To keep things simple I omitted a few costs in the standard bread costing formula. They'd add little value in a small set up. Adding them with the existing expenses made the formula much more complicated considering many readers won't be including them! If you're reading this you should be looking to scale big or (at least) looking to manage costs accurately to do so.
Using this costing formula introduces previously unspoken expenses whilst accounting for productions costs with improved accuracy.
Why costing larger bakery operations is more complicated
There is of course extra costs in running large scale operations. The more costs that can be identified and reduced the better for the profitability of the business. Whereas, the more accurate with how much each product takes to make, the more value we can pass on to our customers.
For these reasons, the oven cost is now calculated by the length of time the bread is in, as apposed to a generic average cost. I'll show you how it works in a moment.
Full bread costing formula
Here’s the costing spreadsheet that I use to work out what price to sell bread in a larger bakery. Using a similar example as last time, I have a small bakery and plan to sell 80 bread products a day, delivering to 8 local businesses.
For this example we’re going to work out how much I should charge for my speciality white farmhouse loaf.
Here's the full costing spreadsheet for large operations
Cost of production:
|Cost of supply:||0.34|
Monthly fixed costs:
Cleaning & sundries
Total monthly fixed costs:
Estimated production quantity
Average fixed costs per bread
|70 % profit||1.31|
In the basic costing formula the previous selling price was £2.70, this increased to £3.19 in this scenario.
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 business 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!
Management & admin costs
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.
Common tasks include:
- Sales/lead generation
- H & S checks
If all this side of business management is done yourself there should still be a cost accounted. 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. Obviously it's not a living wage but as I'll be baking and delivering myself, all the roles will add up (plus any remaining profit!) to give me enough for essentials. I'll spend around 2 hours a week on this side of the business to start with - it's ok for me!
Of course we can break down the tasks and apply an hourly rate like we did in the production and supply tasks. This will provide you with a more accurate result.
As the business grows there will be more time spent managing which will see this monthly cost increase.
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 usually too tight for this amount of investment. Customers tend to buy because of price, quality or place instead a promotion or branding campaign.
As bread prices are so competitive it's hard to justify investing in marketing.
You might want to invest in marketing when you launch a bakery business. This should be classed as a start-up cost and not as a regular outgoing so excluded in 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. Most accountants do the majority of their work at the end of the financial year but it's best to cost in monthly and reserve some cash to pay them.
Accounting software is commonly used in modern businesses. Being able to input the data online into software saves money paying for data entry whilst providing an up to date figure on where your financials sit.
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.
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 it's best to store some money away each month in case something happens.
If transporting your bread you should include an expense here for servicing and maintaining the vehicle.
Making the oven a cost of production
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 breads 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 breads. So we should be able to lower the cost of the bake to compensate.
Charging for oven rent
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 that can be bake 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 why it is hard to compete 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!
Other points to consider
If you are an employer of people (including yourself), you have to make an employee national insurance contribution to each of your taxable employees that take a wage. This is a tax payable to the government each month. The employer's national insurance contribution is currently set at 13.8% above £732 a month in the UK. I’m not sure about other countries but feel free to let me know in the comments.
This is not clear in my hourly rates so be sure to account for an extra 13.8% on the wages given if your business merits.
The owner's salary
It is best to cost a salary from the management & admin expense. Even if you plan to take dividends, you should cost this in.
If you plan to grow the business quickly and employ people, include a high management wage from the start.
Most business owners strive to make the business run itself with a team of bakers and management in place to drive the day to day operations. In my opinion, achieving a profitable bakery business must begin with being generously profitable from the start.
Can I change the prices for creative price tiering?
Yes! I think that's a great idea. Once you've calculated the cost for each bread you are welcome to add a bit of hierarchy to your range. To do this, you can increase the cost of the bread that you want to appear more premium. Also, you could reduce the price of another (providing it won't be selling at a loss) to entice customers to make additional purchases or draw them in for the first time. This said it's important that the costing is completed accurately beforehand so you are in control!
Can I round the prices up to be more attractive?
Of course. The costing formula is a guide and you should adjust your prices to the nearest 10p or £1. I’ve found that numbers ending in 99 should be left at the supermarkets as they look too “commercial” for local producers.
Are these the same figures that I could use for a business plan?
These figures can be a part of a business plan however, this exercise is about ensuring your products are selling at a profitable price.
A business plan should have a cash flow plan which details your bills and what you expect the income to be. As it's not possible to purchase the exact amount of ingredients or pay a worker for the exact amount of minutes needed each month (unless you're very smart!). A separate cash flow plan is required.
Why charge for a driver or baker when I will do these things myself
If you scale up your bakery business you will have to pay a driver and a baker to work for you. It is best to include these costs at the start, rather than put your prices up later on to absorb the cost.
When you start you will receive the payment for your time and as you grow you can take earnings from the management wage and/or from the outstanding profit.
How do I pay myself as I grow
As you employ staff you will probably find that you will be baking with your team anyway. As you become more hands-off you will find your economies of scale reduces ingredient purchase costs, delivery costs (if the customers are close to each other), and the fixed costs will lower per item sold as you are selling more items.
As you make savings in your costs you will be able to increase your management wage to compensate whilst selling the products at the same price.
How often should I review my products' prices?
Prices of the ingredients can go up because of a bad harvest. They can also increase if the government introduces higher national minimum wage levels. You will also have to readjust for supply costs and any changes in fixed costs.
You might also be able to negotiate better prices from suppliers as your buying increases.
It’s worth planning to review your product's pricing every 6 months for the first 2-3 years.
Do I calculate my costing in units or package size?
The fixed cost mark up should be added to every product's price. When selling products in batches like selling rolls in packs of 6, the cost is added to the total package sold. When calculating the total amount of units sold each month, the same products should be counted as packet sales and not individual units.
Why can't I charge less when I start and increase if I get busy?
Price rises will annoy your customers and lead to a negative brand. If you test your market with one price and then increase it later down the line you will enter a new price tier.
It's the same reason Adidas have charged roughly the same amount for their products for years.
A rise in price can alienate your previous customers. Whilst other people who previously considered your product as cheap (and maybe nasty) take a while to realise you are now a premium product with premium prices. Getting your price strategy right at the start of opening your bakery is crucial.
How to charge a more competitive price for my bread
To reduce your costs to compete with the competition you will need to produce bread on a bigger scale. This requires better equipment that has a larger capacity.
It is usually best to start small, gain experience, and build a team and business systems before making these investments.
You can choose to lower the profit margin to say 40% but this is high risk and should be avoided unless you are sure that your business can afford it with the volume you are making.
The marketplace is dominated by major players who'll be able to outprice you. It's usually best to focus on producing quality products for a good price.
Click to download a copy of the costing spreadsheet.
An opportunity to learn more:
For more information on how to start a bakery business including marketing, writing your business plan, 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.