When your passion lies in creating and sharing food with others, bookkeeping and accounting can be a drag. It’s important not to overlook the business side of your cottage food business, though. Before you throw together an Instagram account to start selling homemade food, spend some time thinking about your financials.
The spreadsheets and financial software tools can be overwhelming. Which data points really matter? These are a few pieces of the finance and analytics puzzle that cottage cooks should pay attention to.
Profit is the amount of money that you hold onto as a business owner after all of your other expenses are accounted for — ingredients, equipment, marketing, utilities, and more. What’s left over after all of your expenses is profit. Your business can have revenue without profit if expenses are higher than the amount of revenue, which is why it’s important to keep an eye on the amount you’re spending on your business.
In many ways, profit is the most important number for your business. We remind cooks of the importance of paying themselves for their work. That means ensuring that their time and talent is valued — and often means higher prices on products than what customers might find in a grocery store.
Trying to manage your cottage food business’ expenses on your own can be tough. Ask your business operations questions to fellow food entrepreneurs in the Kitchen, our free-to-join community of cooks.
If we asked you what your all-time food sales were, could you answer? This number differs from profit because it’s only focused on the amount that customers are paying you. We’re not accounting for the cost of doing business — only the amount you’re bringing in.
Your total revenue number can be broken down by year, quarter, month, week, or even by the day. Analyzing your total revenue can help you understand the buying habits of your customers. If you sell chocolate truffles, maybe you see an uptick in November and December, but you know your biggest revenue month is in February, thanks to Valentine’s Day. Knowing this can help you plan your marketing, inventory, and even staffing if you’re in need of an extra set of hands.
Average Order Value
Your business’ average order size can help you understand your customers. If you sell $15 bagel dozens and your average order value is $29, you know that the majority of your customers are buying two dozen bagels at a time, instead of just one dozen or three dozen. Average order value can help you predict your future sales and profit, and knowing the number can help you manage inventory.
When you increase your average order value, you’re increasing your profits. An increase in spend with your company by just $10 per person for 100 existing customers is an additional $1,000 in revenue.
It’s worth testing different pricing strategies to see how they impact average order value. Sometimes cooks are afraid to increase pricing, but they see increased order value when they bump their prices up by a dollar or two. In general, it’s recommended to price yourself one of two ways: as a discount brand, or as a luxury. Middle-of-the-road pricing raises concerns about margins.
Before you can even think about selling food to customers, you have to invest in your ingredients. For some food businesses, ingredient investments will be higher than others. It all depends on how you’re branding your business. Are you positioning yourself as a premium quality, no-shortcuts producer, or are you a producer that focuses on being family-friendly and accessible to the masses? There’s no right or wrong answer. The choice comes down to your goals — but it’s important to make sure that you’re factoring your own time and labor into the costs of your products!
If you want to run a profitable business, you can’t simply sell products for the sum of your ingredients. You must calculate your break-even price (the cost of your goods, overhead, and labor) and then determine the right mark-up (the difference between your break-even price and your retail price). Learn more about pricing your food here.
When it comes to tracking expenses, it can be helpful to differentiate between fixed and variable costs. Fixed costs — like equipment, insurance, and training fees — stay the same no matter how much you produce. Variable costs, on the other hand, change as you increase or decrease production, like ingredients, packaging, and even utilities. As you think about your business’ cash flow and profitability, these expenses must be accounted for.
For new cottage cooks, sometimes your fixed costs will occur before you have regular revenue. For instance, if you need to buy specific equipment to produce your food, you may have to buy it before you’ve ever made a sale.
How are you managing your customer list? Do you have an up-to-date pulse on who’s ordering, how often, and what they’re ordering? Are you simply blasting your email list with un-targeted messages? If you’re like most cottage cooks, you’re struggling to manage your customer list.
Keeping track of your top customers — the ones who purchase most often, spend the most, or share their experiences with your food — is key to growing your business. When you identify your top customers, you’re able to identify common threads between them. Are you selling to mostly busy moms? That helps you narrow your targets for future customer acquisition. You’ll also notice when a top customer stops purchasing, so you can reach out to them before you lose them as a customer for good.
Remember, your top customers can help you grow your business just as much as paid advertising, social media, or email can. Consider turning your best customers into micro-influencers for your business. In exchange for free product, they may be willing to promote your business on social media or via other channels.
If you’re selling homemade pizzas from your apartment, maybe your Korean banchan pizza is your best seller. If you’re a pro baker selling pastries, it could be your special hazelnut-filled croissant. As you manage your sales and inventory, make note of which of your items are selling out consistently. Think of your best-selling items as a roadmap for future product development: how can you double down on your best-selling breads, canned goods, or ready-to-eat meals?
Promoting top items as best sellers can also help drive interest, encouraging new customers to give your best sellers a try.
How do you manage your cottage food finances? Share your tips and recommendations in the Kitchen, our free community of cottage cooks and food entrepreneurs.