Cash Flow & Profitability: Minding Your Dollars and Cents
As a cottage food operator, your expenses will be limited to a few categories. Unlike a larger food business, you will not be renting space.
Fixed costs are those that are not directly related to how much product you produce. They include:
Equipment (such as: pans, cutting boards, knives, scale, cups, storage containers, dehydrator)
Permits & licenses
Required Cottage Food Training Class fees
Other class registration fees
Website development and maintenance
Fees to sell at farmers markets, festivals, etc.
Signage for your market stall
Other marketing/promotion fees
Variable costs are those that do change as you increase or decrease your production. They include:
Employee wages and Social Security contributions
Utilities (gas, electricity, water, phone)
You must consider both your fixed and variable costs when assessing your cash flow and profitability. Cash flow and profitability are different; to calculate profitability, capital expenses such as equipment are typically capitalized, or spread over several years. In this case, the capital expenses are relatively low and are assumed to be “fully expensed” over the year to simplify the analysis. When making formal financial projections (such as when applying for a business loan), you will need to capitalize such expenses.
You will spend money on equipment, supplies, permits, insurance before you have any sales; therefore you need to have funds available to cover this negative cash flow, or be prepared to payoff your credit card quickly to avoid paying interest costs. You probably will not be profitable during the first few months you are operating, especially if you have relatively high upfront costs from having to purchase a lot of equipment and/or pay high permit/license fees. Clearly, the more product you sell, the lower your fixed costs per product will be. If the price of your product is less than your variable costs per product, you can never be profitable. Consider raising the price of your product, and/or seek ways to reduce your variable costs, for example, by finding cheaper containers.