Starting a Food Business
A business will have both fixed and variable expenses. Fixed expenses are those that do not change, such as rent. Also in this category are the "one-time" or annual expenses, such as equipment, remodeling, license fees, etc. Variable expenses change from month to month. Examples are utility bills, ingredient costs, transportation, supplies, promotion, advertising, and salaries.
Food Costs
Estimate the cost of ingredients on a per unit basis (or per dozen, if small items such as cookies are involved). List the ingredients needed; then compare prices in both retail groceries and wholesale outlets. Try to find the most inexpensive ingredients, but do not sacrifice quality in order to cut costs.
In general, larger quantities of ingredients have lower unit cost. But wholesale buying of large quantities may not save money for a beginning business, particularly if the food is perishable. The major advantage of wholesale buying is to maintain consistent product quality. It also may enable you to purchase ingredients that are difficult to obtain in small quantities.
Pre-prepared foods, such as dehydrated soup bases or chopped nuts, may reduce food costs by cutting preparation time.
Labor
Although you may be willing to work for nothing, assistants, delivery people, and others expect to be paid. Always include a labor cost, even if you do not intend to pay yourself a salary. This is a good business practice that will help establish a fair price.
One way to estimate labor cost is to divide the profit by hours spent. For example, if it takes 50 hours of labor to produce a $100 profit, the labor cost is $2 per hour. Another way to establish labor cost is to decide what your time is worth. You may think your time is worth $2 per hour or maybe $20. It's up to you.
Labor cost is more than preparation time. A certain amount of time will be required for developing the business, transportation, purchasing, and recordkeeping. If others will be working as well (family members for delivery, for example), include their labor costs also. Will they work as quickly or efficiently as you do?
Transportation
Consider the following questions. Will you deliver your products? If so, include gasoline and other automobile costs as an expense. Is a special vehicle necessary? Will you need equipment to keep foods at recommended temperatures while in transit? Some foods need to be kept cold during delivery. Let's use the example of ice cream. Ice cream must be kept frozen at all times or the quality of the product is lost. Therefore, if you plan to sell ice cream, you must purchase, rent, or lease a refrigerated truck to transport it. To determine which is appropriate for your business you must ask another question: Can you recover a prorated cost of the delivery vehicle, including fuel and maintenance?
Insurance
Insurance helps safeguard your business against losses from fire, illness, and injury. You cannot afford to operate without it. Talk with your insurance agent about your business needs.
You will need a commercial policy for full protection when you have a business. Discuss these other possible needs with your agent:
- Product liability Coverage to protect you if your product causes injury to the user.
- Auto liability Insurance and "non-owned" auto liability insurance if a car is ever used to support the business in any way.
- Medical Payments Insurance payable if someone is injured in your business, whether or not it was your fault.
- Worker's Compensation if you have employees.
- Business Income Insurance or Earnings Insurance if your business is damaged by fire or some other cause and you must totally or partially suspend operations
- Disability Income Protection, a form of health insurance in case you become disabled
- Business Life Insurance to provide funds for transition upon your death. Be sure to keep all your insurance records and policies in a safe place-either with your accountant or in a safe deposit box. If you keep them at home for convenience, give your policy numbers and insurance company names to your accountant or lawyer or put a list in your safe deposit box. Final advice for the wise business person is to read and understand the fine print in all policies and to re-evaluate business insurance needs frequently.
Other Expenses
Although not all the following expenses are applicable to your business in the beginning, they may become significant as the business grows:
