So you’ve finally taken the plunge and decided you’re going to open a coffee shop, and you’ve even created a business plan, found a space and decided on a name! One thing that often eludes coffee shop owners are the numerous “hidden costs” that inevitably come up. Hidden costs encompass everything from marketing to labor to equipment repair…basically, anything that’s easy to forget in the midst of more obvious costs, such as rent and supplies. Not to worry, below I’ve detailed common hidden costs, how to identify them, and how to plan and budget!
The trick to realizing hidden costs is to realize they’re not really hidden! All costs are staring you in the face in your business plan and then again once you open for business. The easiest way to uncover “hidden” costs is to think about the “already there” costs such as rent, equipment, and supplies and dig a bit deeper. Think about if that’s really all you’ll have to pay.
For example, you may have a particular budget for equipment, but have you factored in extra cushion for the repairs that equipment will eventually need? Or for potentially needing to add more equipment as the business grows? If these seem a bit overwhelming, not to worry, I’ve laid it out in this guide.
One area that isn’t as obvious are costs that are hard to estimate, these are known as “unknowns” and can include everything from labor to expansion costs to cash flow. The tricky thing about costs in this category is that they aren’t as obvious and can be difficult to factor in. However, this guide helps reduce the confusion and gives tips for how to plan for “unknowns.”
Hidden Costs of Space
So you’ve found the perfect cafe space to rent or coffee stand to buy or whatever space you’ve decided on for your business. Great! Now look at your carefully estimated budget and double it. NOW you’ve got a more reasonable estimate. Well, doubling it was a bit of a guess on my part, but the point was to get you thinking about the hidden costs you’ve likely left out of your space budget.
What exactly are hidden space costs? Well, let’s look at costs already factored in and dig a bit deeper. As mentioned above, you’ve likely already set aside a budget for equipment, but you’re not just going to purchase equipment and then never spend a dime on it again. You’ll need to factor in repairs, replacements, and maintenance on the equipment. You’ll potentially want to upgrade machines at some point. This guide isn’t meant to lay out exactly how much you’ll spend on each category, but to elaborate on hidden costs so you can estimate what a reasonable budget would be.
So to simplify, hidden costs of equipment would include:
Now on to another large subcategory under “space costs:” physical space. You’ve factored in rent, but have you really budgeted enough? Does your rent include utilities? Or just some? Perhaps none; make sure that’s accounted for in the budget.
Likewise, how much are you going to invest in securing and protecting your space? Chances are your rent doesn’t include a fancy (or even not so fancy) security system, so you’ll want to decide how much you want to spend there.
Again, simplified, hidden costs of physical space:
- Utilities (not so much hidden, but easy to forget)
Hidden Costs of Operation
So, you’ve re-evaluated the budget for your business space, now it’s time to crunch numbers for how much it will really cost to operate. Again, let’s take a look at more obvious costs first and dig a bit deeper.
You may have already come up with a name and even a possible motto for your coffee shop, but you’ll need to do more than that for marketing. You may need to invest in a staff member devoted to marketing (depending on the size of your business) or at least in someone to help craft a plan. Even if your marketing will take on a smaller scale, you’ll need to put aside some money for flyers, advertising space (online or in print) and maybe a website. This is often forgotten in the midst of more initially “pressing” costs such as rent, equipment, and staff. (Get more ideas for advertising your shop here.)
Speaking of those initial costs, you may have already invested a bit in an attorney to look over things such as a rental agreement or purchasing contract if you purchased a business already in operation. However, more often than not, your legal and administrative costs don’t end there.
Take a moment to check that you’ve taken into account licensing fees such as a business permit, certificate of occupancy, food service license, resale permit, health permits, etc. Again this list is not meant to be exhaustive but to make you aware of the scope of needs your business may have. This is not meant to be a post on legal advice, so check with a lawyer and your city, state and county offices for specifics related to your business location.
The final major “hidden” cost of operation is insurance, which really has many subcategories of its own. You’ll need insurance for your business, all major equipment, rental insurance (if applicable), and health insurance for employees. Again, not meant to be an exhaustive list, just to get it on your radar.
As I did above, here’s a simplified list of hidden operations costs:
- Marketing (supplies, staff, advertisements)
- Legal and administrative fees
Unknown Hidden Costs
Ah, the trickiest and most frustrating of hidden costs! The unknowns. I don’t mean to suggest there will be a bunch of undefinable, hidden costs, but that there will be hidden costs whose amounts will be difficult to estimate.
In your initial business plan, you may have budgeted a particular amount for labor, but this likely won’t be totally accurate. It will be difficult to estimate how much help you will need. You might initially hire two baristas, one cashier and a floater only to find out one barista suffices. Or you may have the opposite problem and find out you need significantly more help than you initially thought. Other unknowns for labor include benefits (if you’ll be offering any), potential raises down the road, and the need for more help as the business expands.
If you’ll be using vendors for weekly deliveries of pastries, snacks, and other items, it might be a bit difficult initially to accurately estimate how much you’ll spend. You may not even be all that sure for the first month or so how much to order from each vendor, let alone how much to budget. Again, just err on the side of caution. You can always order more, but if you’re left with a bunch of expired food you’ve just wasted a lot of money upfront.
Finally, you’ll need to budget for cash flow to start. What this means is you’ll need to put aside some financial cushion to pay for costs (hidden and otherwise) before the business starts making money. Few coffee shops are profitable right away (maybe none is a better answer), and even after a year, you may only be breaking even.
You may find that when you sit down and look at your budget, there are other costs you’ve forgotten or that were “hidden” to you. Factor those in, too! Just because it isn’t in this guide doesn’t mean it’s not important. I’ve just written about the biggest and most often “hidden” costs here; it’s not meant to be exhaustive, and every coffee shop is different!
How to Prepare
As with any business – and especially coffee shops – you need to plan! Once you’ve written an initial business plan and budget, go back and edit with all the hidden costs mentioned here (and anything else you can think of). The initial additional cost may shock you, but not to worry, it’s better to plan than be shocked and blindsided later.
Planning for hidden equipment costs
Once you’ve written a budget for the start up equipment you’ll need do a bit more research. Look up how long each machine typically lasts for and how often each requires maintenance, then write it down in a spreadsheet. Then look up how much repairs can typically cost for each machine and add to the spreadsheet. Once you’ve done this for all the equipment you’ll have a pretty well estimated “hidden costs” equipment budget as well as a timeline for when you’ll likely need to shell out money for it. Of course something could always require work a bit earlier, or last forever without an issue, but it’s always best to have a plan.
Planning for hidden physical space costs
Once you have a rough budget for rent and bills you need to make sure you’ve actually covered everything. Does your rent include utilities? If not, you’ll need to look up how much water, heat, electricity, etc. and add to the budget.
Then, decide how much you want to spend to secure your space! Is there already an alarm system in place? If so how much does the company charge a month for services? Do you want to add things such as cameras? Find out and add these to the budget, and it never hurts to call around to see if you can find a better deal.
Planning for hidden costs of operations
Starting with your marketing plan, first off do you even have one? Have you included this in your business plan? If not, probably a good time to start. Once you’ve decided if you want to budget for a staff member to handle this or simply for marketing material you’ll need to estimate the cost. You can do that by using sites such as Glassdoor to estimate marketing staff salaries and calling around to graphic design companies for estimates on materials.
Then, you can move on to legal and administrative fees. These aren’t so bad once you start looking around. If you’ve already brought a lawyer on board, have them help out (keeping in mind their hourly rate, which hopefully you’ve budgeted for!). Make a spreadsheet like you did for equipment and note all the various licenses your area requires. Then, look up the costs and add to the spreadsheet. At the end, you’ll have a decent estimate.
Finally, work with your lawyer again to make a list of the various kinds of insurance you legally have to have. Some of this might be worked into your business plan or included in other costs (perhaps your renters insurance is included in rent). Again, a spreadsheet would help as would looking around to different providers as you hopefully did with security.
Planning for unknown hidden costs
Arguably the most frustrating cost to estimate, however planning will help immensely. Look at your business plan and be honest with the amount of labor you’ll need, ask around to other similarly sized business. Google. Whatever you can do to make the best estimate possible. Make sure you add a bit of cushion in case your estimate isn’t quite good enough or for expansion down the road.
For vendors, ask around and Google. It also helps to get quotes from various vendors (provided your area has more than one for a product) and pick what makes the most sense. Again, you can adjust, but it’s better to have a plan than to blindly order 1,000 sandwiches a week and realize after a month you’re throwing half of them out (along with the money).
Cash flow will be the most difficult as you likely don’t have much extra after all the initial start up and hidden costs. The best advice is to set aside as much as you can spare (and then some) and assume it will take at least a year to 18 months to be truly profitable. Then if it takes longer you’re even better off!
Budget from the beginning
I can’t emphasize this enough! A lot of what has been discussed here is, “It depends,” or, “It’s hard to say,” which is always going to be the case with any business. However, a plan and a budget will put you leaps and bounds above others who don’t even consider hidden costs.
Frequently Asked Questions
As with many questions related to opening a coffee shop, it depends. On average it takes between three to six months to break even. Perhaps a bit longer if you’ve invested more or are in a competitive market. Once you’re earning about 50% of what you initially invested, you can deem the “profit” sustainable, usually takes about 18 months.
Again, it is hard to say exactly when a new business will be profitable, one can only estimate. Thus as mentioned above having a financial cushion for cash flow issues is the single most important thing you can do to protect yourself. Well maybe not single most important thing, but definitely top three. It would also help to do an annual business assessment to sift through any areas for improvement.
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Hi! I’m Shawn Chun
My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!
As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.
I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.
Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.
Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.
Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.
Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!