Over the past decade, thousands of entrepreneurs have opened specialty coffee operations, fulfilling their visions of business ownership and financial security. But for all of the success stories in the coffee industry, many dreams of business profitability are never fully realized. Why is it that some businesses are thriving while others are struggling to eke out a living?

The Profitability Puzzle
Let's say you did everything right in the preplanning phase. You found a great location and negotiated an advantageous lease. You put together an attractive store and have a well-priced, well-rounded menu. But somehow, you still aren't achieving profitability. What might be the reasons, and how do you resolve these issues? First, you must understand that not achieving profitability is usually a result of one or a combination of two factors: insufficient sales and lack of control over cost of goods and expenses. In this piece I'm going to talk about how cost of goods and labor can affect your bottom line.

Let's first talk about controlling labor. Begin by writing a smart schedule, go back through your cash register tapes and determine when you do the majority of your business. Make sure you don't schedule excessive labor coverage outside of that time frame. Write your schedule for the week and calculate how many dollars you have allocated for each day. This will become your labor budget. As you calculate your actual labor expenditures on a daily basis (you should always do it daily), it will become immediately apparent whether you hit your projected budge or exceeded it.

Labor should always be analyzed as a percentage of your total sales. If your sales far exceeded what you had projected, then your labor may actually run higher in dollars, but it should never run higher as a percentage of sales. For example, let's say your labor on $30,000 of sales is 35 percent (or $10,500). Your sales increase to $40,000 and you spend $12,000 on labor. You're spending more on labor to make $40,000, but the percentage of $40,000 is only 30 percent. If you find that you've spent more than your allotted budget for labor-perhaps $100 on a particular day - your goal should be to recover that $100 in the following days, and to determine why you exceeded your budget.

Knowing your employees' schedules is crucial to adhering to your labor budget. You don't want employees punching in early or staying beyond their scheduled time without your permission. It can be helpful to write down your employees' schedules for the day on a piece of paper that you carry in your pocket. With a quick glance you can check scheduled shifts to ensure that employees aren't working beyond their budgeted hours.

One thing you don't want to do to control labor expenses is make decisions that may be to the detriment of your operation. For example, never reduce your labor to a point that sacrifices a smooth operation. Compromising your quality or customer service for the sake of a few hundred dollars will only upset customers, and it can actually lead to a decrease in your sales, nullifying any attempts you've made to save on labor cost.

In addition to labor, you also need to control your actual cost of goods. This is the handling, preparation and assembly of the raw products you purchase to turn into finished beverages and food. In order to control the cost of goods, you must do a cost of goods calculation on a monthly basis. Unfortunately, I have found that very few coffee bar owners actually do this. Calculating the cost of goods means determining exactly how much product has moved off your shelves to generate the sales in a given period of time (usually a month). Begin by counting all the goods left on the shelves at the ed of the month. Then multiply each item by its dollar value and add all items together to reach a total dollar amount of all products in the store. You only have to take inventory once a month, as the inventory you take after you close your doors on the last day of the month will obviously be the level that you start with on the first day of the new month. Next, add all of the beverages, food and paper products you purchased for that same month. When you have all of this information, calculating your cost of goods is simply a function of running these numbers through the following formula.

The result of this formula is what you have used up in products in dollars. Divide this number by the sales these products generated and you will have your cost of goods as a percentage of those sales. Always analyze cost of goods as a percentage of sales so that you can judge efficiency by comparing performances from month to month, even though sales volume may be different.

Once you've determined a percentage for your cost of goods, how do you know if it's a good or a bad number? This leads to the second essential activity in controlling the cost of goods: knowing what your cost of goods should be. Twice a year, you should calculate an "ideal cost of goods." This entails calculating the exact cost of every size of every beverage and food item you serve. For example, if you make a 12-ounce cappuccino and you have two one-ounce shots of espresso in that drink, you can calculate the cost per shot by dividing the price per pound for your espresso beans by 46. (There are approximately eight grams of espresso in one shot and 448 grams in a pound of coffee, so 448 divided by eight gives you 56 shots per pound.) If you put two ounces of espresso in a 12-ounce cup, 10 ounces of space will need to be filled with milk. But you won't need 10 ounces of milk to finish the drink because the milk will actually double in volume during the steaming process. So you can account for a cost of five ounces of milk to complete the drink. You'll also need to add an allowance for condiments, paper cups, napkins, etc. Once you've done this for every item on your menu, go to the cash register tape at the end of the month and figure out exactly how many of each size drink and food item you've sold. Then multiply the total of each item by its ideal cost and add them together. Compare this medial to the actual food cost you calculated by counting products on your shelves and purchases. Examine the variance between these two numbers.
   
You will probably never hit your ideal because it's not a perfect world. Milk is spilled, bad shots of espresso are poured down the drain and day-old pastries are thrown away. But the difference between your actual cost of goods and your ideal shouldn't vary by more than a couple of percentage points, and your actual cost of goods should never be less than your ideal. If it is, you probably miscalculated. If the variance between the ideal cost of goods and your actual cost of goods is great - more than three percent - you have some problems, such as over-portioning, waste, theft, or a clerical error.

Beyond controlling labor expenses and cost of goods, you should put together a theoretical profit and loss statement prior to the beginning of every month. If you've been open for six months to a year, you have some useful historical data at your disposal. By analyzing sales and expenses for past months, you should be able to create a projection for sales and expenses in the upcoming month. If you have been open for several years, be sure to take into account your historical data - what you have done at the same time the previous years - along with any evident trends. For example, if you see your sales increasing by one or two percent each month, then August of this year should reflect that change over last year's sales.