As the cold reality of Midwestern weather sets in, I thought it might be a good time to talk numbers. Specifically, what does it take to be a profitable small business? Like our weather, the financial reality is manageable but harsh.
Let’s deconstruct a typical coffee shop’s financials. We’ll back into the amount of coffee the business must sell to support its owner.
According to the last census, the median income in Oak Park is about $50,000. Not wealthy, but let’s start there. Assume you open a coffee shop, hoping to make $50,000. Set aside for this analysis your significant investment to even open the doors.
The average net profit margin for a small independent coffee shop is 5%. That means that revenue from sales less all expenses required to run the business, pay staff, service debt, etc. equals 5% of total revenue. Another way to say that is five cents of every sales dollar is profit, or money the owner gets to keep.
How much sales is needed to generate $50,000 for the owner? One million dollars. Assume each customer buys a latte and scone for $8. That’s 125,000 transactions in a single year; 2,400 a week; 340 each day. Easy math, difficult reality in a small town.
A national chain like Starbucks is a different story. Their margins are at least twice as high, or 10-15%. That means they only need to sell one-third to one-half as much to raise the same $50,000 profit. And, let’s face it: it’s not too difficult to imagine 300 people a day frequenting a Starbucks. Which is why their margins are higher.
This simple math explains why you find most independent owners working in their stores. The volume rarely is high enough for the owner to sit back collecting a weekly check. In fact, it is often said that owning a small business is buying yourself a job.
The bottomline is that the bottomline isn’t so big. Small business owners are important to the community because they provide vitality, jobs, products, services and sales tax. But minting money? Not so much.