I'm thinking about opening up a business, what is the best formula or process for identifying its profitability?
Hi CameronJ, thanks for the post! I'll send this question over to the ChooseWhat staff as well as some of our professional contacts and they'll have an answer for you as soon as possible.
CameronJ, Can you give me more information about the type of business you're thinking about opening up? It's hard to give a good answer with the information you've provided.
I would like to open a food trailer, but I wanted to see if there was a good formula for incorporating the overhead costs to better help define the price of product. Furthermore, if the estimated price of product was too high (competitively speaking), how much additional money would I need to raise to supplement the cost of overhead. For how long? How many customers would I need at each price point, etc. Does that help Koby?
CameronJ, I'm reaching out to my food trailer contacts to see who can provide an answer based on real experience.
CameronJ, The overhead costs should be, on average, about 1/3 of your total food cost. The other 2/3 being equal between ingredient costs and labor to produce the food. Your Overhead Rate is a function of dividing your Total Budgeted Overhead Costs by your Labor Hours for any specific menu item (Total Budgeted Overhead/Labor Hours = Overhead Rate). Labor Hours are defined as the base pay rate plus any other additional costs associated with those employees (example: Unemployment Insurance, Workers Compensation, Social Security & Medicare taxes, Health Benefits, Vacation & Sick Pay, etc). Overhead Rates consist of Advertising & Marketing, Repair & Maintenance, Supplies, Training, Utilities, Communications, Research & Development, Taxes, etc. This equation will give you your overhead cost per menu item and help determine how you should price the item to maximize profit. The first thing you need to do to get a handle on your projected food costs is to put together all of the recipes that you are going to be selling off of your food trailer. Create Batch Recipes (scaled recipes for large quantity production that become their own inventory item when produced and can be used in other recipes) for each of these menu items making sure they account for the proper yield, including known waste, and labor. To better understand the labor cost for any menu item time yourself, or whomever will be in charge of executing the recipe on a daily basis, to see how long it takes to produce the item. Once you have your labor costs figured out use the formula above, including raw ingredient costs per recipe, to calculate the Total Food Cost and then mark it up to give you the desired profit. If the Total Food Cost is to high to give you the profit you would like make adjustments until you are where you want to be (example: cheaper ingredients, less skilled labor, etc). Hope this helps to answer your question - not the easiest thing to explain through a forum.
Thanks so much for the super thorough and insightful post Blake. The reviews for Le Truc on Yelp are making my mouth water. I'll definitely come to your food truck next time I'm in San Fran. Super cool to see ya'll accept credit card payments with Square, too.
It depends on what kind of business it is. Will you be offering services, goods, or a combination of both? How will transactions and orders be handled? How much capital are you able/willing to spend?
