Getting to grips with your finances and understanding the numbers is essential if you want to run a successful cake business. The Cake Professionals are here with four steps to get you started.
Finances – not the most exciting topic for most. But SO important to understand if you want to create a successful cake business with longevity. Let’s not forget that most cake businesses don’t last more than 12-18 months (sorry, but it’s true!). But fear not! Cake business pros Phil and Christine Jensen are here with four simple steps to help you get started with tackling those business finances so you truly know your numbers. It’s over to The Cake Professionals…
“There are three top rules for starting a business: know your numbers, know your numbers, know your numbers!”
Health warning: this article involves maths. We’re sorry there’s no avoiding it.
1. How much do you want to make from your business?
We all have different reasons for starting our businesses and what we want to get out of them financially. Maybe it’s some money to pay for a family holiday each year, or you want a full salary out of it, or somewhere in between. So, what’s that number? That question will shape your planning for your business. Knowing what it is will help you to work backwards to see what kind of business you need to be running.
Let’s take the example of Sharon who wants to earn a salary of £10,000 from her business. What budget does she need to work to? How many cakes does she need to make? It sounds a bit like a GCSE algebra question but this is real life, real business, super-important maths.
“Think of the finances of your business like the foundations of a house. It doesn’t matter how beautiful the house is, unless the foundations are good the house won’t stand. They are that important.”
2. Work out a budget
Think of a good business budget like a good stool. It has three legs and a seat:
Leg 1 – ingredients and materials
How much will you spend on flour, eggs, sugarpaste, sugar flower stems, boxes, ribbons… you get the idea.
Leg 2 – time
You need to get paid for your time making cakes. What’s your hourly rate?
Leg 3 – overheads
These are all the things that don’t directly contribute to the cost of a cake but you need to pay e.g. equipment, rent, taxes, marketing. Include some money in here to cover the time you spend on your business not making cakes.
The seat – profit
A stool without a seat isn’t a very comfortable thing. Profit is the money you'll have left over after everything is paid for (the official term is ‘net profit’). It's money for you to reinvest, or to keep for unexpected expenses, or to pay for a nice holiday somewhere. Profit is awesome – we love profit.
Taking Sharon’s example, let’s put some basic numbers together to make a budget. We're going to work on a rough percentage for each part of the stool. These percentages can change a lot depending on what kind of cake business you run… but they’re a good start.
- Leg 1: Ingredients and materials (20%) – £5,000
- Leg 2: Time (30%) – £7,500
- Leg 3: Overheads (30%) – £7,500 (includes £2500 for time spent on the business not making cakes!)
- Seat: Net profit (20%) – £5,000
Total turnover needed = £25,000.
So, Sharon needs to turnover £25,000 to be able to take home £10,000. That’s £7,500 for her time spent making cakes and, this is a bit lots of people miss out, £2,500 for her time spent on making the business run but not making cakes.
Importantly… She also has £5,000 to reinvest back in the business, buy new equipment or, if she wants, give herself a well-earned treat!
Here are some useful terms you’ll hear people use and are good for you to know:
- Turnover/revenue – how much money you take in from sales during a year. For Sharon this is £25,000.
- Gross profit = turnover – ingredients, materials and time. For Sharon this is £12,500.
- Net Profit – turnover – all costs (including rent, your time spent not making cakes, marketing, etc.). For Sharon this is £5,000.
Looking to boost your cake decorating and sugarcraft skills? Cake Decoration & Sugarcraft magazine has all the tutorials, expert advice and knowledge you need to master the techniques and grow in confidence!
3. Work out how much to charge per cake
When Christine started her cake business, she was selling muffins. We sat down and worked out how many muffins she would need to make in a year to earn £20,000. It was a lot – 40,000 muffins, that’s close to 800 muffins a week! We very quickly realised that unless we were willing to start a fully equipped commercial bakery, muffins were not going to be the answer for us. Knowing how much you need to charge for your cakes REALLY helps shape your business.
Back to Sharon, she needs to turnover £25,000 a year. How many cakes does she need to make? That depends on how much she charges on average for each cake…
We’d all love to make one cake per year for £25,000, but sadly that isn’t realistic! What’s the right price point for your cakes?
This is where you’ll need to do a bit of research…
- Who are you going to be selling to?
- What will they pay for a cake?
- What sort of cakes do you like making?
- What is your skill level?
Remember that as you grow and develop your prices can go up so this number isn’t set in stone. Don’t miss this guide to pricing your cakes!
4. Don’t forget years 1 and 2
We wish there was a magic wand you could wave and your business would be instantly profitable. Sadly, we haven’t found it yet (we’ll tell you if we do!). For the first couple of years of starting a business you’re investing in it to get it up to speed. You need to plan to have some other income coming in during this time so you have what you need.
We hope that maths was not too painful! If you’ve got your numbers right your business will pay you back many times over in the coming months and years.
Looking for more business advice? Look no further! Here are five things you need to know about starting a cake business, plus find out Cherish Finden’s top tips for a successful cake career!