1st August, 2021
Running a café means keeping a tight ship. So here are some practical steps to understand your financials and then boost café profits to get your ship pointed in the right direction.
Cafés, for anyone who doesn’t own one, have a reputation of being incredibly profitable businesses. Most people look at the surface operations and compare the cost of what they pay at home for a piece of toast or a cup of coffee and assume that the profit margins of their local café must be through the roof.
While gross profit margins of cafés in Australia average at 65-70 percent (according to ATO industry benchmarks), the net profit for a café is only around 10 percent, with the additional 55-60 percent margin all but wiped out when you pay things like rent, wages and the cost of the assets you need to operate.
So if you run $450,000 through your register each year, you’re likely to only be left with only around $45,000 to pay loans, do repairs and consider paying yourself something.
How can you help your business beat the averages and increase your profit margin?
Start by understanding what your margin actually is. It’s the difference between your Cost of Sales (ie the money you spend to supply and make food and beverages) and your Income (ie the money you make from selling food and beverages).
Put simply, you want the money coming into your café to be more – hopefully a lot more – than the money you spend to make it.
Keeping a watchful eye on your finances and understanding what is happening in your business accounts is essential to identifying problems, opportunities, strengths and weaknesses.
If you’re worried about your profits, you should be checking your Profit and Loss Statement at least weekly, and if you’re not sure what you’re looking for, sit down with your accountant and get their help.
You need to understand your percentages of profit, costs of goods sold, wage expenses, rent and other items you’re spending money on. The benchmark survey from the ATO gives you an idea of what other companies are spending, but you need to work out where your money is and identify areas that need work.
And while checking your finances may not immediately grow your bank account, understanding where your money is going helps you refine your business practices and give yourself the best chance of success.
Once you’ve got a handle on the basics, it’s time to get to the nitty gritty of saving on costs, getting more customers and selling more items.
Understand what it costs to make each item on your menu and then identify the profit margin of each.
The first step is to work out your best-performing menu items – and figure out how to promote them. Menu items that sell well and have high profit margins are your golden ticket to profit success.
The second is to lose your worst performers – menu items that cost a lot to make and only sell every now and then.
If there are menu items that sell well but cost a lot to make, go back to your supply chain. Have you invested time into building relationships with excellent suppliers? Could you be getting the products more cost-effectively elsewhere? Can you do a deal with your existing suppliers?
READ THIS NEXT: How to develop a supply chain strategy
It can be scary to think about, but do you need to reconsider your pricing?
Increasing prices can sometimes can be daunting, but think about a staged approach. For example, if you ultimately want to increase coffee prices by 10 percent in a year, perhaps doing it in increments of 5 percent at a time will feel less imposing.
Or increase your prices of different product categories at different times. For instance, increase food prices in the spring and beverage prices in the autumn.
Another figure you’re going to become familiar with are your wage expenses. Wages are no doubt going to be flagged up as a pretty hefty bite out of your profit cake.
Some businesses panic when they see this and immediately start cutting staff or run on ‘skeleton staff’ until their profit margin looks better.
But this can be a costly mistake. Cutting numbers without a real plan can cause remaining staff to stress, service standards to drop, wait times to increase and customer satisfaction to plummet.
The best investment is to use your staff as a direct tactic to boost sales. Creating a relaxed and happy vibe in your café with friendly and good-natured staff will get customers wanting to come back every day for their ‘hit of happy’.
Remind your staff of the importance of consistency. Good food, good coffee and good service all promote word of mouth and repeat customers.
How much time and effort are you putting into your marketing?
Marketing is critical in any business, but cafe marketing can be the difference between thriving and floundering. Café-goers like to build a relationship with their favourite haunts, but how can they build a relationship with you if they don’t know you exist?
The best thing about marketing is that it can be low-cost — it has more to do with the planning, time and effort you put in than the dollars you spend.
Can people find your café? Is signage prominent to street traffic?
Consider a flyer-drop in the local area. Advertise an offer or loyalty program to get people in the door.
Use social media to build your café’s brand online. Get people to sign up to a mailing list to get the ‘inside scoop’ on daily or weekly specials.
Approach other businesses in the area to see if they’d be willing to put a poster up in their space, or they might be open to cross-selling opportunities.
You could also encourage repeat customers with loyalty programs, VIP events, keep cup exchanges, or gift cards.
It might be tempting to focus on cutting down, try selling up.
Make a commitment to do all that you can to increase sales each day. A great motivator is to compare week-to-week financials and always try to beat the previous week’s sales – even if only by a small margin.
Upselling is a simple tool that is often underutilised, as people wrongly assume it has to be aggressive.
Simple upselling to larger drink sizes, offering takeaway items with takeaway coffees or adding small additional sides to dine-orders can be a minor change that, over time, really helps the bottom line.
Another great way to increase customer spend is to bundle items.
Do your sales records show that many items are often bought together? Create a special deal with some of your high-profit items (such as a coffee and a muffin) which will encourage the items to be bought together more frequently.
Ultimately, however you attempt to increase your sales will depend on your specific venue and customer base. But, by shifting the focus up instead of down, and working out where you can refine your business practices, you may find things begin to improve quite quickly.
Keep track of all your café or restaurant’s business-critical information with MYOB. Try FREE for 30 days today.