Our Client’s Coffee Shop Wasn’t Profitable Yet. We Needed to Know Whether It Was Getting There.
By ProfitWise - a Visa Business Plans company
A client came to ProfitWise after running her coffee shop for about a year. She had built a loyal group of regulars, stellar online reviews, and days when the shop felt genuinely busy. But the business still wasn’t consistently profitable, and she had continued putting some of her own money into it.
She wanted to know whether this was still part of the normal process of establishing a new coffee shop or whether the numbers were telling her that something needed to change.
The question wasn’t easy to answer simply by looking at how busy the shop appeared. Sales had grown since opening and the coffee shop was developing a base of regular customers, which were encouraging signs, but our client was still using personal funds to cover some of the business’s expenses. We needed to review how the financials had changed over the year and determine whether the improvements she was seeing in the shop were actually bringing the business closer to self-sufficiency.
We Started With What Was Happening Behind the Sales
Knowing that monthly sales had increased wasn’t enough. We wanted to understand how the shop was generating those sales and what was left after paying for the ingredients, labor and other costs required to produce them.
We looked at how many transactions the shop was averaging each day, what customers were spending on average, and how much of the revenue came from coffee alone compared with pastries, breakfast items, and other purchases. We also wanted to understand how sales changed throughout the day and whether the strong morning business was enough to compensate for slower periods.
Then we looked at the costs behind those sales, including food and beverage costs, payroll, rent, merchant fees, utilities, waste, and the other expenses that can quickly consume the margin on a relatively small transaction.
Once the bookkeeping was properly structured, we could see more than total monthly sales and get a clearer picture of how the coffee shop's economics were developing.
Then We Calculated What the Shop Needed to Break Even
One of the most useful things we could give our client was a much clearer understanding of the sales volume the shop actually needed.
Instead of simply telling her that she needed more customers, we could translate the problem into something she could relate to operationally.
Suppose the shop averaged 150 transactions a day but, based on its current average ticket and cost structure, needed closer to 200 to reach break-even. We could then look at whether reaching that level was realistic based on what had happened since opening.
If the shop went from averaging 90 transactions a day shortly after opening to 150 a year later, while also increasing how much customers spent per visit, that progression would matter when deciding whether to give the business more time.
A shop that needs 200 daily transactions and has steadily grown from 90 to 150 is in a very different position from one that needs the same 200 transactions but has remained around 120 for most of the year.
Both may currently be losing money, but the financial trends tell us much more about where each business may be heading.
More Customers Weren’t Necessarily the Only Answer
We also didn’t want to assume that the solution was simply getting another 50 people through the door every day.
Increasing the average ticket could make a meaningful difference. A customer who buys only coffee contributes something very different from one who also orders breakfast, a pastry or another item.
We could look at which products customers were buying together, which items produced stronger margins and whether some popular menu items were contributing much less than expected after considering their ingredient and preparation costs.
Labor was another important part of the equation. The shop needed enough employees to provide good service, particularly during the morning rush, but staffing the same way during slower periods could leave the business carrying labor costs that its sales volume couldn’t support.
Waste mattered as well. Milk, pastries and prepared foods that were purchased or produced but never sold still represented money leaving the business.
Looking at these areas helped us determine whether the path to profitability depended entirely on increasing traffic or whether part of the opportunity was already inside the business.
The Monthly Trends Told Us Whether Things Were Improving
This is where specialized bookkeeping became especially valuable.
With reliable monthly information, we could compare sales, transactions, average ticket, payroll and other important costs over time and connect those numbers with what our client was seeing inside the shop.
For example, sales might be increasing while payroll was growing at a slower rate, or food waste might be declining as the owner became better at predicting demand. We might also see the average ticket gradually increase as more customers added food to their orders.
Those improvements might not make the shop profitable immediately, but together they could show that the gap was closing.
On the other hand, if sales were increasing while payroll, ingredients and other expenses were rising just as quickly, the owner could be working considerably harder without making much progress toward profitability.
Reviewing those trends during our monthly meetings allowed us to explain what was happening in plain English and identify where changes could have the greatest financial impact.
We Also Needed to Know How Much More Money She Was Prepared to Put Into the Shop
Even if the coffee shop was moving in the right direction, it might still need additional cash before reaching break-even.
Our client needed to decide how much more of her personal money she was comfortable investing and, more importantly, what she expected that additional investment to accomplish.
If she put another $30,000 into the business, for example, we could estimate how long that money would last based on the shop’s current losses and whether the financial trends suggested that the business could reach break-even within that period.
We could also consider whether some of that money should be used differently. Perhaps there was an opportunity to increase sales during slower periods, improve the average ticket or make an operational change that would reduce ongoing costs.
Through our Fractional CFO work, we could model those possibilities and help her understand how each one might affect the amount of additional funding required and the timeline for reaching profitability.
The purpose wasn’t to predict exactly what would happen. It was to give her enough information to decide whether another investment in the business was financially reasonable and what results she should expect to see if she made it.
Sometimes the Shop Doesn’t Need More Time. It Needs Something to Change.
A coffee shop can have a beautiful concept, loyal customers and great reviews while still having parts of its financial model that need attention.
Prices may not have kept pace with ingredient and labor costs. The menu may be creating more waste than the sales justify, or staffing levels may not reflect the considerable difference between the morning rush and slower periods. In other cases, the rent and other fixed costs associated with the location may require a level of sales the shop hasn’t yet been able to generate.
Identifying one of these issues doesn’t automatically mean the business isn’t viable. It gives the owner something specific to evaluate instead of assuming that waiting longer will eventually solve the problem.
With accurate bookkeeping, we can identify where the financial pressure is coming from. Through deeper analysis, we can estimate how changes to pricing, staffing, menu mix or other costs could affect profitability and then follow the results to see whether those changes are actually working.
The Hardest Question Was How Long to Keep Going
After a year in business, our client had a much better sense of what customers wanted and had seen meaningful growth since opening. At the same time, she couldn’t continue covering losses with personal funds indefinitely, so we needed to determine whether the progress the shop had made was enough to justify continuing to invest in it.
That required looking at how quickly the gap to break-even was closing and what was driving the improvement. If transaction volume, average ticket and margins were moving in the right direction and the shop was approaching the sales level needed to cover its expenses, we could estimate how much additional funding might be required and how long it could reasonably take to reach that point.
If the numbers showed that the shop was still a long way from break-even, we could identify what was keeping it there and determine whether changes to pricing, staffing, the menu, operating hours or other expenses could realistically improve the situation. If the changes required were too significant or the assumptions needed to reach profitability weren’t realistic, our client needed to understand that before committing additional personal funds.
This is why looking at one month’s profit or loss rarely tells the whole story for a young business. What mattered in our client’s case was understanding how the coffee shop had performed over its first year, where the improvements were coming from and whether those trends supported a realistic path to profitability.
With that information, she could decide how much more she was comfortable investing, how much time she was willing to give the business and what results she needed to see along the way. Instead of continuing indefinitely and hoping the shop would eventually become profitable, she could make those decisions based on what was actually happening in the business.
