How to Run Small Bakeshop Operations by Cooperative

The article below was lifted from Go Negosyo website (www.gonegosyo.net) on the section “Ask A Go Negosyo Mentor”.

Question:

I am an officer about to launch a cooperative by January 2008… [W]e wish to have an idea on how to completely run a bakeshop since it’s a good business in the location we have. I would appreciate any help that you could extend to us. – Charlie Mejos Jr 

Answer:

Before you start, you must realize that there are five groups of people or “publics” that you need to face the moment you start your business:

  1. your organization – this includes your staff, sellers, book keepers, managers, bakers, coop members etc.;
  2. government – local gov’t, baranggay, city hall for permits, BIR for taxes, Food & Drug Adm, DOH,etc.
  3. your suppliers – where to get your basic ingredients like flour, sugar, eggs, butter, fats, flavorings, etc.
  4. your competitors – neighborhood bakeries, supermarkets around, household bakeshops doing small quantities for special orders, and
  5. your customers – who are they and where do they come from; what they want (variety) and when they want it; the price they are willing to pay for it; seasonality involved like Christmas season, summer vacation and special occasions, etc.,

For a coop to survive, the key issue is the selling price to your coop members. Too low mark-up will make your operations lose money. Too high a mark-up will turn off your members and force them to buy outside. I believe that you must first survey from among your members and find our what their budget for bread is per week. From this survey or interview, try to set a sales target.

The next step is to determine your fixed and variable costs. Fixed costs include utilities, depreciation, rent, salaries, etc. Variable costs include costs related to the production of a specific bakery product, say pullman bread or pandesal, which may include direct raw materials used, etc. In business school, we teach our students how to compute for their BEP or break-even point in sales. This means that upon selling that much quantities of products, your profit will just be able to pay for the fixed costs that you shall be incurring on a month-to-month basis.

At the risk of sounding too mathematical, let me introduce you to a formula which I regularly teach anyone who consults me:

BREAK EVEN POINT (Sales) = FC / 1 – VC

where FC = Fixed Costs
VC = Variable Costs

Let’s take an example. After summing up your rent, light, water, taxes, labor costs, etc. you realized that your fixed cost is Php50,000, the question now before you is how much sales must you realize a month in order for you to “break-even”? The concept of break-even is based on the expectation that whatever gross profit you realized will have been enough to just pay for all of your expenses or costs, including administrative costs. Before you continue, try to compute for your variable cost and average it out.

Let’s say for a coop, instead of applying the industry mark-up of cost times 2.5 or 3, your opted to just mark-up at cost times 2 to make your price attractive to the members. This means that your variable cost is 50% of your selling price or something like 0.50 for every 1.00 selling price. After applying the formula, you will be able to determine your BEP at Php100,000. On a daily basis, you must be able to sell at least 3,300 in order to stay in business without losing. The final step is for you to come up with a product list that will motivate your members to buy your bakery products and make it to the 3300 sales target, on average, daily.

The above is the finance part of the business. Ultimately, it is the quality of your baked goods that will make your customers come back. You must have a “product-man” who knows the baking process from start to finish. He may or may not be a baker. He is just someone who understands the intricacies of the baking process, if not the business in general.

– Johnlu Koa, Go Negosyo Mentor

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