Business Advice

Cafe Health check (3 of 3) Profit

In this blog series, We are looking at how you can make your Café’s bottom line healthier.

Please read sections 1 & 2 of this post available here before continuing with this post.

Section 3

The formula for profit.  

The background.

Sitting down with your accountant at year-end should not be the first time you find out that your Cafe has made a profit. I assume this is the case for 95.5% of business owners.

There is nothing wrong with operating that way, but there are better ways to operate.

For example, a Cafe owner could produce quarterly accounts and then have these reviewed by their accountant. Knowing what possible tax may be due as you go will help with future cash flow. Especially if you are operating bank balance accounting.

Forecasting an estimate tax bill for your cafe just makes good business practice.

Now, let’s look at how to make a profit which you can see.

Firstly you need to have an idea of the profit your cafe could make.  To figure this out research a floated company in a similar business to your own.

For Cafes a good benchmark is Starbucks.

Look at an international company that operates in your industry. Go on Google and see the profit this company has made in the last 4 quarters. If a multinational company can record a 20% profit for the quarter then why can’t your business?

Here is what you could compare yourself against.

Sales Growth %

Net profit %

Take baby steps.  Open a third bank account and at the end of every week and deposit, 1% of the sales made. This is your PROFIT this will accumulate in time these profits should not be used to pay for any operating expenses in the Cafe.

As each week’s tick by, you should increase the amount allocated until you reach or exceed the quarterly profit which your floated company is reporting.

Example

Mary has a café which is located in Sligo; she has implemented stages one and two of this series. She has started to pay herself a better wage than what she had in the past. She has reduced the operating costs of the business to a level where she can now implement stage three.

She has implemented the necessary processes and procedures in her business which ensures her customers get a great product and service every time.

A business Mary will use as a benchmark is Starbucks. To date, her selected company, Starbucks which has recorded a quarterly profit that has varied between 17% – 20% for 2019. From her last financial statements, she recorded a net profit of 9% for last year.

Now it is time that you started acting like an international business. If Starbucks can achieve a 20% profit margins then why can’t Mary?

To start off I would suggest Mary take 1% of all weekly sales and place it in the third bank account for the next quarter. As you save more on expenses and look to streamline your business, you can increase the percentage, but not by more than double the previous quarter.

Year 1                       Year 2                       Year 3

Q1 Profit 1%              Q1 Profit 7%              Maintain the profit.

Q2 Profit 2%             Q2 Profit 10%

Q3 Profit 3%             Q3 Profit 15%

Q4 Profit 4.5%          Q4 Profit 22.5%

The goal is not to allocate the maximum amount of profit in the shortest amount of time but rather to be able to achieve the profit while you maintain the healthiest possible business. This is not a blueprint; different cafes will achieve the profit percentage in different time frames.

A business should never be judged on the value of sales it makes, but rather on the profit it generates on those sales.

If you want to implement any of the topics discussed in the blog series for your own business, be sure to get in touch.

 

Conclusion

If your Cafe is not actively looking to grow profitability, you can fall into the trap of staying stagnant.  If a global company records an increase in sales and this does not result in an increase in profit there could result in a drop in their share price. The CEO will have to come before the shareholders to explain. This is difficult when you answer to no one.

As a Cafe owner you may not view your business with the same eyes as a global company does, but perhaps you should.

I hope you have been able to get some benefit from this series. If you have questions be sure to get in touch.