Do you dream of brewing savory beans? Are lattes your true love? Is perfecting a cup of piping hot coffee your life’s goal? Owning and operating your coffee shop may be just the thing for you!
What does owning and operating a coffee shop cost, and how do you calculate your break-even point?
The cost to own a coffee shop will vary greatly depending on the location of the coffee shop, shop size, and necessary equipment. Costs can range from $10,000 for a small, mobile coffee cart to $35,000 for small coffee kiosks to upwards of $375,000 or more for a large sit-down coffee shop. A break-even point simply refers to the level of revenue needed to cover the costs of operating your business. Calculating your break-even point is relatively easy and can be found with a simple formula: Fixed Costs÷Gross Margin %.
If owning and operating your own coffee shop business is a venture you would like to pursue, then this article has been designed with you in mind! Let’s get to grinding!
**Since each coffee shop is different and the startup cost can range from $10,000 to $375,000 or more depending on the size of your coffee shop and location, I included a list of what costs you should be aware of unique to your situation.
What are the costs associated with owning a coffee shop?
Before you can focus on brewing up the perfect cup o’ joe, you’ll need to turn your eye to the financial aspects of your coffee shop business. These costs fall into three main categories:
Startup costs: This is what it will cost to get your business off the ground and may include the following:
- Creating a business plan and a formal business structure for your coffee shop business
- Choosing a location for your new business venture
- Retrofitting the location you choose (your build-out)
- Necessary equipment
- Hiring operational staff, contractors for needed build-outs, and legal professionals (attorneys, accountants, business consultants)
- Securing appropriate licensing, permits, and insurance policies
- Federal and state tax setup
- Real-estate costs
Fixed costs: These are costs that do not change from month-to-month and must be paid regardless of profit made and may include:
- Loan payments
- Your fixed salary
- Marketing costs
Variable costs: These costs will fluctuate from month-to-month depending on your business activity and may include:
- Payroll costs
- Repair costs
- Supply costs (beans, milk, cups, pre-packaged baked goods)
Before you begin selecting your beans, let’s talk about cost analysis.
Putting together a cost analysis for your coffee shop sounds like an arduous task, but it’s really just a fancy way of lining out all of your costs. Your cost analysis is just a blanket term that covers everything that you will need to account for in starting your new business venture. It should include your initial startup costs and operational costs, as well.
Counting beans – Let’s talk about calculating your coffee shop business costs.
When calculating your coffee shop business costs, there are two general costs to consider: your startup costs and your operational costs (fixed costs and variable costs). Time to grind!
There are a few steps in calculating the startup costs associated with your coffee shop. Let’s take a look at them one-by-one:
Step 1: Write a business plan (I know you’ve heard it before, but it’s important!). A well-written, solid business plan will help you to determine important financial projections, including general overhead, equipment costs, rental costs, payroll, profitability projections, and your break-even point.
Step 2: Discuss and determine your coffee shop menu. As simple as it seems, the menu you choose will ultimately set the pace for your entire budget. Your menu and pricing will line out who your target customer will be and determine where the ideal location for your coffee shop resides. The menu you also choose influences what equipment you will need to purchase, which, in turn, determines the amount of space you will need to properly run your operation.
Step 3: Acquire the necessary coffee equipment. Equipment will play a large role in your startup costs. Depending on how you choose to secure the necessary equipment (purchase, finance, or lease) will also factor into either your fixed monthly operational costs or your initial startup investment.
Step 4: Scout the best physical location and space for your new coffee shop. The cost of real estate will play a huge role in the operational costs of your coffee shop business.
Step 5: Determine an appropriate budget for all of your legal and administrative costs. You will need to make sure that you don’t overlook the costs of legalizing your business, from permits to licensing to attorneys to inspections. Several small, nominal costs can sneak up on you if you aren’t careful.
Step 6: Budget for one-time startup expenses. There will be various one-time costs beyond equipment that you will need to account for. These expenses can include:
Security deposits (building lease, equipment rentals)
Professional consulting fees (business planners, marketing professionals, website developers)
Point-of-sale (POS) system
Step 7: Budget for staff hiring and training.
Step 8: Budget for marketing and promotion costs. The marketing costs of your coffee shop may be a one-time investment or an ongoing operational cost.
Step 9: Make certain you have cash on hand to cover expenses until you reach profitability. It is unlikely that your coffee shop will instantly achieve profitability, and it will likely take time for it to reach its full potential. Without cash on hand, your coffee shop will grind to a halt before you can brew the first cup of java. Depending on the concept of your coffee shop, you will want to have enough cash on hand to keep your business open for a minimum of six months (meaning, you will want to have allotted a budget large enough to cover all operational costs for six months).
Learn more about start up costs HERE.
Operational costs fall into two separate categories: fixed and variable. These costs are what is needed to actually run your day-to-day business.
Fixed costs (sometimes referred to as overhead expenses) must be paid regardless of the number of sales made (this is sometimes referred to as ‘covering your bottom line’). These costs can include:
- Rental payments
- Payroll costs
- Loan repayment
- Insurance premiums
- Service contracts (pest control, security)
Variable costs will fluctuate with sales in your coffee shop, meaning when sales are up, variable costs are up. This number can be hard to predict from month to month. These costs can include:
- Equipment maintenance
- Coffee beans
- Coffee syrups
- Other drink ingredients
Consumable items (paper towels, napkins, cleaning supplies)
You know your costs; now let’s move on with how to calculate the break-even point in your coffee shop.
To have a successful coffee shop, it is extremely important to understand your break-even point. The break-even point isn’t the line at which you make a profit, but the point where all operational costs are covered (and then you can make a profit!).
The formula you will use to calculate the break-even point of your coffee shop is:
Fixed Costs÷Gross Margin %
Where do you find these numbers, you ask. Let me brew it up for you!
Determining your fixed costs is pretty simple. It is just the sum of all of your operating costs (rent, utilities, payroll, so on).
The gross margin percentage is found by dividing your gross margin by your selling price. The gross margin is calculated by subtracting the selling price from the cost to produce.
Here’s an example of determining the break-even point using Jim’s Coffee Shop:
Jim’s fixed costs: $325 per day
Jim’s sales price of a cup of joe: $3.25
Jim’s cost to produce a cup of joe: $0.75
First, Jim needs to calculate his gross margin (sales price-costs):
Jim’s gross margin: $2.50
Next, Jim needs to find his Gross Margin % (gross margin÷sales price):
Jim’s Gross Margin %: 78%
Lastly, Jim needs to calculate his break-even point (fixed costs÷gross margin %):
Jim’s break-even point: $416.67
For Jim’s Coffee Shop to break even, he will need to collect $416.67 each day. Jim will need to sell 128.2 cups of coffee each day (found by break-even point÷sales price per cup) to break even.
Knowing your break-even point will enable you to understand the volume your coffee shop must produce in order to generate revenue.
Why is the break-even point important in my coffee shop business?
The break-even point helps you to assess your overall costs and determines how much coffee you will need to sell to cover your bottom line before generating a profit. The break-even point also aids in setting up a pricing strategy for your coffee shop business.
What can increase the costs in my coffee shop?
There will be unavoidable cost increases that you cannot truly avoid, but it is imperative that you strategically analyze your costs and stay on top of your budget. The most avoidable cost increase is lack of planning. Having a well-developed business plan can help you avoid this issue.
Should I look into franchising with my coffee shop?
Franchising your coffee shop can be a great option if you are financially able to pursue it. Typically, as a franchisee, you will pay a franchise fee and a percentage of your profits to the franchise company. In exchange for those fees, you can use a tried and trusted brand name and have access to resources that will help you effectively manage your coffee shop business.
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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.