As part of our Two-Cents Tuesday series.
Today’s question comes from Linda. She asks :
“I’ve been in business for 7 months and made $0 profit (actually negative numbers). Everyone says that’s normal, but is it?”
Great question Linda! I know so many people struggle with this questions so I’m super pumped to share my two-cents.
Before I dig into this question I want to give everyone a bit of background on Linda’s story as this definitely affects the way I answer her question. She explains :
I have a home-based baking business. I sell cupcakes, cookies and cakes. All my orders are unique and made to order—mostly birthdays, communions and baptisms. So in a business like this, is it normal to start at negative (at this point currently negative $2500), and if so, can I turn this around quickly? I’m trying to avoid going back to my old corporate HR job, and giving myself until the end of the year to turn this around.
I’m wanting to enter the wedding industry as I think it’ll be more profitable, but I’m yet to make one wedding cake … and like you recommended I’ll be covering the cost of the first few wedding cakes so when will this negative profit state end?
So many things to unpack here, but I’ll break it down into three reasons why your business might be losing money and how to change that.
First : Baking is a high material cost (and labor) industry. This would be similar for floral designers, online or retail shops who purchase inventory, potters, etc. Anyone who has to buy materials prior to completing their work. These types of industries often do incur some startup costs prior to making their first sale.
So to answer your question Linda, it is not uncommon to incur upfront costs that put your business at a loss initially. Not to mention : software fees and general costs of doing business.
In these types of industries and particularly in Linda’s case, I think it’s very important to be aware of :
One of the very first steps I recommend for all my clients is to determine the COST of producing ONE of your goods.
How much cost goes into a cookie? How much cost goes into each cake or a dozen cupcakes? What are the true material costs?
Once you determine that number it’s much easier to evaluate your pricing.
That leads me to step number two. It’s either a pricing problem or a quantity problem.
More than likely you’re not pricing high enough. You want to see at least a 60% profit or 3xs markup on your costs.
It can also be a problem with quantity. If your price is correct, then you may not be selling enough. Given that you have to buy your goods in bulk, you might just have too much waste—meaning your not selling enough product. This dramatically increases your “cost” per item due to how much ingredient is left over.
You can solve this by either purchasing ingredient in smaller portions? Or if this is not an option, then you must increase sells.
Right now, you’re making to order.
I would look at how many orders are coming in one week versus how many you need to sell and come up with a marketing plan for the rest of the orders.
Are there farmers markets or other avenues you could use to get your baked goods in front of your audience?
I actually don’t believe jumping ship and moving over to the wedding industry is your problem as you can run into the same problem : while yes the margin might be higher you may still not get the quantity of orders you need to use up your ingredients. I would look into places you can sell your goods and increase your audience size in order to use up the materials you are purchasing and decreasing your cost per item.
This is one question we can unpack for days!
You may also find helpful this 1-hour interview I did all about pricing for profit from day one.
While yes, I do believe certain businesses will incur more startup cost and will take longer to turn a profit—in most cases for business who aren’t purchasing tens of thousands of dollars in equipment or inventory up front—you should definitely be seeing a profit by year one.
If you’re not I would dig into :
Linda, thanks so much for sending over your question!
There are definitely tools out there to help you become more profitable (that’s what I’m all about!) and totally believe you can replace your corporate salary with your baked goods.
If you’re struggling with your price, I highly recommend taking some pricing classes to help.
February 26, 2019