Thanks to the Internet home based businesses are booming and one of the most popular ways of making a little extra dough is…well… to make dough. Home baked foods from rolls to wedding cakes are a hot commodity all over the country. You can make a nice little addition to the household income as long as you charge enough to cover your costs and make a profit.
Charging too little is probably the number one reason that any food related business goes under. Too many novice entrepreneurs estimate and guess at their food costs, fall far short of what the cost actually is, and create a financial sinkhole that they can’t climb out of.
Good thing you’re not going to do that, right?
Decide on Your Inventory
First of all you’ll want to decide what you are going to offer to your customers. At this point keep the list small with similar items – perhaps only five or so with a few variations to round out the choices without adding cost. Be sure to have a few specialty items that are amazing enough to be signature items. These should be something that isn’t being offered locally. Every bakery in town sells chocolate chip cookies but if you choose to feature something more unusual, like peanut butter cup stuffed chocolate chip cookies, people will have a reason to seek you out – and pay a bit more for your artisan baked goods!
Figure the Cost of Ingredients
Once you’ve decided on your inventory of home baked foods make a list of all the ingredients that you need. It’s best to buy as much as possible at a big box store. You probably won’t be buying enough to qualify for an account with a wholesale bakery supply but it doesn’t hurt to try. Steer clear of the regular grocery stores because you’ll pay the most there. Create a price book with the cost of each ingredient listed. If you pay $3.50 for five pounds of flour then list it that way. Once everything is listed with the cost you will need to break everything down into the amounts you would use in a recipe. For example, one cup of that $3.50 bag of flour costs about 17 1/2 cents. Round it up to 18 cents. The equation looks like this –
5 pounds of flour = $3.50
20 cups of flour in 5 pounds
$3.50/20 = .175 cents, rounded up to 18 cents.
You will break each ingredient down in a similar manner. Now, get your recipe out and add the cost to each ingredient like this –
- 2 cups flour 0.36
- 2 eggs 0.23
- 1 cup milk 0.18
Do that with each ingredient. When you have all of the ingredients priced add them all up. For this example we’ll say that the entire cost of this recipe is $2.75. Divide the entire cost by the number of servings – in this case we’ll call it 12 cupcakes. 2.75/12 = 0.23. Always round up to the next penny when there is a fraction of a cent.
Now, you know that your basic cost per cupcake is 23 cents – but you aren’t done yet.
Estimate the Cost for Supplies
Next you’ll need to figure the cost of supplies. Cupcake liners, waxed paper, food coloring, and other supplies are a little harder to calculate. You need to know roughly how many items you will be selling on average every month and you won’t know that until you have had a couple of months in business. Just estimate for the first few months and then adjust when you have a solid number. Divide the cost of each supply by the total number of items you are selling each month. If you sell 150 cupcakes you’ll need to divide the cost of each item by 150. In some cases you will get fractions of cents so round up to one cent.
Add in the Cost for Equipment
The cost of equipment has to be figured in as well. This is a little more complicated to figure out. One way is to estimate how long each piece of equipment will last and divide the cost by the number of years, then divide that figure by 12 months, and finally divide that figure by the number of items you will sell. If your mixer costs 525.00 and you expect it to last eight years the breakdown will look like this –
$525.00/8 = $65.63
$65.63/12 = $5.47
$5.47/150 items = 4 cents per item.
Complicated, isn’t it? Luckily you will rarely need to update any of the costs except maybe the ingredients!
Include Operating Costs
Operating costs include your utilities, phone, printer cartridges, and other essentials. You will figure those costs by estimating the yearly total and dividing like you did for the equipment. Don’t forget advertising, web hosting, and other possible expenses. At this point you also have to decide whether you will include an hourly salary for yourself in the cost of what you sell. Some people do and some don’t – be careful with this because it can run your price much higher than it should be at this point. When you are established you can consider adding salaries for yourself and any employees you may need to hire.
As long as you are baking to order you won’t have to figure in the cost of unsold products – an expense that commercial bakeries have.
Plan for Profit
Once you have all of your costs broken down per item add them all up. This is how much it costs you to make each item. In order to make a profit you have to make more than the total cost. On average this is done by multiplying the cost times three or four. So, a cupcake that costs you $1.25 to make should be sold for at least $3.75 in order to make a profit.
Before you absolutely decide how much to charge for your items check the bakeries and other home bakers in the area to get an idea of what they are charging. You should not charge too much more or less than the going rate.
Time consuming? Yes, but the hours you spend on pricing your inventory to ensure a profit will pay off in the long run. If you have sold baked goods from your home what are your best pricing tips?
image: © 2013 Marye Audet