Cafe Profit: This is what successful coffee shop owners do differently

Summary

This 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

00:00

🤔 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.

05:01

💰 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.

Keywords

💡Net Profit

Net profit refers to the amount of money a business makes after all expenses have been deducted from its total revenue. In the context of the video, it is mentioned that the average coffee shop makes around 5% net profit, which is a key benchmark for evaluating the financial success of a business. The script uses the example of a cafe turning over $700,000 a year, resulting in a net profit of $35,000.

💡Industry Benchmarks

Industry benchmarks are the standards or measurements used to compare the performance of a business within its industry. The video mentions that while many coffee shops may just be breaking even, others are earning significantly more, suggesting that understanding and meeting industry benchmarks is crucial for a successful coffee shop.

💡Cost of Goods

Cost of goods sold (COGS) is the direct cost attributable to the production of the goods sold by a company. In the video, controlling the cost of goods is identified as one of the three key percentages, along with rent and wages, that can impact a coffee shop's profitability. The script emphasizes the importance of measuring these regularly to identify opportunities for improvement.

💡Profit and Loss Report

A profit and loss report, also known as a P&L or income statement, is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period of time (monthly, quarterly, or annually). The script explains that understanding this report is fundamental for any successful cafe owner, as it helps in identifying the sales, expenses, and ultimately the net profit.

💡Efficiency

Efficiency in a business context refers to the most effective and least wasteful use of time and resources. The video script discusses the importance of improving efficiency in a coffee shop to control costs and grow sales, suggesting practical ways such as simplifying the menu, improving workflow, and automating repetitive processes.

💡Product Mix

Product mix refers to the combination of products or services offered by a business. The script highlights the importance of understanding the profitability of different products in the menu, emphasizing that not all products contribute equally to the overall gross profit. It suggests focusing on selling more high-margin products and improving margins on low-margin ones.

💡Gross Profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. The video explains how to calculate the gross profit by dividing the cost of ingredients by the selling price, which helps in understanding the profitability of individual menu items.

💡Capacity

Capacity in a business sense refers to the maximum output that an organization can produce or handle. The script discusses increasing capacity as a way to improve profitability, suggesting methods such as adding more tables, opening earlier to attract a new segment of customers, and speeding up service times.

💡Workflow

Workflow refers to the sequence of industrial or business processes through which a product or service passes from conception to completion. The video script suggests improving workflow by arranging equipment and furniture to minimize staff movement and automating processes to increase efficiency.

💡Margins

Margins, in a financial context, refer to the amount of profit a company makes on a sale. The script uses the term to discuss the profitability of different menu items, emphasizing the need to improve margins on low-margin products and focus on high-margin items to increase overall profitability.

💡Benchmarking

Benchmarking is the process of comparing a company's business processes or performance metrics to industry leaders or best practices from other companies. The video script advises using benchmarks as a guide to set targets based on one's own situation, rather than as rigid rules, to improve a coffee shop's performance.

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