Reprinted from Fresh Cup Magazine

Most of us got into the coffee business because we are passionate about coffee. We love offering an environment where people can gather, share their experiences and enjoy a delicious cup of their favorite brew. These are really the best reasons to get into this business, and keeping that passion will continue to generate revenue for your company. To thrive, it is important to understand how to drive revenue, control costs and manage cash. Increasing profitability is important not only for business survival but to help you grow, giving you the freedom to try new things. Greater profits will allow us to stave off competition, pay our employees and even grow the business beyond its current state.

In times of economic hardship, one of the ways businesses look to improve their profitability is by cutting costs. Unfortunately, this tactic is usually the first step toward a downward spiral in profitability. Cutting costs often impacts the overall customer experience, and it becomes difficult to rebuild your customer base. This is true in almost every industry; however, the specialty coffee industry is particularly sensitive because we have a quality-focused clientele. Your number-one priority needs to be driving revenue; without sales, you won’t be able to pay for inventory, labor or rent.

One way coffeehouses reduce costs is by increasing “hold times” on drip coffee beyond the recommendation of their roaster or equipment manufacturer. Although this practice will directly decrease coffee waste, it can ultimately decrease your customer base. The customer who was looking forward to a great cup of their favorite blend will find it stale and will start looking for a better cup of coffee.

Below is a brief summary of the topics I cover in my workshop “The Ultimate Coffee Profitability Seminar.” Managing these areas will help you improve profitability and stay focused on driving revenue. The class, which I developed exclusively for the American Barista & Coffee School, covers:

• Managing your cost of goods sold through quality control
• Increasing your focus on cash and inventory control
• Maximizing your labor
• Managing your inventory levels
• Continuing to build your brand economically
• Developing expectations before spending money on promotions
• Prioritizing expenses-don’t spend time worrying about things you can’t control

When examining your cost of goods sold, remember that switching to lower-cost ingredients will only drive your quality-conscious customers to your competitor. Instead, look at this as a training opportunity. Manage your cost of goods sold through quality control. A renewed focus on beverage training not only will reduce waste but will increase revenue by producing a higher-quality product. Quality of your product, quality of your service and quality of the entire experience should never be compromised.

Coffee retailing is a high-cash business. Combine that with inventories that are difficult to manage, and your business is prone to theft. Although you will never eliminate theft in your stores, there are ways to minimize losses. The first key is to set up cash-control procedures to eliminate the innocent. One of the worst things we can do when we suspect theft is to assume everyone is guilty until proven innocent. This will only lead to low employee moral and a further decline in sales. Make everyone aware of the rules ahead of time by implementing cash-control procedures. This will give a sense of security to those who aren’t stealing while putting thieves on notice that they should take their business elsewhere. Cash-control procedures should limit the number of people per shift who have access to a cash drawer and should include regular counting of drawers between shifts, as well as random cash audits.

Regular counting of inventory is also critical. The most common form of theft in coffee shops is the pocketing of money that should have been rung into the register. As these sales never see the cash register, you won’t see the thefts when conducting cash audits or through increased cash-handling procedures. Regular counting of coffee, milk and cups can show when sales aren’t making it to the register. Think about someone not ringing in 10 lattes a day that you sell for $3.50 each. Assuming your employee works five days a week, that’s $35 a day, or $9,100 per year, in extra cash your employee is taking home. If your cost of goods sold is 25 percent, this is going to appear as less that $9 per day, or $190 per month of inventory adjustment in coffee, milk, and cups; the true problem appears much smaller than it really is.

Maximizing your labor is a difficult challenge. Lack of labor will have a direct and long-term implication on sales. Too much labor can be our largest burden on profitability. Use sales-by–hour analysis to determine your labor needs. When you’re overstaffed, you have two choices: Cut your labor or increase your sales. Getting your store personnel involved in sales by the hour can create a sense of ownership. If they feel empowered and can see a direct link between scheduled hours and sales, they typically will focus on increasing the top line. Remember to use your best asset: Your employees can drive your business better than anyone else.

Inventory is a hidden cost that often gets overlooked. Buying too much inventory ties up cash that can be used in other areas of the business. The adage that “cash is king” reminds us that optimizing inventory is critical. Too little inventory can mean a loss in sales, while too much is cash that is tied up. Releasing that cash can be used to pay bills, reduce interest payments, or promote and grow your business.

During tough times, it is important to remember that brand-building activities will help drive top-line revenue growth. There are many ways to build a brand that don’t involve spending money. The most successful brand-building activity is overall customer experience and word-of-mouth advertising. Focusing on what you are delivering to your customer from the minute they walk into your store is critical. Other low-cost brand building can include having your logo on cups (even if it’s using a rubber stamp or a sticker), bumper stickers, and community involvement such as providing free coffee to charitable or sporting events.

Taking time to understand promotions and the impact they have on your sales can save unnecessary expenditures. Large companies have analysts who look at individual promotions to determine their success. As a small business, you don’t have the time or resources to do this. Instead, set goals for what you would like to gain out of a promotion prior to spending money on it. Once you launch your promotion, look back at your goals and see how you measure up.

Managing the expenses of your business requires a simple prioritization exercise. If you signed a lease, you are going to be locked into your rent for the duration. Spending time working on reducing your rent probably isn’t the best use of resources. Break your expenses into four categories: those you can control immediately (i.e., office supplies); in the short term (i.e., professional fees); in the long term (i.e., rent); and those you can’t control at all (i.e., taxes). Focus on the expense you can control immediately and in the short term; instead of thinking about expenses that you can’t control or can only control in the long term, spend that time focusing on growing your revenue.

It is always important to build revenue while maintaining control of coasts. In tough economic times, it is critical to manage revenue and costs to stay in business. When you’re about to spend money on something, the most important questions you can ask is, “How will spending this money grow my sales?” If you can’t answer the questions, you should not be spending the money. Developing a budget to understand what is necessary in sales and expenses to make your company profitable-and comparing your budget against your actual results-will show you when to make changes to your strategy. Smart business practices can help us survive the difficult times and thrive during a strong economy.

About Chris Legler
Chris has been a Financial Strategist for more than 18 years with experiences in the coffee, retail, entertainment and manufacturing industries. As owner and roaster of a coffee roasting/wholesale company in Northern California, Chris gained an understanding of the needs and challenges that face small businesses. Chris’s hands on approach and deep understanding of the coffee business provide excellent insight in financial planning for coffee retailers, wholesalers and roasters.

Chris’ background in providing assistance in developing tools such as sales analysis, beverage costing models, labor modeling, and project analysis is extensive. He has helped a variety of companies in understanding their strategic mission and creating an actionable, tactical plan to achieve these goals. Identifying and locating business growth opportunities, creating cost saving measures and prioritization of action steps is one of Chris’ great strengths.

Chris has held executive positions in finance and administration, marketing, retail operations and strategic planning. He was Vice President and Chief Financial Officer for Barnie’s Coffee and Tea Company and has held positions of increasing responsibility with Starbucks Coffee Company, Sony, British Petroleum, Blockbuster Entertainment, Eddie Bauer and Hasbro. He is also a senior consultant at Bellissimo Coffee InfoGroup.

While at Starbucks, Chris participated in the early high growth of the company as they grew from less than 50 stores to over 2,000 during his tenure. He was instrumental at developing the initial beverage costing models including gaining a deep understanding of cost components, condiment usage and regional variances in beverage production. He also worked heavily with Real Estate, Retail Operations and Marketing. Projects included development of proforma models that projected new store economics prior to lease negotiations, implementation of cash control and loss prevention measures and installation of labor scheduling models and systems.

Chris earned his MBA in Operations Management and International Business from Seattle University and his Bachelors of Business Administration in Finance from Pacific Lutheran University.