You’re the owner of a coffee shop and your friend is coming to visit you. Your friend is trying to be supportive of your business. Should you offer them food or beverages for free?
Free food: What does it really mean to your business?
A lot of people feel that offering free goodies from their operation is the way to go. After all, it’s just the profit that you are giving away. Right?
Not quite. The cost of the goodie is also being given away and you will need to pay for that out of your own pocket, or with the earnings from the shop. Let’s look at the cost of a muffin, for example. There’s the actual ingredients, which will fluctuate depending on the type of muffin; the use of the muffin pan, it will wear out over time and need to be replaced; the use of the oven, which will also wear out over time and need to be replaced; the power to run the oven, which will increase as the oven ages; the mixing machine, another item that will wear out over time and need to be replaced; the power to run the mixer and keep the lights on in the kitchen; the cost of the building that houses the kitchen, either as a piece of the rental cost or mortgage interest; the tables and chairs that are available for customers; insurance on the premises; the cash register; and finally the labour cost for the person making the muffins. Did I miss anything? Probably, but you get the idea.
We don’t actually see many of these costs and for one muffin they may not seem significant, but the operations of the shop have to cover all costs. Ideally, you, the owner, would like there to be money left over after all the costs have been paid to enable funds that will be needed in the future. Especially to replace old machines, that use more power and aren’t as efficient as they once were. If you are taking drawings out of the business to pay for personal costs, like food, housing, and so on, then the coffee shop needs to earn enough over and above the cost of a muffin and all the other offerings a customer can buy from the coffee shop, to pay for these personal costs.
Each item available for customers to purchase and enjoy contributes to the overall cost and profit of the coffee shop. The individual items don’t contribute equally. Each item has an item- specific cost, plus a cost of contributing to the operation as a whole, and a selling price that determines the amount of profit left over. The selling price is what the customer is willing to pay. So, if the muffin only contributes $1 to profit after all other costs are accounted for, and a piece of pie, for example, contributes more than that, you now have another decision to contend with. How many muffins should be made compared to pies? How many will the customers demand in the course of a day? This mix of offerings is a bit of a science.
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