When I wrote the standard bread costing formula to keep things simple, I omitted a few costs as they add little value to a small bakery set-up. If you’re reading this you should be looking to scale big or (at least) looking to get tighter control of your expenses. Using this bread costing formula introduces previously unspoken expenses to provide improved accuracy to my original article. If you’ve not read it, this article won’t make much sense, so go back and read it first!
There are of course extra costs in running large scale operations. These costs need to be identified and controlled to ensure you have a profitable bakery business. Also, with more accuracy in your product costs, the more potential you have for passing on the value to your customers or money in your back pocket (depending on your approach!).
Aside from including extra expenses, the biggest change is that the oven cost is calculated by the length of time the bread is in, as opposed to an average cost. I’ll show you how it works in a moment.
Here’s the detailed costing spreadsheet for bakeries I use to work out what price to sell bread. Using the same example as last time, I have a small bakery and plan to sell 80 bread products a day, delivering to 8 local businesses. We are going to work out how much I should charge for the same white farmhouse loaf and see if we see a difference in price compared to the previous calculation.
|Cost of production:||1.02|
|Cost of supply:||0.34|
|Monthly fixed costs:|
|Cleaning & sundries||10|
|Total monthly fixed costs:||648.11|
|Estimated production quantity||1248|
|Average fixed costs per bread||0.52|
|70 % profit||1.31|
Sorry to be a spoiler, but the basic costing formula produced a selling price was £2.70, this increased to £3.19 using this strategy.
Considering more expenses in the costing increases the expected sale price of your products. This can be a little scary but it means you are protecting your business in the long term. Many businesses don’t do this, then they get a leaky roof and close down. The owners will have lost everything because they didn’t generate enough profit. For long term success, a “rainy day” pot should be established and every potential cost should be considered.
Here are some fixed costs that I didn’t mention in the standard costing method. These extra costs should be considered if running (or planning to expand into) a large bakery format. There may be plenty more to consider depending on your situation. If there’s any that I’ve missed let me know in the comments below!
Managing people and the day-to-day paperwork of a business takes time or if you hire someone, money. In a lean start-up, you might do the bulk of this sort of work yourself initially, otherwise outsourcing experts or building your own team will be necessary to complete these tasks.
Either way, you will have to incorporate these expenses into your monthly fixed costs.
If all this side of business management is done yourself there should still be a cost accounted for. As you grow you’ll likely look to hire someone to do these tasks for you. Therefore it’s best to include a charge for your time whenever you offer a price.
Here I’m going to take a £100 monthly management wage (all my roles will add up to a decent wage). I’ll spend around 2 hours a week on this side of the business to start with. As the business grows there will be more time spent managing which will see this monthly cost increase.
You could break down the weekly tasks and multiply them by an hourly rate as we did in the production and supply tasks if you want a more accurate cost.
To get sales you need to let people know you’re around. A typical marketing budget is 30% of the sales, yet bakery margins are generally too tight for this amount of investment. Customers tend to buy because of the price, quality or place instead of a promotion or branding campaign.
As bread prices are so competitive it’s hard to justify investing much in marketing. You might want to invest when you launch a bakery business. This should be classed as a start-up cost and not as a regular outgoing so excluded from this costing method. Many small bakeries use local social media groups to promote their business for free. If you choose to use regular paid marketing, enter it here.
If you are going to hire an accountant to run your books you should figure in the yearly total for their work and divide it by 12 for a monthly figure. Accountants do the majority of their work at the end of the financial year but it’s best to cost monthly and reserve some cash to pay them.
Accounting software is commonly used in modern businesses. For small businesses, a simple spreadsheet is fine. But as your accounts get busier, spreadsheets tend to slow down to the point they are painful to use. In this case, get yourself an online solution such as Quickbooks. Being able to input the data online into software saves you money by paying for data entry and provides you with an up to date figure on your financials.
Bakery machinery will break every now and again. Newer equipment is obviously less prone than older ones, so you should adjust your budget accordingly. Even if you have no expected faults budget for some money each month in case something happens. If nothing breaks, save it in a rainy day fund for when it does! If transporting your bread you should include an expense here for servicing and maintaining the vehicle/s.
Including the electricity cost with the other utility bills gives us a set “oven cost”. This is great for simplicity, but not for accuracy between products. For bigger operations, higher accuracy in our expenses enables us to make better decisions and ensure profitability is maintained.
When running a bakery at full capacity, bread that takes 15 minutes to bake is a lot more convenient and profitable than loaves that take 45. Not only can more quick-to-make loaves of bread be produced but it’s easier to manage proofing and prevent bottle-necking at the ovens.
Then there is the how many items can fit in the oven question. When baking small rolls you can fit a lot more in the oven compared to large bread. So we should be able to lower the cost of the bake to compensate.
Using your businesses electricity bill, work out how much it costs for electricity per day.
The oven is going to be the majority of the electrical expense, any other use will be minimal in comparison and likely include mixers and other bakery related equipment anyway.
My electricity is £20 a day, I divide this by how many hours the oven is in use each day (6) and work out the cost per hour:
20 / 6 = 3.33
To calculate the oven’s cost per minute, divide the hourly cost by 60.
3.33 / 60 = 0.6p
Multiply the cost per minute by the baking time.
0.6 x 35 = 1.94
Then divide by how many can be baked in the oven.
2.10 / 8 = 0.26
Cost of baking in the oven: 26p
Home bakers can only bake one or two at a time in a domestic oven which is many find it impossible to compete on price with the big boys! That said, your customers will expect high prices as a small batch producer. Many will be willing to pay a little extra regardless to get their hands on your fantastic loaves!
One thing a lot of new entrepreneurs fail to grasp until it’s too late is that a £12 per hour worker, costs your business more than £12. In the UK you’ll have to make an employee national insurance contributions for each of your taxable employees. This could be the case if you’re elsewhere too. Then there are holidays, sick pay, parental leave, uniform and other employee benefits that you might potentially have to pay out.
Check your local authority to find your employers tax rate and add a buffer to your hourly rates to compensate. You’re budget might increase up to an extra 20% on top of the advertised wage, including your own!
It is best to cost a salary from the management & admin expenses. Even if you plan not to take a wage, you should cost this in. A profitable bakery business must begin with profitability. Your business plan may involve rapid growth over the first few years. If this is the case, include a high management wage from the start so your model will require a full-time manager to drive the business and manage the team.
For more information on how to start a bakery business including marketing, writing your business plan, and building a team, you should take a look at the book that I wrote about my first bakery business.
It’s a great read and you’ll learn lots about how to run a bakery business, especially the mentality needed to be successful.