

Also, I assume I would just mess around with numbers if I include cookie orders or other things.

And I guess it WOULD be easier to know what my expenses (is that what is considered to be overhead?) are after being in biz for a couple of months in each season since electric bills can change. Is it safe to assume that I should figure on my expenses being double what I pay in rent?

It's good to have confidence. Without confidence, none of us would ever accomplish anything. I like to keep a little fear on the side ... it keeps us motivated and helps prevent us from getting lackadaisical!

Saberger, good luck to you. Where in NJ are you? I live in NY.

In the scenerio Saberger came back with, the 2.5 cakes only covers ABOVE the COGS, so you need to sell to cover COGS and your pay, plus proift. So the next step would be to figure out the COGS in cakes plus the hours it will take to make the cakes, then add that all up. Is that what I am understanding? I am having more of an issue just getting all of it! The classes seem to make no sense. I am not selling a widgett!

the example I gave is how to figure the portion of the price that will cover the overhead. PLUS the cost of supplies (eggs, flour, sugar) PLUS the cost of labor .... THEN you tack on something for profit. So jlynnw, your thinking is right.

And I'm with both of you ..... when I was in those classes, they never made sense. In my limited knowledge of business, it just didn't seem to relate to the real world.

What indydebi describes is what I learned in different business, but perhaps this way it translates better:

Your price is based on
1. direct costs - all what directly goes in your cake - supplies, work, whatever where you can say: "to make THIS cake I had to..."
2. "one serving constant" - all the other costs you have, including insurance, licensing, etc.


When you plan your business, you can only approximate the costs for point 2. You do your best to be realistic. Then, again trying to be realistic, plan how many cakes/servings you will probably make. Divide it and get so your "one serving constant". You need to cover both to break even - up to this point you still make no profit.
At this point, look at the price you get. Can you make and sell the expected amount of servings for this price? If not, either abandon the idea or look for other ways how to make it work.

Ideally, this price is lower than what you can sell your cakes for. Now, take the price as high as you can still get, and multiply the difference by your servings number from previous point. This is your theoretical profit. Can you live with it? Is it higher or lower than you expect?

Either way, when you start your business, it is quite possible to make review of your calculation in 3 or 6 month. You will see how many servings you really had (no need to panic yet, you are still starting) and how much overhead you had. Take the time and repeat the calculation with real numbers. Take hard look at the numbers and think about it. Was your real overhead higher than you planned? Are you way low because you cannot make the servings you wanted? - Here you need to think about potential "wedding season" or other seasonal highs in the year. Have you the most busy part still before you?
It is a good idea to think about it and take the time for it. Even if you decide not to react, you NEED to know how you are doing.

And good luck to you.

Thank you for all of this fabulous and useful information. It really helps. Now, indydeb, in one of your posts somewhere (don't remember which forum, sorry), you mentioned to start with a higher price rather than a lower since it is hard to raise the price afterwards. I also had another person tell me that I should charge higher (@ $5/serv. for BC rather than my $2.50) because even though a customer may complain about the price, they think they are getting something amazing since the price is so high....but if it is low, then they think the cake is cheap and not going to taste good. I sort of understand that logic, but I don't necessarily agree. Thoughts? Obviously I have to compare with other bakeries in my area, but the only person within 15 miles of me who does similar work starts at $5/serv.

I recall another CC'er who said she raised her prices and started getting more orders! It was the thought process that you mentioned... the customers perceived a higher, greater value of her work.

A common piece of advice that is frequently given to those just starting is NOT to adapt the philosophy of "oh I have charge a little price just to get my foot in the door". This will come back to bite you when you raise your pricing up past the "just getting started" point and your customers balk at the price increase. MUCH easier to have a 'realistic' price in the beginning than to try to justify a price increase later.

It's a fine line .... high enough to give a perception of great value but not so high that you price yourself out of the market.

If your closest competition is only a few miles away and is in the $5 range, then it sounds like the market will support that price range.

I'm not in business, but I would say if your only close competitor is charging $5 for buttercream, you definitely need to charge more than $2.50. $4 at the very least!

Well, one town over starts at $3.50 for BC (which is a bakery), another town over (as previously mentioned) starts at $5...so......I have some thinking to do, I guess. *sigh*

Indy, I just did a copy paste to my documents just incase I ever need that for a business plan. Thanks. I don't see me doing that because I don't think I could turn out that number to keep the door open so I will continue to make my cakes as I WANT TO and keep my full time paying job so I can still play.

thanks for this information. It's alot to chew on.