Creating a Financial Plan for a Café Business

Have you thought about your finances and how they’ll evolve when you serve your first cup of coffee? 

You might be surprised to learn that most people haven’t. It’s why The Credit Protection Association reports that 51% of business owners admitted to not creating a plan or forecast when starting up. 

Your financial plan is part of your overall business plan, identifying potential expenditures, profits and future opportunities. But how do you create one? Here’s how financial plans work for café businesses.

Why your café business needs a financial plan

Your financial plan tells you where the money is coming from and how much you expect to make based on the components of your business plan. 

It also answers key questions, including: 

• How will your café get its initial funding?
• How will it break even?
• When can you expect to enter profitability?

Your café needs a business plan because it focuses on the hard numbers. With 82% of businesses failing due to cash flow, it’s easy to see where the value of knowing your finances comes from.

What financial metrics should you track for a new café business? 

Ultimately, every café’s story can be told through its finances. There’s a reason why entrepreneurs and investors alike flip straight to the financial section when analysing a business first.

The core financial metrics all new coffee shops should be focusing on include: 

• Gross Profit Margin – This analyses the profitability of your core operations. It’s how much money you keep from each sale after deducting the cost of goods sold. 
• Net Profit Margin – Your net profit margin represents your whole business’s performance. It’s your profitability after all expenses are deducted. 
• Customer Acquisition Cost (CAC) – CAC puts a figure on how much it costs to attract a new customer after you get yourself up and running. It also assesses the profitability of each new customer. 
• Employee Cost Percentage – This is the percentage of your revenue that you’re spending on employees. Tracking this stops staff costs from getting out of control. 
• Customer Retention Rate – Although not strictly a financial metric, your retention rate provides insights into satisfaction, which impacts your overall gross and net profitability.

These aren’t the only financial metrics you can track. Other metrics include food cost percentage, employee turnover rate, cash flow, inventory turnover and break-even point. With a record jump in businesses in financial distress, drilling down into the more niche metrics makes sense for better understanding your café’s future prospects.

What to include in a café business financial plan

In the beginning, your financial plan focuses mainly on projections. This is where you’ll have to extrapolate your figures based on the projected future performance of your café. It’s also the point where entrepreneurs should seriously consider bringing in independent experts.

After all, founders are notoriously bad at being objective, which is why so many operate on overly optimistic figures. With that in mind, what should feature in your financial plan?

Startup funding

Startup funding matters because it won’t just determine whether you get to open your doors, but also the sustainability of your loans. Initially, loan repayments will make up a substantial part of your monthly expenditures.

Examples of loans might include: 

• Personal loans
• Family and friends loans
• Private investment
• Government startup loans
• Commercial mortgages
• Equipment financing
• Merchant cash advances

Calculate how much the loans you need will cost you. If the repayments are too high, you might have to scale back your plans.

Break-even point 

Your break-even point is a massive milestone in your business because it indicates when you’re on the precipice of going into the black. Like most businesses, cafes can take several months to a few years to reach this point.

Conduct a break-even analysis by comparing your projected revenue with your monthly expenses. A comparison will tell you when your revenue will overtake your expenses, thus putting you across the break-even point.

Financial projections and Profit and Loss (P&L) statements

Café business plans live and die on financial projections. Get these wrong and you’re operating under false pretences. Unfortunately, it’s also where most entrepreneurs fall flat on their faces because they’re overly optimistic. 

Without sales data, you’re relying on predictions. Instead of a timeframe, begin with your café’s major expenses and income. You might decide to use similar cafes in your area to get a rough idea of where to start to help with this.

So, what do you need to focus on? 

• Food costs
• Labour costs
• Operating costs
• Rent/mortgage costs
• Insurance costs
• Loan repayments

With your expenses and sales projections in place, you can start to add in a timeline. Consider your location and market to start measuring sales over time. For example, if you’re on the coast, it’s reasonable to say that you’ll have a peak in the summer and a trough in the winter.

Rinse and repeat for every month of the year, incorporating seasonal trends and local customer behaviour. 

As you can see, without any sales to base your projections on, you’re relying on existing industry data and knowledge of the local market. That’s why smart entrepreneurs bring in industry experts at this junction.

How often should you review and update your café financial plan?

Financial plans are like business plans in that they’re living documents. They’re of limited use if you make them at the start of your journey only to put them in a drawer and forget about them. Remember, your financial plan is your guiding light. 

Ideally, you’ll go back to your financial plan every quarter and look for significant deviations. Compare your actual data with your projections. If there are any big changes, it’s time to reassess.

At the end of the year, it’s time to recalculate and recalibrate, regardless of actual performance. The purpose is to keep yourself on track and adapt. Plus, going through this process often uncovers warning signs that you might need to initiate changes. It’s all part of being proactive rather than reactive. 

All good cafes start with a plan, but before you can execute on any plans, you’ll need a place to start brewing coffee. At Cogogo, we’re the UK’s leading database for café businesses for sale. Covering the entire country, we’ve got a range of venues and existing businesses for you to choose from. Contact us today if you’re ready to learn more.