4 Steps to Assess the Feasibility of Your Cafe – The Likuid Espresso Story, Part 2
Welcome to part 2 of the Likuid Espresso story. In this blog post I’m going to show you 4 simple steps Pius and his team used to assess the feasibility of their cafe.
What You Got?
What’s your offer? What are you going to sell, where are you going to sell it, and why are people going to buy it? If you get this part right, you’re ready to start assessing the financial feasibility of buying a business.
So, you’ve got a rock-solid vision that you’re aching to turn into a reality — and you’ve got your eye on what could be the perfect spot. Time to figure out how “perfect” this spot really is.
1. Lock Down Your Overheads
Overheads like rent, electricity, advertising, and other running costs stay practically unchanged regardless of how much revenue comes in the door. You need to be able to generate a revenue in proportion to those costs, every week. If overheads are more than 15% of your expected revenue, you need to tighten the screws a little.
Overheads have the potential to drown your business, so you need to get them down as far as you can from the get-go. Once you’ve signed the lease, you’re locked in — which is why negotiating these costs upfront is critical to your success.
There are generally 3 people you can call on for accurate information on overheads:
- The landlord
- The previous owner
- The previous owner’s accountant
Don’t just accept the estimate the landlord gives you — it could be way off.
You need to thoroughly investigate the true overheads for your business to get a fix on your feasibility.
The Viability platform we mentioned in part 1 of this series allows you to enter budgets for these overheads. This helps you assess your feasibility.
Once you’ve locked down your overheads, you’re ready to roster!
2. Create Your First Roster
What is the minimum staff you can have in your store, to begin with? You need to be realistic when you decide this.
Choosing the right staffing level, with the right staff, is a double-edged sword. Overstaffing your restaurant makes happy customers and hurts your pocket. Understaffing makes your productivity metrics look good, but often causes customer frustration. You need decide what your sweet spot is, based on your best guess of initial foot traffic.
When you start out, your labour costs are going to be pretty high. The industry standard for Australian cafes and espresso bars is between 30-35% of revenue.
Don’t be surprised if your labour costs are as high as 50% in the beginning — it’s pretty normal.
So what is your minimum staff level? Do you need a chef, someone front-of-house, a top notch barista, a runner? In the initial stages, you’ll probably find that people who can multitask are very valuable and help you to scale better. A manager who can jump on the coffee machine, serve customers, and give the kitchen a hand is always going to be a valuable asset at any stage of the game.
Pius and the Likuid team created a their first roster with strong core staff. Each person in the team is highly autonomous and seasoned in the hospitality industry. This approach is aimed at getting up and running to a high standard in the shortest amount of time possible. Pius calls this a “SWAT team” approach.
Your roster will obviously change over time, but for now this will help to give you a much clearer picture of the feasibility of your food-service business.
The next step is very straight-forward — estimating your purchasing.
3. Estimate Your Purchasing
Gross profit across the industry is generally around 65%, so you can assume that your purchasing will be 35% of your revenue (100% – 65%).
In the case of Likuid Espresso, theirs will probably come in a little lower than 35% — closer to 32% of revenue.
Some boutique restaurants and ‘hipster’ cafes tend to have higher gross profits, because of the perceived value of a more artisan style offering. Their GP can approach the 75% mark, while their labour costs tend to be a little higher than average.
At the end of the day, good gross profit is a byproduct of 3 things:
- Smart ordering in combination with budgeting
- Minimising waste
- Smart pricing strategies
Now that we’ve covered that, let’s move on to the fun part — seeking break-even.
4. Discover Your Break-Even Point
How much revenue do you need to make to cover your business expenses? What you’re looking for here, is the point at which your nose is above water — where you’re making a handsome return of zero dollars and zero cents.
The Viability platform has a super simple Feasibility Tool that shows you how much revenue you need per week to break even.
We’ve also created a free online tool that you can use to calculate your feasibility and break-even point here.
Below is a screenshot of Viability’s feasibility analysis. It has already pulled in the overheads from the budgets we assigned in step 1. The software has also taken our labour percentage from the roster data, including penalty rates, holiday pay — everything. All our estimates are in the system and ready to play with.
If you keep the current staffing level of the roster you set up in step 2, and increase your revenue, you’ll eventually hit your break-even point.
The Viability Goal Seek section of the Feasibility Tool has a simple “Seek Break-even” button that calculates how much revenue you need to break even (see below).
In Likuid’s case, their break-even revenue level is $15,888 per week. That’s what they need to work towards if they want to get their heads above water.
Live, Dynamic Feasibility
Viability’s Feasibility Tool doesn’t just help you plan ahead, it updates every day based on your current week’s data and the true health of your business.
It’s like a virtual lighthouse for the Likuid team, constantly leading them toward financial safety.
Fortune favours the brave, especially when the brave have a solid game plan. The hospitality industry is no exception.
If you follow these steps before you open a restaurant, you’ll have a good, solid idea of where you need to end up.
Likuid Espresso’s team followed this process to the letter, which is one more reason why they’re likely to succeed.
Also published on Medium.