Start-up Strategies

Calculating Your Startup Costs

by Greg Ubert

Oné of the first ques­tions poten­tial busi­ness own­ers ask is, “How much will it cost to open my cof­fee shop?”

Because every spe­cialty cof­fee busi­ness is dif­fer­ent, there is no sim­ple answer. Your costs will depend on the type of busi­ness, the price of retail space in your com­mu­nity, and many other variables.

Lets Get Started!
The first step is to decide what kind of busi­ness you want to open. Some com­mon types include a cof­fee house with drive-thru, a walk-in cof­fee house, or a strictly drive-thru cof­fee bar. Generally, the more square footage, the higher the cost of build-out.

At the same time, con­sider where you will oper­ate. Location can make or break your busi­ness. In most cases, your cof­fee shop should be on the drive side of a road with heavy morn­ing traffic.

Tailor your loca­tion search to the type of busi­ness. A cof­fee house with drive-thru requires up to 1,500 square feet in a retail strip or stand­alone build­ing. For a walk-in cof­fee house, you may need as lit­tle as 300 square feet in high-density loca­tion to 1,800 square feet with easy access to auto­mo­bile or walk-up traf­fic. For a cof­fee drive-thru, usu­ally 100–300 square feet will suffice.

Calculating Projected Sales
Once you’ve found poten­tial loca­tions, it’s time to run some num­bers. Calculating pro­jected sales weans out unprof­itable options. Count the num­ber of cars pass­ing dur­ing peak morn­ing hours. In a good loca­tion, you can expect about 1.5 per­cent of cars on the drive side to stop at your shop. You can also expect vis­its by five per­cent of those pass­ing by on foot. So if 10,000 cars and 500 pedes­tri­ans pass each morn­ing, expect vis­its from 175. For this arti­cle, we’ll use $4 as a con­ser­v­a­tive esti­mate for each pur­chase. (In real­ity, this fig­ure varies by mar­ket.) Daily sales would be $700, with monthly sales aver­ag­ing $21,000.

As a rule, your rent or mort­gage should take up no more than 15 per­cent of monthly sales. For a loca­tion gen­er­at­ing $21,000 in monthly sales, this means a max­i­mum of $3,150 in rent.

You must also account for build-out and equip­ment costs, which will be depre­ci­ated over time. It’s a good idea to hire an archi­tect or con­trac­tor for the build-out. These pro­fes­sion­als can esti­mate costs of plumb­ing, elec­tri­cal, heat­ing, and air con­di­tion­ing sys­tems, and they can help you nego­ti­ate to see whether the land­lord will finance any of the remod­el­ing expenses.

In terms of equip­ment, you’ll need a top-of-the-line espresso machine, espresso and cof­fee grinders, blenders, cof­fee brew­ers, refrig­er­a­tor, etc. Don’t be tempted to save money by buy­ing cheap or used equip­ment. Your espresso machine is the life­line of your busi­ness. If it breaks, you’re out of busi­ness. Buy the best you can find, learn how to use it, and fol­low the sug­gested main­te­nance sched­ules rigorously.

Drink ingre­di­ents such as cof­fee, milk, and syrups will be your largest oper­at­ing expense, account­ing for up to 40 per­cent of sales, or up to $8,400 monthly in the sce­nario above. Never scrimp on ingre­di­ents. Serving the best is the only way to attract and keep spe­cialty cof­fee cus­tomers. You can keep inven­tory costs low by part­ner­ing with a sup­plier that makes fre­quent deliveries.

Your next-largest oper­at­ing expense, pay­roll costs, should account for 30 per­cent or less of sales. These include wages, ben­e­fits, pay­roll taxes, worker’s com­pen­sa­tion, and costs of pay­roll pro­cess­ing. For our sce­nario, you would bud­get no more than $6,300 – includ­ing your salary, if you plan to work in the shop.

Calculating “Other” Expenses
Rent, drink ingre­di­ents, and pay­roll costs can account for 85 per­cent of expenses in the begin­ning cof­fee shop. This leaves 15 per­cent to cover all other expenses, including:

1.    Professional fees for archi­tects, attor­neys, accoun­tants, and busi­ness con­sul­tants
2.    Training costs
3.    Principal and inter­est costs (if you plan to bor­row money)
4.    Income taxes (usu­ally about 35 per­cent of oper­at­ing profit)
5.    Other expenses, includ­ing busi­ness insur­ance, sup­plies (cups, nap­kins, stir sticks, etc.), licenses and per­mits, office sup­plies, util­i­ties, adver­tis­ing, and repairs and main­te­nance
6.    Your profit

After you’ve done your home­work, add up all these pro­jected expenses. You should have cash on hand to cover your ini­tial build-out as well as oper­at­ing expenses for the first six months. That’s what it will cost to open your cof­fee shop.

Greg Ubert, founder and pres­i­dent of Crimson Cup Coffee & Tea, has been roast­ing cof­fee in small batches since 1991 and has taught hun­dreds of busi­ness own­ers how to run suc­cess­ful inde­pen­dent cof­fee houses. Greg can be reached at
greg@crimsoncup.com.

Do you like this? Share it: