Welcome to the chapter where we will discuss Planning and Budgeting for your own very first BizBaby.
In the previous article we discussed business models and structures. Before actually jumping right into doing it, let’s crunch some numbers.
As a new business you will need plan your budget to:
- File corporation/LLC
- Rent business space
- Hire people
- Equipment
- Inventory
- Runway for at least 12 months
- Etc
Let’s take a coffee shop as a business example.
- What kind of coffee shop does Nick want to create?
- What type of customer will it serve?
- Does Nick want people to be quick in and out or he wants it to be more of a sit and work kind of environment?
- How is he gonna get those customers?
- He needs to find a location and space.
- Furniture and Equipment.
- Hours of operation and staff.
- Who is Nick?
Nick has been working as a bookkeeper for the last 5 years, last 2 years he was forced to do it from home.
- What is Nick’s doing this coffee shop for?
He wants to get a financial independence and just focus on this one coffee shop. He knows how hard working from home has been, and he wants to allow other professionals to have an option to work from his coffee shop.
He doesn’t want to make it into a franchise business, but to keep it a very personal, professional, a place you can belong, perhaps even a community.
- Who are his customers?
He wants to find people who are young professionals, who are lower to middle class, not yet with families, people who can work from a laptop, supposedly mid to late 20s. So he needs to look into a very specific area. For example Ballard in Seattle or Lower East Side in New York are perfect examples for such customers.
- Walk through or sit in a coffee shop?
Nick wants to personally greet and welcome a customer into his coffee shop. Make them feel comfortable and important. It will be postly 1-2 customers per party, working from the coffee shop or having a chat with a friend.
- How is he gonna get those customers?
The biggest channel of customer acquisition for Nick is gonna be word of mouth. He will focus on each and every customer individually. Bulk of people in the area have roommates, so they can spread the word about a new community coffee shop where you can comfortably sit and work, instead of logging in all day working from home.
But first he needs to think about some advertising to land the first few hundred customers. He will focus on some free advertisement channels and Some Yelp and Google Map ads will be needed.
- Location and space
Based on the type of coffee shop and type of customers, Nick needs a very particular space. It doesn’t need to be a corner space, since that’s gonna be much more expensive, however he needs it to have lots of space, lot’s of sunlight, some exposed brick or rustic vibe. Enough space to comfortably sit 30 - 40 people.
1500 sq.ft. space should fit those nicely. Such space will go for about $4000 - 6000.
- Furniture and Equipment.
Since Nick wants to personally greet and focus on each customer, he will have just one station and espresso machine, as well as the coffee machine. It needs to have 12 two seat tables and 4 four seat medium tables.
- Hours of operation and Staff
Nick wants to work at a coffee shop full time, however he needs to have backup, he can’t work 7 days a week. Usually such coffee shops are open from 8 am till 8 pm. He will work in the morning till 4 pm 5 days a week, Sunday he will work the whole day, and he will have a barista cover 2 pm till 8:30 pm 6 days a week. Extra 30 mins after closing the shop will be dedicated to cleaning. To cover a variety of different tasks, he will need to find someone with experience and pay a little extra to do the cleaning and closing of the shop. $20/hr would be a starting point. $780 per week.
- Runway
Nick needs to prepare to lose money for the first year before his coffee shop can breakeven, sometimes even longer.
- Potential Changes
Simply selling coffee may not be enough to make the math work, people will get hungry and will want to get snacks or even some cooked food. However, serving food is a departure from the original idea, so let’s see how much of a hole we need to cover once we put all the numbers below.
- Cover from the unforeseen
Nick is looking at a substantial investment he needs to come up with, betting such a large sum of money would be silly without thinking of covering at least part of it with insurance. He needs to find an insurance that can protect him from potential interruption or loss of customers.
Budget:
All numbers listed below are very very rough estimates of what it could cost.
Monthly:
Rent - $5000
Payroll - $3300
Coffee - $2000
Utilities (Electric, Internet, Phone) - $500
Garbage Removal - $100
Marketing - $5000
Monthly Total: $15,900
Before we continue further, let’s see how much coffee he needs to make a day with monthly $15,900.00 expenses. With average cup of coffee around $6 and 30 days in a month. Let’s consider that cost of coffee and a cup is $1. It totals to 106 cups of coffee every day. However, Nick focuses mostly on sit down customers who spend an hour or two and drink a cup or two of coffee. Even if he had 100% of tables filled with at least 1 customer at all times and each customer getting 1 cup of coffee per hour, it would result in $900 per day. Of course that’s scenario is completely unrealistic. Very rough estimate of average capacity of a coffee shop should be somewhere close to 20-30%, with that in mind, it comes to $300 average per day, for sit down customers. Of course there will also be people who just get a coffee and go, however if we focus on sit down customers, let’s stick to the original math.
That’s not enough to cover monthly expenses and return on the investment.
We need to make sure customers spend more money, purchase additional items. Introducing pre-cooked sandwiches and pastries could boost revenue per customer. Offering special drinks like capuchinos, lates and offering a little extra twist with decoration and increasing the cost of a cup by a $1 could make the math work.
We will need to increase average customer spending from $6 to $10 per hour to make the math work and to ensure 100% focus on our main target customer, those who work come there to work. Introducing, Sandwiches, Pastries, Bottles Water and Juices will help us boost the revenue. Partnership with local bakeries will be required to ensure a fresh supply of baked goods every morning.
Upfront:
Filing Corporation - $1200
Rent (1st month) - $5000
Security Deposit (3 months) - $15000
DOB Work Permit (for basic renovation) - $5000
Basic renovation - $10000
Tables/Reception - $5000
Coffee Machine & Espresso Machine - $10000
POS Terminal - $500
Inventory - $2000
Insurance (basic business insurance) - $3000
Workers Comp - $1000
Sign - $3000
Miscellaneous - $1000
Upfront Total: $52,700.00
Runway 12 months - $190,800.00
Total Investment: $243,500.00
So Nick needs to come up with $243,500 to establish a successful coffee shop. There are definitely ways to minimize that initial investment or looking for help from an SBA loan, however there are large risks of not doing it properly and not having enough funds to cover the first period of having no or very little revenue. Since Nick is going to focus on being in a coffee shop full time, it will be hard to dedicate much personal time to other things.
Congratulations, you are now ready to successfully plan and budget for your BizBaby.
