One exercise I hope you will follow up on is figuring how many products you will need to sell and break even for a bakery. Instead of throwing caution to the wind and just starting, you can estimate how much you need to sell every day in order to break even. This exercise is easy to figure and will help you better understand the economics in running a bakery. Your numbers will vary but here is a simplified way to do it.
Let’s assume you are starting a cupcake bakery since it’s the hot thing at the moment.
First we need to list our monthly fixed costs:
- Rent – $1,000 (Try to not exceed 10% of gross sales)
- Wages – $3,000 (I’ll use $3,000 and I know many will want to say their wages are $0 because the owners are the only employees. While many do this in the startup phase it isn’t realistic in the long term because someone needs to be paid, whether it’s an owner or employee. (Try to not exceed 30% of gross sales)
- Payroll Taxes – $450 (usually figure 15% to be safe)
- Electricity – $500
- Telephone – $100
- Water – $150
- Insurance (liability, workman’s comp, etc) – $200
- Advertising – $300
- Miscellaneous – Packaging, office supplies, etc – $200
- Repairs & Maintenance – $200 (budget for things breaking)
Total Fixed Costs – $6,100
Next we need to find the variable costs:
Cost of Inventory – Should average 25% of sales, which means your inventory cost is $.25 for every $1.00 sold.
Then, figure your average selling price per item. In this example lets figure $2.00
Now, let’s break out the algebra.
Monthly Fixed Costs = $6,100
Profit per cupcake = $.50 ($2.00 X .25)
Break Even = $6,100/$.5 = 12,200
So in this example 12,200 cupcakes need to go out the door each month just to break even.
Now to break it down even further:
Let’s assume you are open 30 days out of the month. You need to sell 407 cupcakes per day to break even. (12,200/30)
If you are open for 10 hours a day, then you need to sell 41 per hour just to break even. (407/10).
If your average customer buys 5 cupcakes at a time, you need to sell to 82 customers per day just to break even. (407/5)
The question you need to ask yourself is, are there enough customers in your area to support your bakery?