Cafe Profit: This is what successful coffee shop owners do differently
Summary
TLDRThis video script explores the profitability of running a coffee shop, debunking myths and revealing industry benchmarks. It emphasizes the importance of understanding financials, controlling costs, and growing sales for success. The speaker shares five key insights from successful cafe owners and their own experience, focusing on efficiency, product mix optimization, and increasing capacity to enhance profitability in a competitive market.
Takeaways
- 💰 The average coffee shop makes around 5% net profit, which can be deceiving as some businesses earn significantly more.
- 📊 Understanding your numbers is crucial for success; knowing your profit and loss report is the first step.
- 📈 Successful coffee shops focus on controlling three key percentages: cost of goods, rent, and wages.
- 💼 Accounting systems like Xero or MYOB can provide valuable reports, but they require correct setup and bank feed connection.
- 🌍 Industry benchmarks can guide your targets, but they should be adapted to your specific situation and location.
- 📉 To avoid cutting into profits, focus on growing sales rather than just reducing costs.
- 🛍️ Consistently good food, coffee, service, and atmosphere are fundamental to attracting and retaining customers.
- 🔍 Getting honest feedback from outside sources can help objectively measure and improve your business.
- 💡 Increasing prices is often necessary, and it's better to do it proactively rather than reactively to rising costs.
- 🚀 Improving efficiency can control costs and grow sales without increasing staff numbers or service times.
- 🔄 Simplifying the menu, improving workflow, and automating processes can significantly boost efficiency.
- 📊 Analyzing your product mix can reveal which items are most profitable, allowing you to adjust your offerings accordingly.
- 🏦 Increasing business capacity through various strategies like extended hours or improved service can boost profitability.
- 🔄 Continuously reviewing and improving upon the fundamentals of your coffee shop is key to long-term success.
Q & A
What is the average net profit for a typical coffee shop according to industry benchmarks?
-The average net profit for a typical coffee shop is around five percent.
What is the implication of a net profit of $35,000 for a coffee shop owner who works a 70-hour week?
-The implication is that the net profit may not be particularly compelling or satisfactory considering the long working hours.
What is the key question to ask when considering the profitability of a coffee shop business?
-The key question is not whether a coffee shop is a good business, but rather what successful coffee shops are doing differently.
Why is it important for a coffee shop owner to understand their financial benchmarks?
-Understanding financial benchmarks is crucial because it helps in identifying opportunities for improvement and in making informed business decisions.
What is a profit and loss report, and why is it important for a coffee shop owner to be familiar with it?
-A profit and loss report, also known as a P&L or income statement, is important because it details sales, expenses, and net profit, providing a clear picture of the business's financial health.
What are the three key percentages that a coffee shop owner should regularly measure to identify opportunities for improvement?
-The three key percentages are the cost of goods, rent, and wages, as these are typically the biggest expenses in a coffee shop.
How can a coffee shop owner ensure they are getting accurate numbers from their accounting system?
-To get accurate numbers, a coffee shop owner needs to set up their income and expenses correctly and connect their accounting system to their bank feed.
What is the recommended approach to growing a coffee shop business, as opposed to cutting costs?
-The recommended approach is to focus on growing sales over time, as this helps reduce the percentage of fixed costs and provides momentum to start controlling variable costs.
Why is it important for a coffee shop to focus on efficiency in addition to sales growth?
-Focusing on efficiency is important because it helps control costs and grow sales simultaneously, without the need for additional staff or resources.
What are some practical ways a coffee shop can improve efficiency?
-Practical ways to improve efficiency include simplifying the menu, improving workflow, arranging equipment for minimal movement, and automating repetitive processes.
How can a coffee shop owner determine which menu items have high margins and which have low margins?
-A coffee shop owner can determine margins by calculating the cost of each ingredient and dividing it by the selling price, comparing this to the rest of the menu.
What is the significance of understanding the product mix in a coffee shop's sales?
-Understanding the product mix helps a coffee shop owner focus on selling more high-margin products and improve margins on low-margin products, thus increasing overall profitability.
How can a coffee shop increase its capacity and attract more customers?
-A coffee shop can increase capacity by adding more tables, opening earlier to attract commuters, speeding up service times, extending trading hours, or offering mobile ordering and delivery.
Outlines
🤔 The Profitability of Running a Coffee Shop
This paragraph explores the varying opinions on the profitability of running a coffee shop, with some considering it a poor investment and others seeing it as lucrative. The speaker notes the industry benchmark of a 5% net profit margin for an average coffee shop, translating to a modest annual profit for owners. However, they emphasize that averages can be deceiving, as some businesses are significantly more profitable. The key to success is understanding the differences in business practices. The speaker outlines five key lessons from successful cafe owners and shares personal experiences, stressing the importance of financial literacy and understanding profit and loss reports. They highlight the significance of controlling three main expenses: cost of goods, rent, and wages, and suggest using accounting systems for better financial management. Benchmarks are mentioned as a guide rather than a rule, and the speaker encourages setting personal targets based on individual circumstances.
💰 Enhancing Profitability Through Efficiency and Product Mix
The second paragraph delves into strategies to enhance the profitability of a coffee shop, focusing on improving efficiency and managing the product mix. The speaker discusses the importance of simplifying the menu to reduce service time and waste, optimizing workflow by arranging equipment to minimize staff movement, and automating repetitive processes to increase productivity. They also address the issue of product profitability, suggesting that understanding the gross profit of each menu item can help in focusing on high-margin products and improving the margins of low-margin ones. The speaker advises using tools like product mix reports from cash registers to analyze sales and adjust the menu accordingly. They also touch on increasing business capacity by removing barriers, attracting new customer segments, speeding up service times, extending trading hours, and offering incentives or discounts during quiet periods. The paragraph concludes by acknowledging the need for a deeper exploration of cafe profitability in future discussions.
Mindmap
Keywords
💡Net Profit
💡Industry Benchmarks
💡Cost of Goods
💡Profit and Loss Report
💡Efficiency
💡Product Mix
💡Gross Profit
💡Capacity
💡Workflow
💡Margins
💡Benchmarking
Highlights
Opinions on coffee shop profitability vary widely, with some seeing it as unprofitable and others as lucrative.
The average coffee shop makes around 5% net profit, with a typical cafe earning around $35,000 after expenses.
Success in coffee shop business is not about the business itself but what differentiates successful ones.
Understanding key financial benchmarks is crucial for successful cafe owners.
A profit and loss report, or P&L, is fundamental to understanding a cafe's financial health.
Controlling cost of goods, rent, and wages are key to improving a cafe's financial performance.
Using accounting systems like Xero or MYOB can provide useful financial reports for a cafe.
Benchmarks should be used as a guide rather than a strict rule, as they can vary by location and business specifics.
Growing sales is essential for a sustainable business, as cutting costs can lead to a downward spiral.
Fundamentals such as good food, coffee, service, and atmosphere are irreplaceable for attracting customers.
Getting honest feedback from external sources can be invaluable for business improvement.
Increasing prices is a necessary part of business, and it's better to do it proactively rather than reactively.
Improving efficiency is a key method to control costs and grow sales simultaneously.
Simplifying the menu, improving workflow, and automating processes can enhance service efficiency.
Understanding the profitability of different menu items can help focus on high-margin products.
Using product mix reports can reveal which items are driving sales and which have lower margins.
Increasing capacity by adding tables, adjusting hours, or offering incentives can attract more customers.
Speeding up service times and considering delivery or mobile ordering can increase customer visits.
The transcript provides a surface-level overview of cafe profitability with further details to be explored in future content.
Transcripts
can you make good money running a coffee shop? if you ask around some people will tell you it's
not even worth it and others will say it's a license to print money.
"they're charging $18 for avocado toast, I could buy a whole box for that"
so which is it: a good business or a dead end. if we look at the industry benchmarks,
the average coffee shop makes around five percent net profit. So for a typical Cafe
turning over $700,000 a year that leaves the owners with around $35,000 to pay loans
taxes and maybe have a little bit left over now I don't know about you but that's not particularly
compelling when you've just worked a 70 hour week. but here's what the averages don't show you,
while many businesses are just scraping by some are earning a whole lot more than that.
So the question isn't really, is a coffee shop a good business it's really more like
what are they doing differently so today I'm going to show you five keys that I've learned
from successful long-term Cafe owners and that I've also put to work in my own coffee shop.
To be clear these aren't a magic formula, success still takes work but I can tell
you from personal experience when you get the fundamentals right the work can pay off
So it's the same in any business, you really have to know your numbers I get it not everyone
is great with financials but at the same time I've never met a really successful Cafe owner
that didn't have a good understanding of the most important benchmarks in their business now
fortunately the maths I'm talking about is really simple it starts by getting familiar with a profit
and loss report also called a P&L or an income statement now not going into every detail today
we'll save that for another time but in simple terms it's got sales at the top expenses below
that and net profit at the bottom and the net profit here is looking good well above average
so how are they doing it well they're doing it by carefully controlling three key percentages cost
of goods rent and wages these are the three biggest expenses in just about every Cafe by
measuring these regularly then we know where the opportunities are we can start to make changes
to get these on the right track now the good news if you use an accounting system like xero or myob
this report is sitting there waiting for you now to get accurate numbers you do need to set up your
income and expenses correctly and you need to connect the accounting system to your bank feed
well once that's done you can run the report and get some really useful info so now that we know
where we stand we can compare our numbers to the best practice in the industry a quick caveat with
benchmarks every business is different so some won't be able to hit the best practice numbers
for a variety of reasons and these numbers will also vary in different parts of the world some
countries have lower labor costs for example so use benchmarks more as a guide than a rule
and work out your own targets based on your situation and of course knowing your numbers
is not the same as controlling them that starts at the very top by growing sales
now most people start by doing the opposite they cut costs they reduce labor hours they hire
younger staff buy cheaper ingredients that will improve margins for a time but then sales start
to fall as service gets slower and products aren't as good as they once were so with less sales then
you've got to keep cutting and so it goes until there's nothing left to cut there really is no
way around it to have a successful sustainable business you have to find a way to grow sales
over time costs will always creep up but focusing on growing sales helps to reduce the percentage
of fixed costs like rent and it gives you the momentum needed to start controlling variable
costs like wages now at this point most people will jump right into marketing ideas social media
discounts loyalty programs well those things can help I've found there really is no substitute for
getting the fundamentals right consistently good food coffee and service and a great atmosphere
now these things are easy to say but they're really hard to objectively measure when you work
inside a business all day every day it's a really valuable thing to get honest and sometimes painful
feedback from other business owners and Industry professionals that are outside your business the
other way to increase sales is painfully simple increase prices most Cafe owners I've met are
terrified of increasing prices and in truth it's just an unavoidable part of being in business and
it's better to act early than wait until rising costs have eaten away all your product margins but
there's also another way to improve margins that most cafes completely miss - improving efficiency.
no one likes inefficient service. it's bad for customers staff hate it and it costs you money
you didn't even know you were spending. here's the problem, let's say you normally roster two staff
on shift if sales grow by 20% then you can either add another person to the shift which eats up all
the extra profit or you can keep it at two people service is slow and sales drop back to where they
were in the first place neither is a great outcome the smart way is to focus on efficiency. That is,
make your team more productive without using extra time and effort in doing this you can
control costs and grow sales at the same time so here are a few practical ways to
do it you can simplify your menu the more items and ingredients you have the more time is eaten
up on service with managing orders and product waste complexity often creeps in over time and
one extra process doesn't seem like a big deal but a whole lot of little processes add up to less
efficiency and slower service you can improve your workflow arrange equipment benches and furniture
to minimize the amount of running around by staff you can automate repetitive processes
automatic grinders tamping robots milk steamers and contactless card systems just a few examples
robots are our friends... most of the time. The mix of products that you sell are not all
equal, some menu items have high margins other have low margins if we end up selling lots of
a low margin products then that's going to reduce our overall gross profit so by finding out exactly
which products are profitable and which aren't we can focus on selling more of the high margin
products and work out ways to improve margins on the low margin products now if you've discovered
the reports section of your cash register try taking a look at the product mix report this
will show you which products are driving the most sales now to work out margin you'll need to add
up the cost of each ingredient and divide this by the selling price this is what's called the gross
profit yes this can be time consuming if you've got a big menu my tip is to do this when you add
a new product to the menu grab a set of scales measure each ingredient now enter this into a
spreadsheet and you can compare the margins with the rest of your menu either way once
you've worked out your product mix then think of your menu like a football team if a product
isn't performing then it's time to put it on bench and bring on some fresh legs those low
selling low margin products are dragging down your overall profit so let's assume that sales
are growing and we've improved efficiency now there's a good chance we've got the opportunity
to increase capacity in the business you can do that by removing barriers like adding more
tables so customers don't walk away when you're full you can also do this by tracking a new
segment of customers like say opening earlier to attract commuters there's a few other ways you can
increase capacity speed up service times quicker service means people are more likely to come
back more often it's incredibly simple but so many cafes are just way too slow and it limits capacity
you can also review your trading hours adding to your opening hours can be slow
at first but it can pay off in the long run you can also offer incentives or discounts
for customers to visit during quiet periods or you could add mobile ordering or even delivery.
Okay so we've really only scratched the surface on Cafe profitability today coming up we're going
to really dig into the details of what makes a cafe profitable and what you can do to improve it
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