How to Start a Cafe Business

how to start a cafe business

At Small Business Plans our client base includes a significant number of aspiring entrepreneurs looking to venture into the hospitality industry, many of whom are embarking on their first café business endeavour. While being your own boss has its advantages, there are also a few challenges to navigate. This blog aims to guide you through the initial stages of starting a café business efficiently. It is designed to assist you in planning for profitability, maintaining a healthy cash flow, growing a loyal customer base, finding excellent staff and suppliers, and maximising your online and offline presence.

Before investing substantial amounts of money, it is crucial to follow these steps:

Plan for success by starting your business plan:

Many owners are skeptical about the necessity of a café business plan. This skepticism is understandable if you have previously run a successful business. However, if you lack such experience, dedicating some time to business planning is absolutely essential, even if you don’t create a formal document.

Your café business plan should include:

  • Conducting market research to identify your target consumers based on factors such as their age, income, gender, and preferences for additional services (like Wi-Fi, mobile phone-free areas, kiosks, or sustainable practices).
  • Analysing the competitive landscape to understand your strengths and weaknesses relative to other cafes.
  • Identifying external opportunities and threats, such as unique menu offerings, favourable location, or potential competitors.

    Additionally, develop your marketing and operational plans, and establish clear objectives and milestones to guide your progress. While not necessary at this stage, you may consider defining a mission and vision for your café business.

Ensure compliance with legal requirements:

It is common for entrepreneurs to focus on their product or service without giving adequate thought to the legal aspects of their business structure. While understandable, neglecting this step can be risky.

But why does it matter? If your café business fails or faces unexpected challenges (like a pandemic), you may become personally liable for its debts. As a sole trader, your personal assets, including your house, car, and possessions, can be pursued by banks and creditors to repay those debts. On the other hand, setting up your business as a company provides a separate legal entity, protecting your personal assets from such liabilities.

It is crucial to decide early on whether you will operate as a company or a sole trader, considering the associated tax implications and other complexities.

Don’t forget to consider marketing before opening your doors:

Increasing visibility and accessibility with branding:

Ensure that your brand’s messages, imagery, logo, and colours accurately reflect your unique features and resonate with your target market. If your product is not aligned with a particular colour preference of your customers (e.g. pink), avoid using that colour in your logo.

Before creating a logo, it’s crucial to complete an “environment scan” of your consumers and competitors. Understand your target audience’s preferences regarding colours, shapes, fonts, and imagery, and also consider how your competitors’ logos are designed. Seek advice from a professional graphic designer to ensure your branding remains contemporary, as design trends evolve over time.

The marketing section of your cafe business plan:

Include a marketing plan as a section within your overall business plan. Think of it as a high-level overview, and when you have more time, develop a detailed marketing plan as a separate document. Your marketing plan should encompass the following elements:

  • Definition of your target market
  • In-depth analysis of your competitors
  • Goals broken down into manageable steps
  • Strategies to reach your goals
  • Monthly measurement and evaluation to track progress and attract customers to your café, website, e-store, app, etc.

Online presence: this can be broken down into the following…

  • Online strategies: Establish and optimise your website, implement search engine optimisation techniques, and utilise content such as blogs to showcase your expertise and the quality of your products or services.
  • Online marketing: Understand the role of different online platforms like YouTube, Facebook, Instagram, Google My Business, Pinterest, LinkedIn, and Twitter in influencing customer choices. Tailor your content for each platform to cater to your customers’ preferences and behaviours.
  • Search engine optimisation: Implement key strategies such as incorporating relevant keywords, building quality backlinks, and utilising AdWords to improve your search engine rankings. Regularly measure and evaluate the effectiveness of your optimisation efforts.
  • Email marketing: While advertising on platforms like AdWords and Facebook is crucial, don’t overlook the effectiveness of targeted electronic direct mail. It allows you to reach a specific audience by purchasing mailing lists and contacting potential customers directly at a fraction of the cost of traditional advertising campaigns.
  • Product/service quality: Ensure that the products or services you offer are on par with, if not superior to, your competitors. Conduct market research and seek feedback from unbiased individuals to confirm that your offerings genuinely stand out. In the case of a café business, consider factors such as ambiance, service times, a diverse range of drinks, and even the playlist to enhance the overall experience.
  • Pricing: Based on your environmental analysis, determine whether you need to be highly competitive, match competitors’ prices, or price your product/service higher due to its superior quality. Research suggests that pricing more than 7% higher than competitors may discourage potential customers.
  • Increasing visibility and accessibility: Beyond online platforms like Facebook, Instagram, and Google My Business, it’s important to explore additional methods to be seen in various locations. For instance, if your café is located near a gym, consider offering free samples to gym-goers and leaving behind promotional materials or QR codes to drive them to your website. By combining such activities with advertising, you can reach a wider audience and maximise exposure.

Neglecting your operations and services in the planning phase would be unwise:

The employment process:

Develop comprehensive job descriptions and person descriptions (i.e. outlining the ideal qualities and characteristics required for the job). Avoid leaving the hiring process to chance, especially when employees play a significant role in your café businesses’ service and operations. Clearly define the values, approach, and style that align with the job requirements, particularly for customer-facing roles.

Your obligations to employees:

Fulfil your obligations regarding employee compensation, superannuation contributions, payroll tax, workplace safety, and providing employment agreements that cover their roles. The hospitality industry is experiencing huge shortages at the moment – become an employer of choice by offering fair pay, timely payment, and treating employees well is crucial. Recognise that employees directly impact the quality of your product or service and influence customer loyalty.

Money is what makes the world go round, especially when you own a café:

Setting up an efficient accounting system:

While it may be tempting to continue using Excel for your financials, it can be more trouble than it’s worth. Excel lacks preloaded formulas, up-to-date tax rates, and charting capabilities that specialised accounting software like Xero, MYOB, or Quicken provides. It’s important to set up a cloud accounting system sooner rather than later.

Organise your financial documentation:

Create a system to track bills, receipts, invoices, and petty cash. Keeping these records organised will help streamline your bookkeeping process and ensure accuracy.

Separate personal and business finances:

If possible, obtain a company credit or debit card to avoid mixing personal and business expenses. Maintaining a clear separation will simplify your financial management and make tax deductions and expense tracking much easier.

Maximising tax deductions:

Many café businesses spend their own money without realising that those expenses could be tax-deductible. Even if your business isn’t generating revenue yet you’re investing personal funds, such as for transportation to scout potential locations, these expenses can create a loss that can be deducted from future revenue. Understanding the tax implications from the start can help you make the most of available deductions.

Simplifying systems with few transactions:

Starting your bookkeeping process early has the advantage of having fewer transactions to manage. It allows you to familiarise yourself with the process and understand how to categorise and record expenses effectively. Beginning with a small number of receipts and sales will make it easier to handle more complex transactions later on.

Start-up costs and expenses:

  • Comprehensive Budgeting: Develop a start-up budget that takes into account all necessary expenses, ensuring you have enough funds not only for business expenses but also for personal living expenses. In a café business, this includes categories such as fixtures and fittings, heavy and light equipment, inventory, and food supplies. Additionally, consider different financing options such as business loans, personal credit cards, equipment leasing, or seeking equity investors.
  • Choosing the Right Lender: When considering financing options, evaluate factors such as loan terms and interest rates. Research and select a lender that aligns with your specific needs and offers favourable terms.
  • Understanding the Big Three Financial Statements: Gain a thorough understanding of the three key financial statements: profit and loss, balance sheet, and cash flow statement. Learn how to read and interpret these statements to assess the financial health of your café business. This knowledge will help you forecast sales, calculate costs and expenses accurately, and make informed decisions.

Calculating margins:

  • Differentiating Costs and Expenses: Differentiate between costs and expenses in your financial analysis. Costs are directly tied to the quantity of goods or services sold, while expenses are recurring regardless of sales volume. In your café business, the cost would include coffee, milk, disposable cups, stirrers, serviettes, and takeaway trays. Expenses, on the other hand, would encompass wages and utilities like internet and electricity.
  • Understanding Gross and Net Profit: Gross profit is what remains after deducting the direct costs of goods sold. Net profit (also known as EBIT) is the amount left after subtracting all expenses, including indirect costs. By comprehending these profit metrics, you can assess the financial viability of your business and make informed decisions to improve profitability.
  • Calculating Break-Even Point: The break-even point indicates the sales volume needed to cover all fixed costs and variable costs. To calculate it, divide your fixed costs by the difference between the average sales price and variable costs. Understanding your break-even point helps you set sales targets and determine when your business will start generating profits.

Compliance with tax obligations:

  • Registering for GST: If your business is projected to generate over $75,000 in turnover, it’s mandatory to register for Goods and Services Tax (GST). Don’t delay this process, as the government actively pursues those who fail to comply with tax obligations. Reporting and remitting GST correctly is crucial to avoid penalties and maintain a good standing with the tax authorities.
  • Accurate Bookkeeping for Tax Deductions: Maintaining detailed and up-to-date records is essential for maximising tax deductions. Work closely with your bookkeeping system and accountant to identify all eligible deductions and ensure compliance. Be cautious not to claim expenses that are not genuine business expenses, as it’s important to stay on the right side of tax regulations.
  • Separating Personal and Business Expenses: It’s vital to separate personal and business expenses to maintain financial clarity and accurately track deductions. This practice will simplify tax reporting and minimise potential issues during audits.
  • Preparing for BAS and Payroll Tax: Anticipate and set aside funds for your quarterly or monthly Business Activity Statement (BAS) and payroll tax obligations. Failing to plan for these financial obligations could lead to cash flow challenges when you’re faced with a substantial bill at the end of the reporting period.

Watchouts for café owners that you need to be aware of:

Lease negotiations:

Negotiating a lease follows a structured approach, similar to purchasing a car or a house. It’s essential to understand the process and key considerations to ensure favourable terms for your café business.

For detailed guidance on lease negotiations, click here.

Price elasticity:

Price elasticity refers to finding the optimal pricing strategy that balances competitiveness, sales volume, and profitability. By analysing competitors’ pricing, you can set a reasonable price for your offerings, such as coffees and popular food items like bacon and egg rolls or sandwiches. It’s important to note that reducing prices by a small percentage, even 1%, would require a significant increase in sales volume, around 10%, to maintain the same revenue. Thus, it’s not just about being the cheapest but rather finding a competitive price that generates strong sales results.

Premiumisation and authenticity:

In the hospitality industry, there is a growing demand among certain consumer segments for premium and high-quality ingredients. Additionally, some consumers, including overlapping segments, prioritise businesses that demonstrate a commitment to sustainability and recycling. If your market analysis identifies these consumer preferences within your café’s vicinity, it’s crucial to highlight these features in your menus, marketing materials, and digital/social media presence. Emphasising premium ingredients and environmental initiatives can attract and resonate with your target audience, driving customer engagement and loyalty.

If you want to start a café business and need some help getting your business plan sorted, get in touch with us on 1300 644 853 or at info@smallbusinessplans.com.au (24/7 website chat and enquiry available).

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