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Issue link: http://freshcup.epubxp.com/i/71652
We'll say it will cost $80,000 to build out your kiosk with all the necessary equipment and signage. If you want to get this money back within a two-year timeframe, you would need to make $40,000 per year of profit. To determine how much you need to sell to create that profit, start by figuring total costs. Kiosks tend to be open only part of the day, so let's assume you will need two people to staff the loca- tion eight hours per day, five days per week. If you pay them $10 per hour plus $2 an hour for taxes, your labor costs will be $192 per day or $49,920 per year. Then there are utilities and other fixed costs: Let's say they run an additional $10,000 per year. We will also assume that the rent you will be paying is $20,000. Add up labor, utilities and rent to get your total fixed costs: $79,920 per year. Next, factor in variable expenses. These are costs that directly grow or contract with sales. Cost of goods sold, for example, will likely be your largest variable expense. If a latte costs you $1.25 to make in product cost, it will cost you $1.25 per unit whether you sell one or 100. Let's assume that your cost of goods sold runs you 30 percent of sales. Therefore if you sell $100 worth of coffee, you can expect that this coffee will set you back $30 in product costs. In our example, we'll say there's also 5 percent in other variable costs for items such as credit card fees and marketing expenses. That makes our overall variable cost 35 percent and the variable profit 65 percent. Now take the $79,920 in fixed costs and add the $40,000 you want to make back on your initial investment, and you see the total cash you need to generate to reach the target: $119,920. To determine the required sales, you can divide this $119,920 by the total expected variable profit of 65 percent. This shows you need to generate $184,492 in sales to reach the yearly goal. SALES COST OF GOODS $184,492 $55,348 OTHER VARIABLE COSTS $9,225 VARIABLE PROFIT LABOR OTHER FIXED RENT TOTAL FIXED COSTS PROFIT $119,920 $49,920 $10,000 $20,000 $79,920 $40,000 Percentages in right column are in relation to total sales. Is $184,492 an achievable number? Well, if you are open 52 weeks per year, that is $3,548 per week. But because you're open five days per week, you need to see more than $710 per day. If the average customer spends $5, it would take 142 customers per day to achieve the goal. In short, if you can't serve at least 30% 5% 65% 27% 5% 11% 43% 22% 142 customers per day at the location, then the kiosk is not a good investment. If these expectations sound high, take a look at your alterna- tives. Do you really need to spend $80,000 on the kiosk? Will the landlord be willing to lower the rent? By going through a step-by- step scenario, you can determine what changes you need to make to build a profitable business. Do you think you can do more than $184,492 in sales? You can use the same method to determine what your sales would be at higher levels. If you think you could generate $250,000 in sales, you can multiply the $250,000 by the 65 percent profit margin. This will give you $162,500 of variable margin. If you subtract fixed costs ($79,920), you see that your profit will double to $82,580 per SALES COST OF GOODS $250,000 $75,000 OTHER VARIABLE COSTS $12,500 VARIABLE PROFIT LABOR OTHER FIXED RENT TOTAL FIXED COSTS PROFIT $162,500 $49,920 $10,000 $20,000 $79,920 $82,580 Percentages in right column are in relation to total sales. year. The build-out would pay for itself in less than 12 months. As with any business, it's important to understand your risks and expectations prior to investing money. If you base your deci- sion on hard, reliable data, you'll know exactly what to do to make the new spot a success. freshcup.com July 2012 31 30% 5% 65% 20% 4% 8% 32% 33%