Many owners of specialty coffee shops focus on coffee quality, decor, or even customer service… but they overlook a crucial and essential element for the continued success of the cafe: accurate cost and profit accounting. Understanding the costs associated with each cup of coffee and every service offered by the cafe ensures business sustainability and helps in making sound financial and administrative decisions that improve operational efficiency and increase profitability. Without a clear understanding of actual costs, sales may appear high, but in reality, profit may be weak or even lead to losses, which can cause the project to halt or decline.
Expert Ahmed Al-Hani explained this topic in a video on Marid Coffee's YouTube channel in a very simple and clever way: he calculates costs and profits through a single cup of coffee. In this article, we give you a summary of the idea, but we recommend watching the full video as it contains important details and practical examples.
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Coffee Cup Profit and Loss Calculation Model
In the video presented by expert Ahmed Al-Hani, a simple and practical model for calculating cafe profits and losses was explained by focusing on just one cup of coffee. Many people assume that the selling price of a cup of coffee, for example, in a cafe that sells a cup for 15 riyals, is entirely pure profit, and that costs do not exceed 20%. But the reality is quite different.
This price includes several essential components: Cost of Goods Sold (COGS), in addition to daily Operating Expenses (OPEX) such as salaries, rent, and electricity, as well as taxes and government fees. Therefore, it is important to understand how this price is broken down to determine the cafe's true profit.
Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) refers to the direct costs associated with producing a product or providing a service. In our case, it is the cost of preparing a cup of coffee. These costs include the raw materials directly used in preparing the product. It is important to accurately know these costs because they directly impact the cafe's profitability.
Examples of COGS components in a cafe:
Coffee beans: The cost of the coffee beans used to prepare the cup, which is the product's foundation.
Milk: Used in preparing coffee types that require milk, such as lattes and cappuccinos.
Syrup Flavors: Such as caramel or vanilla, which add a distinctive flavor.
Sugar: Used to sweeten some beverages like Spanish latte or other sweetened drinks, and is considered a direct cost for each cup.
Example of COGS calculation for a cup of coffee in a cafe:
Coffee beans: 2 SAR (based on an Mblend price of 100 SAR per kilogram, with each cup requiring 20g).
Milk: 0.9 SAR.
Syrup: 1.5 SAR.
Total = 4.9 SAR. (before tax)
Operating Expenses (OPEX):
Operating expenses are indirect costs related to the daily operation of the cafe and are not included in the cost of goods sold, but they affect the project's net profit. These expenses include all costs that ensure smooth and efficient operation.
Employee salaries: Wages for baristas, service staff, and cleaning personnel.
Social and health insurance: Legal obligations towards employees.
Rent: Cost of leasing the premises.
Electricity and water: For operating equipment and lighting.
Internet and telephone: To facilitate communication and customer service.
Bank expenses (POS - Point of Sale and others): Fees for electronic payment transactions.
Government fees: Such as work permits, licenses, postage, and other expenses.
Equipment maintenance: Such as maintenance for coffee machines and refrigerators.
Cleaning and operating supplies: Such as detergents and daily necessities.
Other administrative expenses: Such as office supplies or marketing.
Typically, operating expenses (OPEX) constitute between 20-30% of the cup's value.
Through these courses, you will learn how to practically use the coffee flavor wheel to select the right coffee beans and build a professional menu that enhances your customers' experience.
Back to the Marid coffee cup example
The most important operating expense items are:
- Rent (1 SAR)
- Employee expenses (2.5 SAR)
- Utility bills (0.5 SAR)
- Other expenses including banking, cleaning, maintenance, etc. (1 SAR)
Total operating expenses = 5 SAR
Net Profit:
After deducting the Cost of Goods Sold (COGS) and Operating Expenses (OPEX), the net profit for any healthy and sustainable cafe should be 10% or more of the coffee cup's price. This target is the foundation that ensures the continuity and growth of your project.
Net profit is what remains after covering all costs related to preparing and selling the cup, including direct costs such as raw materials, and indirect costs such as rent, salaries, and government fees. Therefore, accurate profit calculation requires a clear and comprehensive understanding of all expenses associated with the cafe's activities.
Achieving this profit does not depend solely on the price of the coffee cup; it is closely linked to the number of customers who visit the cafe daily, and the frequency of their visits and their loyalty to the place. The more customers and the higher the retention rate, the greater the opportunities for achieving higher profitability. Therefore, managing customer relationships and improving the customer experience are crucial factors in increasing net profit.
Let's remember that the selling price of the cup is 15 riyals. According to our calculations:
We start by deducting VAT = 2.25
Cost of Goods Sold = 4.9 riyals.
After deducting tax and COGS from the selling price, 7.85 riyals remain.
From this amount, operating expenses (OPEX) must be deducted, which in our example we calculated as 5 riyals.
To this, we add depreciation expenses = 0.3 riyals
Thus, after deducting all mentioned costs, the net profit is 2.55 riyals per cup.
Regularly analyzing these figures and meticulously tracking costs helps management make sound financial and administrative decisions, such as adjusting prices, improving operations, or reducing unnecessary expenses, which contributes to enhancing profitability and project sustainability.
Therefore, net profit is the true indicator of a cafe's success, and it should be a clear goal for every project owner striving to build a sustainable and profitable business.
How to build your cafe's success?
Focus on sales stability.
Enhance repeat purchases from your customers.
Invest in customer loyalty and the quality of their experience.
Tips to increase your cafe's profitability
To increase cafe profitability, it is important to focus on improving operational efficiency and reducing costs without affecting product or service quality. Here are some practical tips:
Accurate cost analysis: Monitor the actual costs associated with each product and service to identify opportunities for savings.
Improved inventory management: Avoid waste by organizing inventory and purchasing materials in appropriate quantities.
Employee training: Increase staff efficiency to improve service speed and quality, which boosts customer satisfaction and sales.
Product diversification: Offer multiple options to cater to different tastes and increase sales volume.
Effective marketing: Use social media to attract new customers and enhance the loyalty of existing customers.
How can Marid's experience help you?
Marid's experience provides you with a practical model for accurately calculating costs and profits, helping you reduce costs without compromising the quality of coffee and service provided. By following an effective accounting system, you can make informed financial and administrative decisions that enhance the sustainability and profitability of your project.
Follow us for more
For more details and practical examples, we recommend watching the full video by expert Ahmed Al-Hani on our YouTube channel. Don't forget to subscribe to the channel to follow more videos that help you develop your business and achieve success.
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