6 Tips To Help You Decide How Much Money You'll Need to Open Your Coffee Business
We’re experiencing an interesting and intersectional time in the evolution of the coffee industry. We’re in the middle of a coffee price crisis that is causing small holder producers to abandon their farms, for at least the last for seasons, the global supply of coffee has outweighed the global demand, an increasing number of roaster are finding the confidence to establish direct relationships with coffee producers and pay a fair price for coffee, and increasingly, strides are being made to legitimise the profession of barista around the world.
Yet, in amongst all of this transitioning, chaos and shifting, one thing has not changed - the attraction to open cafe’s and roasteries (or both) by people who are inexperienced in the complexities of the supply chain and business models they’re entering into.
While the barrier to entry to become a barista and roaster is very low, the barrier to entry to becoming a cafe owner or roasting brand owner is made only slightly higher because of the amount of capital required to start the business.
To become a cafe owner or a roasting brand owner, you’re not required to have done any degrees to qualify you to purchase, brew, roast or sell coffee. You’re not required to prove that you can read and understand a green buying contract. You’re not required to prove that you know how to manage cashflow or build a healthy business culture or deal with the public who support your business. You’re not required to prove that you can recognise a sexual predator within your team or that you know what to do when you find out that something untoward has occurred if there is a sexual predator amongst your team. You’re not even required to prove that you will be able to pay your employees for the first month that you’re open.
On a weekly basis, I’m sent at least one email or DM that sounds something like this: ‘We don’t have a lot of money, but the coffee in our local cafes sucks, all the roasters are burning the coffee, and we want to help teach people how to drink coffee and grow the industry here. I don’t have much experience as a barista but I don’t think it will be too hard to open a cafe and roastery and bring awareness to the hard work of the farmers growing the coffee.’ The low barrier to entry for business ownership in coffee means that this person will be likely to go on to open a cafe and I would bet my life savings on it that this cafe would close within the first 18 months (if that).
If you’ve attended Navigating a Successful 10 Year Career and Business as a Cafe Owner you’ll know that while the number of specialty coffee shops opening in the USA continues to increase year on year, the percentage of small businesses that close in the first year remains stable at around 20% (the numbers presented in the table below are specific to the USA). This number doubles by the third year.
This slide is taken from the MAP IT FORWARD Webinar: Navigating a Successful 10 Year Career and Business as a Cafe Owner
I have no intention of dashing people’s dreams of being business owners. Having a business is hard and I’m constantly telling people to “Do the Hard Shit”. However I do have an intention to manage people’s expectations of what they’re getting into before they become business owners in this wonderfully complex industry selling this complex agricultural product that means so much to so many people.
I want everyone opening a business to succeed and perhaps, by delaying opening your business till you have “all your ducks in a row”, you give yourself a greater chance of staying open for as long as you choose to, rather than being forced out of business because you’ve gone broke.
Cafe and roastery owners are not entrepreneurs (entrepreneur = change makers and innovators doing something in business that’s never been done before), they are business owners. Entrepreneurs are making it up as they go purely because they’re creating something that’s never been done before. Business owners don’t need to experience these pain points because many people have done what they’re doing. That being said, it doesn’t mean you can’t do it better. Knowing the flow of your business is much more calculable (easy to calculate) than most other businesses.
Having enough starting and working capital is the key to giving yourself a greater chance at success.
Here are 5 MAP IT FORWARD tips to help you know how much money you’ll need to open your coffee business no matter where you are in the world!
1. Conceive it
Conceive your concept and know everything there is to know about it. Who your customer is, what you’re offering, where you’ll do it, where you’ll find your customer and how you’ll convert them from being intrigued about your product to buying your product, and when you’re going to launch? The more detailed you can get, the clearer your eventual understanding of how much capital you’ll need will be.
2. Imagine it
Knowing what your business will look like on day one is great. But how does it look, operate, evolve and influence over it’s first five years? This is an important (and super fun) creative thought experiment to do in detail. It will help you get more clarity around how your intentions and ideas might evolve if everything goes to plan and when they don’t.
Write a full page synopsis (a brief summary) for each year of the business for the first 5 years. Include details about everything; what the walls look like, the changes in equipment, the amount of staff and what positions they hold, the renovations you’ll have to do , events you’ll run, any changes in product offerings, how much money you’ll be making, what your buying and selling philosophy is etc etc.
Knowing where you’re going will help you build-in the costs of that growth into your initial set up (e.g. you may only need a 2 kg roaster for the first two years but by year four you’ll need a 12 kg roaster. Buying the biggest roaster you can afford as a part of your initial setup may save you money in the long term and support a quicker than expected growth curve should it happen).
3. Write it down in numbers
Once you’ve done all the important, beautiful, fun, creative dreaming and written down all the details in your synopsis, it’s time to start doing the research and assigning real dollar values to those dreams and images.
Go through your synopsis and highlight everything that will cost money or require resources (relationships, special skills etc) and create a list of all of them in a spreadsheet.
Have one spreadsheet for year one and call it “Starting Capital” and another spreadsheet for the remaining four years and call it “Working and Growth Capital”.
4. Double the number, double the time, half the earnings
Ask anyone who’s opened a cafe or a roastery before and no matter how many times they’ve done it before they’ll all tell you the same thing: “It costs twice as much, took twice as long, and I make half as much as I thought it would”. If you know this before you embark on the journey, you’ll be better able to prepared and plan for it.
5. Have 12 months worth of wages in the bank on the day you open your business.
Wages are the biggest burden on your business so having that resource accounted for in your starting capital and in the bank on the first day you do business is more important than you’ll realise.
Resist the urge to spend the money you’ve put aside for wages on anything other than wages. Hiring people, training them, building a culture that they want to be a part of etc etc, these are all expensive things and, as you’ll find out, will eat into most of your bottom line. Not being able to pay your employees is the thing that most likely to sink your business in the first few years.
Most people will tell you that this is unrealistic. I want to remind you, those same business owners are most likely barely scraping by due to being under prepared to go into business in the first place.
6. Don’t rush it
Far too many people expand well in advance of being ready to have done so. Take your time, do your numbers, and don’t compete with anyone else’s pace of business growth. 100% of the time you wont have all the information as to what’s driving their growth. You also have know idea if they know what they’re doing.
If you follow these tips and go through this process, you’ll have a much clearer understanding of exactly what will be required to open a cafe or a roastery and you’ll be way ahead of most other businesses opening at the same time as you.
Depending on where you are and how elaborate your setup is, the starting capital you’ll need could range anywhere from $200,000 to $2,000,000 (or more). I promise you, $20,000 or $50,000 or even $100,000 isn’t a responsible amount of money to have as starting capital in most situations when starting cafe or roastery if your aim is to give yourself the best chance at success beyond “barely keeping the doors open”.
Let us know your thoughts, questions and experiences in the comments below!
[Watch a discussion about this on our Youtube Channel here: https://youtu.be/3t3PHwxeFKw]
This article was written by Lee Safar @leesafar - Founder of MAP IT FORWARD and Elixir Specialty Coffee, and host of The MAP IT FORWARD Podcast. If you’d like to better prepare yourself for becoming a cafe owner, we recommend taking our online webinar, presented by Lee Safar and Elliot Reinecke “Navigating a Successful 10 Year Career and Business as a Cafe Owner” which includes a detailed career and business map to help you understand the trajectory of your career and business flow. Click here for more details.