By this point you may have noticed that the title of this document may very well have been “top reasons that coffee businesses fail,” had it been written from a different perspective. This same theme rings true with our #3 entry: Plan Your Startup and Operating Budgets Wisely, or essentially, have enough capital. Starting any new retail coffee business is neither easy nor inexpensive, and as the old adage implies it does take money to make money. But what is enough?
According to the Small Business Administration, 50% of small businesses fail in the first three to five years. Studies show that the top two reasons for failure are management inexperience and insufficient capital.
As you consider your budget planning portion of your business plan, it is reasonable that you should expect that your required opening bankroll or credit access will total in the hundreds of thousands of dollars rather than tens for the model “average” coffee shop in America today; just how much will depend on you and your plans. The actual value will vary greatly from business to business and will be affected by the scope and complexity of your intentions, local market conditions, as well as, your access to resources that others may need to contract separately and vice versa.
While determining the capital equipment portion of your budget, be mindful of the role that each of these tools plays in allowing you to generate your revenue and assign them an appropriate level of priority. Prioritizing the importance of tools in your shop will help to make those detailed purchase decisions easier in the future (is it really such a good idea to purchase your espresso machine, the primary income producing tools of your business, second hand on eBay?), as well as, acting as a solid indicator of which items should be included in your operating budget for routine maintenance expenses.
If you are not experienced developing a budget, there are many resources available at your disposal as were mentioned in the page on immersing yourself into the industry. However, when you prepare your budget, we recommend that you be conservative with your income projections and generous with your expenses. By having enough cash on-hand to not only meet your initial capital expenses, but also your complete operating expenses for a minimum period of one year, you will maximize your chances of success during the formative stages of your business; any less and you will not be giving you or your business the full opportunity it may need to establish itself in the community.
In the event that you make the determination that your available funds are well below your reasonable expectations of what will be necessary to succeed, by all means, find another source of funding or quit while you are ahead. Entering into a business venture that is undercapitalized greatly increases the chances that business will fail. Sure, there is always a chance that you will “get lucky” and everyone has his or her own tolerance for risk, but such ventures are invariably some type of investment in either your spiritual or financial advancement - a smart investor knows how to manage risk.