Business Plan Basics: Determining Your Breakeven Point

by Greg Ubert – Crimson Cup Coffee

Most cof­fee shop entre­pre­neurs begin with a dream. Perhaps they’re pas­sion­ate about cof­fee and want to serve the finest cof­fee and espresso drinks. Or they envi­sion cre­at­ing a com­fort­able, invit­ing envi­ron­ment where friends and neigh­bors can gather to share the news of the day. Many seek an inde­pen­dent lifestyle as own­ers of their own business.

The dreams are as indi­vid­ual as the busi­ness owner, but they have one thing in com­mon:  none can be real­ized unless the busi­ness turns a profit. Without care­ful atten­tion to the bot­tom line, the best cof­fee beans pre­pared by the most highly trained baris­tas will be wasted in a shat­tered dream.

It doesn’t have to be that way. By craft­ing a solid busi­ness plan and employ­ing some sim­ple man­age­ment tools, you can ensure that your busi­ness gen­er­ates the profit needed to sup­port your dream.

Building to Profitability
How do you know when your busi­ness is prof­itable? By cal­cu­lat­ing the breakeven point! Breakeven is the point at which your busi­ness cov­ers all its expenses and starts gen­er­at­ing a profit. Below breakeven, your busi­ness is los­ing money. After breakeven, every dol­lar brought in is profit. (Keep in mind, though, that income taxes will claim about 35 per­cent of profits.)

Calculating breakeven is fairly sim­ple.  Begin by devel­op­ing sales pro­jec­tions and iden­ti­fy­ing fixed and vari­able costs.

Projecting Sales
Established busi­nesses project future sales based on their sales his­tory.  For a new busi­ness, a good rule of thumb is to count on around 1.5 per­cent of pass­ing cars stop­ping to pur­chase your prod­uct. This assumes that you’ve done your home­work, cho­sen a good loca­tion that is eas­ily acces­si­ble to morn­ing drive and/or pedes­trian traf­fic, done your grass-roots mar­ket­ing, have a drive-thru, and promi­nently and prop­erly dis­played busi­ness.  Further, gar­ner­ing 1.5 per­cent may take a lit­tle time to get established.

So, if 6,000 cars pass your cof­fee­house between the hours of 7 and 10 a.m., plan to have 90 cus­tomers stop in (6,000 x 0.015). You can also expect to see about 5 per­cent of peo­ple work­ing at busi­nesses within a short walk of your shop, plus 5 per­cent of pedes­trian traf­fic pass­ing by.

Once you cal­cu­late the poten­tial num­ber of cus­tomers vis­it­ing your estab­lish­ment, we sug­gest using $4.00 as an aver­age price of what patrons will spend each time they visit. This is fairly con­ser­v­a­tive and will vary by market.

For the pur­poses of this arti­cle, let’s assume you’ve cal­cu­lated that 200 patrons will visit your shop each day, spend­ing an aver­age of $4.00.  That means daily sales will be $800, and sales dur­ing a 28-day month will be $22,400 or 5,600 trans­ac­tions per month.

Counting Fixed Costs
Fixed costs are expenses that do not vary with sales vol­ume. Often called over­head expenses, they must be paid even if you make no sales at all. Some typ­i­cal fixed expenses include:

•    Rent (no more than 15 per­cent of sales and should drive toward 7 per­cent)
•    Payroll costs, includ­ing wages, ben­e­fits, pay­roll taxes, worker’s com­pen­sa­tion, and costs of pay­roll pro­cess­ing (keep these below 35 per­cent of sales)
•    Principal and inter­est costs (if you bor­rowed money to cover start-up or oper­at­ing expenses)
•    Business insur­ance
•    Utilities
•    Advertising

For the pur­poses of this arti­cle, let’s assume your fixed costs are $12,000 per month.

Adding up Variable Costs
Variable costs fluc­tu­ate with sales. For most cof­fee shops, these will include equip­ment main­te­nance as well as your cost of goods sold (COGS):

•    Coffee beans, milks, syrups, and other drink ingre­di­ents
•    Paper cups, nap­kins, and other con­sum­able serv­ing items

For the pur­poses of this arti­cle, let’s assume that vari­able costs aver­age 40 per­cent of sales, or $320 per day, or $ 8,960 per 28-day month.

Breaking Even
Calculating the breakeven point involves sim­ple math:

Breakeven trans­ac­tions = (Fixed Costs + Variable Costs)/Dollars per transaction

Using the num­bers we devel­oped above, the monthly breakeven point would be:

Breakeven trans­ac­tions = ($12,000 + $ 8,960)/ $4

Breakeven trans­ac­tions = 5,240 per month

So the breakeven point for this busi­ness is 5,240 trans­ac­tions or about 187 cus­tomers / day.  Since we pro­jected that 5,600 cus­tomers (200 per day) would spend an aver­age of $4 each month, the gross profit for this busi­ness each month would be $1,440 ($22,400-$20,960) or $17,280 per year.

Once you know your breakeven point, you can see how changes in busi­ness activ­ity affect prof­itabil­ity. When changes occur, you can take steps to main­tain a healthy bot­tom line. If, for exam­ple, the cost of cof­fee goes up, you might decide to raise your prices accord­ingly. However, rais­ing prices might mean los­ing cus­tomers, espe­cially if your com­peti­tors are hold­ing the line. So you might, instead, decide to increase pro­mo­tional efforts to bring in more cus­tomers.  Running the num­bers will help you decide on the wis­est course of action.

Of course, breakeven analy­sis is just a small part of putting together a win­ning busi­ness plan.  Next month, we’ll look at how you can put a plan together in a sin­gle work­ing day.

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. The author of Seven Steps to Success in the Specialty Coffee Industry can be reached at greg@crimsoncup.com.

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