Ingredients + baking + packaging + delivery = huge loss in profits.
It’s a common mistake for businesses of any type to make, but especially small start-ups and when working from home. We calculate the cost of everything we can see, add a margin for profit and think of the profit as our income, but there’s a huge hole in the formula.
Company Profit is not the same as your pay, and your pay must be built into the cost of the product.
“I’m a sole trader, I pay myself out of the profits.” I’ve heard this many times from struggling solopreneurs. They don’t treat themselves as a start up company, instead living hand-to-mouth through under priced products.
Unless you plan to work in your business in exactly the same role forever (and you can’t if you ever try to expand), you’ll need to calculate wages from the beginning. In the UK, this is made easier with the minimum wage laws, and harder, because your minimum price is much less competitive.
Calculating Time
Time is the biggest factor business owners leave out, when starting a company. They call it all sorts of sexy names, like “sweat equity,” “an investment in the business,” “grinding” and other nonsense to hide the fact (often from themselves) that they’re losing money.
When I started my biscuit business I included my time, but I priced my biscuits at 1p-2p (company) profit per box. It was a rubbish price for me, but I knew as the business grew, my economies of scale for purchasing would reduce my costs, leaving more profit. The low price allowed me to enter the market competitively, but it was stressful. I also underestimated the cost of logistics. Buying 100kg of flour from a wholesaler is much cheaper per kilo than buying 3kg bags from the supermarket.
When I got to the point where I was all set to place an order for the month, I couldn’t wait to see the discount. Then I realised my car can’t hold half a ton of flour, sugar and butter. It might take the weight, but it physically won’t fit in the back. I had to pay for delivery, which also meant receiving a pallet. Drivers don’t unload pallets for you and don’t usually carry pallet trucks or forklifts. I was restricted to smaller orders or multiple drives to the wholesaler, wiping out any big profit improvements. It was also an extra 3 hours of my time.
Price Yourself In
Work out what your minimum wage is, as an employee, not what you want to be paid as the owner. Ultimately you’ll replace yourself with an employee, so use an employees wage for the cost calculation. If you want more income for yourself, you can take it from the company profit, if the company can afford it.
In the UK it depends on your age what the minimum wage is, plus national insurance contributions, plus pension contribution. These are the official figures from the UK Government.
For our calculation, I’ll use £10 an hour.
Now calculate your actual time in delivering a packet of biscuits. Use a timesheet for one day to prompt yourself for things you might not think of:
- Driving to the supermarket / wholesaler – 1 hour round trip
- Time purchasing in the supermarket or online – 20 minutes (don’t include time for your regular groceries, just your cookie ingredients)
- Cleaning the kitchen – 10 minutes
- Making and baking – 4 hours
- Wrapping, boxing and labelling – 45 minutes
- Delivery boxing and labelling – 30 minutes
- Driving to and from the Post Office – 40 minutes
Things not to include are “capital” time, like office admin, designing the boxes etc. Just add up the time spent actually getting a cookie from raw ingredients to delivered.
So for my home baking time, I can make 400 cookies and in total it took 7 1/2 hours. Some days I got enough ingredients for more than 400 cookies, so I’ll work out how many cookies I can make versus how many trips to the supermarket I have to make, but for now I’ll keep it simple.
7 1/2 hours @ £10 per hour = £75 to make 400 cookies = 19p per cookie.
Calculate Your Production Costs
Now we have all the figures to calculate an accurate production cost, based on making 400 cookies:
- Ingredients – £20
- Production time – £76
- Electricity and water – £6
- Inner wrap – £4
- Printed retail box – £261
- Sub-total: £364
- Company profit: £16 (4p per cookie)
- Total: £383
£383= 400 cookies
If you pack your cookies in singles, that’s £0.96 per cookie.
A 5 pack is £4.80
A 10 pack is £9.60
These are your minimum retail prices, where you get paid for your time, cover your costs and have a little bit left over (company profit) to pay for capital time such as admin, box design etc. You can also save it up for expansion with new machinery or seasonal staff.
For a luxury, handmade cookie, these prices aren’t unrealistic in 2023, but if you want to wholesale your cookies, you’ll need to leave room for the wholesalers profit and the retailers profit. That’s where scaling up your business comes in… making the same number of cookies, in less time with lower costs.
To help you plan your upscaling, I have a video and a spreadsheet.