Here we are post-Covid with more entrepreneurs than ever before. As entrepreneurship has grown, so too has the number of food entrepreneurs. For some, it might be a side hustle that was started when a relative said, "you should sell these!" For others, it was a way to make money while staying home with the kids who were e-learning.
Whatever the reason, a lot of people got into business fast. So fast that there probably wasn't a lot of planning. No business plans or revenue projections were made. Instead, people purchased ingredients, made food, and looked for a way to sell it. Many are doing so illegally - without a Cottage Food License - via social media. Caveat emptor!
If these businesses are lucky enough to still be viable after one year, they only stand a 50% chance of being in business to celebrate a 5th anniversary. Why do so many businesses fail? One theory - one to which we subscribe - is that people know how to make their products, but they very typically don't know how to run a business.
The main thing people tend to ignore is what they don't understand. What most people don't understand are the numbers. Here are the seven most important numbers you need to know and understand to keep your business on track.
Understanding cash flow is critical to managing your business. Simply stated, it is a running balance of every penny you spend and every penny you earn. Operating cash flow is the difference between what you spend and what you earn, including interest on debt as well as any receivables outstanding. When you are spending more money than you are bringing in, you are operating at a loss, and you need to take a hard look at your income and expenses. Monitoring your cash flow is essential to ensure you have the money in your business account to pay all of your expenses – especially tax obligations.
Tracking cash flow will help you understand your net income, which is what you have left once you subtract all your expenses from all your earnings. If this number is in negative territory, your business is spending more money than you are bringing in from sales.
Profit and Loss
Also known as an income statement or P&L, your profit and loss statement is a snapshot of your income minus expenses during a specific period. This should be done at least monthly and yearly. Since history is predictive, you should use your prior P&L experience to budget for the future.
Determining the price point for your products can be tricky. Here is a breakdown of the process.
Gross Margin is also known as Gross Profit. It is what is left over after you subtract the cost of goods sold from the selling price.
It is essential to understand what you have in inventory at all times. Monitoring inventory will allow you to see which items are selling fast or slowly. It also helps you estimate when you need to make more of a specific product or reduce production in items not selling quickly to avoid waste. Remember, some of your ingredients can be perishable, so only store as much as you need before the use-by date expires.
The above numbers are all significant, but nothing is a better indicator of business viability than sales. It is critical to know your sales numbers as stand-alone numbers and as trends. Sales trends are necessary for planning and knowing if your business is going to remain viable.
You need to pay attention to sales figures by day of the week, week over week, month over month, quarter over quarter, and year over year. Understanding these trends will help you plan for future cash flow needs and the quantity of products at any given time. For example, if January and February are slow months, you know to cut production and avoid expenditures during that time.
It is not sufficient to simply know a total sales number for a time period. It is beneficial to understand the following:
Doing the work to understand these numbers might not be fun, but all entrepreneurs must undertake the effort. These numbers provide invaluable information on when your business will reach breakeven and when you will make a profit. Essentially, doing business by the numbers allows you to set goals and create a budget so your business can stay afloat or, better yet, thrive.