Bakernomics: Time To Work Those Numbers
Last time, you did some figuring about what it would cost you, each week, to make the changes needed to get your bakery stable.
In case you've forgotten, here's what we mean by 'stable':
Your bakery functions in a manner that you can sustain it over the long term.
Sometimes this means adding an extra baker so you can take a day off. Maybe it means hiring a business manager so you can focus on baking. Maybe it's something completely different. It depends on your bakery and your needs.
We're working through the 'hire a new baker' scenario here. And in the last post we figured it would cost an extra $800 per week to pay for that new baker.
Where are we going to find that money? Well, we only have a couple of options:
a) Reduce Operating Expenses
b) Production Efficiencies
c) Increase Sales
d) Reduce Owner Compensation
Let's look at each of these individually.
Reduce Operating Expenses
This is simply a case of looking at all your recurring expenses and seeing where you can cut them back.
- Are you hiring a laundry service?
- How's your food waste situation?
- Can you reduce bank / financing charges?
- Are there efficiencies / discounts available from suppliers?
- Are you getting value from your software/music/internet/cell phone subscriptions?
- Is your advertising getting results beyond the cost?
I'm not suggesting you go full 'austerity' here. You need a phone after all. Likely an internet connection too. But perhaps a lower data plan is still enough and you could save $30 per month.
I suspect you already run a pretty tight ship when it comes to expenses. The bakery owners I know don't have lots of luxuries. But as the owner, you get to weigh the benefit of some personal freedom with each of these recurring costs. You get to choose.
One more thing: Reducing expenses has the biggest overall benefit toward making your magic number. It doesn't require more production or more customers. It doesn't fluctuate with the seasons. Low overhead always pays back.
Sure, you always try to streamline things in general. But now that you have a magic number ($800 per week) maybe this has triggered something. Does making scones twice a week free up a baker to make a brand new product? Do you have the freezer space to batch viennoiserie?
The strategy here is to free up work cycles in the name of making new products to sell. And those new sales (less food and packaging costs) go toward the magic number.
Drop Expensive Products
This can have the same effect as reducing operating expenses, but on the product line. Do you have any product that is labour intensive or uses extra expensive ingredients but just doesn't sell all that well? What else could you make in that time that sells even better, or more profitably?
This is a bit of a spin on the MBA's growth matrix, but looking at cost and sales.
You want to consider dropping the high cost / low sales products and promote the low cost products which could be selling better.
This is a long term, ongoing process, and is good management practice, but worth double checking even when doing this magic number exercise.
This is where things get really interesting. There are several ways to increase Sales, but not all have the same impact on your magic number.
Make (and Sell) More Product
Easy, right? Just get out there and start selling! But there's a few angles to consider:
Find new customers: If you have a subscription or wholesale business, how many new customers do you need to make the magic number? With focused effort, how long will it take to get there?
With retail, how many new customers per week (multiplied by the average sales per visit) do you need to make the magic number?
Increase spend per visit: Can your front crew upsell a cookie to go with the bread? Or coffee to go with the cookies?
Are there any value add products you can sell to go alongside your scratched baked items? I'm thinking coffee, honey, granola, olive oil, that kind of thing.
Can you invent a premium subscription product? A CSB Mega-Share?
Increase customer visits: If you're a bread shop, your customers might only come by once or twice per week. What could you offer that they might want every day, or every other day?
Key point: Remember however, that increases in production, even if you sell everything, doesn't directly hit your goal. You have to take to food and packaging costs into account. So every time you make and sell and extra $1 worth of product, only $0.70 goes toward your magic number. That's why cost reductions and price increases always win. That's also why offering soup and sandwiches is more complex than banking $8 per sandwich!
Small, planned price increases is something you need to be doing regularly anyway. It's not like your costs stay put year over year.
But when trying to fund your magic number, a small price increase goes a very long way. That's because the extra revenue goes directly to your magic number.
In the 'hire a baker' scenario, we need to make an extra $800 per week. Based on average weekly sales of $8000 (which was reasonable at Orange Boot), a 5% increase across the board is $400, or half the magic number?
So a $5.00 loaf becomes $5.25. That $1.00 cookie goes to $1.05. Even a $50 subscription moving to $53 doesn't seem huge individually, but it adds up quickly.
You can still do this compassionately. You can invite your customers into the story, explaining how this small increase will make for a better bakery for you and for them. But please, give this option some serious thought.
While you're at it, just to get a sense of the ceiling, what if you funded the entire magic number with a price increase? How bad does that look from a customer perspective? $0.25 per loaf? 1.00? It's good to put real numbers into this - often our perception of price increases is way worse than the reality.
The Final Option: Reduce Your Compensation
Don't laugh! It's all about what makes you happy. If you've increased the top line, reduced operating expenses and are still $100 per week short, you've got an interesting decision to make. Is it a good trade off to reduce your salary by $100 per week in order to get a day off plus more time to focus on sales?
What makes you happy?
Remember, we're designing a situation that will make you happy over the long run. You're not forced into a specific scenario. It all depends on what changes will make a business that works for you.
For some people, taking home $100 less per week in order to get a day off plus time to focus on sales is a great trade off. For others, that's simply not possible. You need to find the mix of changes that will give you the work and life that you seek.
It's too early for conclusions! First, you need to actually try this yourself. Take the numbers you gathered about your bakery and plan through a couple of scenarios to make your magic number.
Then sit with those scenarios for a bit. Are they truly impossible, or is there a spark of hope? Will the joy of getting yourself unstuck be greater than the "pain" of change?
Seriously, run your specific numbers. Leave a comment and share your results, ask questions, point out my flawed assumptions. But do the work. We'll leave conclusions to the next post.