You know what goes into your cake recipes from eggs to extracts. Although these ingredients are an important part of your bakery expenses, there are other costs you need to consider when picking a price for your homemade cakes. Overhead costs, in particular, can affect whether your bakery business generates a profit or a loss.
Overhead costs are the expenses that don’t trace directly to your cakes but nonetheless are part of your expenses. In short, overhead is the anything that is part of the “cost of doing businesses.” Determining these costs will help ensure that you make enough money to cover your basic expenses with revenue from your cakes. This article will help you calculate and distribute your costs in six easy steps.
1. Find out how much baking supplies cost.
Overhead costs are designed to cover those things that you might not measure exactly, like powdered sugar for dusting the top of a cake, or parchment paper for lining the pans. Determine these costs by tracking your expenses for a month and dividing that amount by the number of cakes you make.
2. Track your delivery and presentation supplies.
How do you package your cakes for transport, delivery, and presentation? Anything you use to take your cakes from kitchen to customer is an expense, and you need to include it in your calculations. The easiest way to determine these supplies is to set an estimate or track your expenses for one month and then divide the total by the number of cakes you make.
3. Determine your rent expense.
This is an expense that doesn’t change, but is critical to pricing your cakes. If your rent changes, take an average for the year or month. If you don’t plan on making lots of cakes, consider not including this cost, or you might end up with an overhead cost of $300 per cake!
4. Research utility costs in your area.
Heat, electricity, water: all these things are necessary to make a high-quality cake, but it can be easy to overlook them when you are setting a price for your finished product. If you live in a very hot or very cold climate, research average utility costs for your area to come up with an accurate guess.
5. Calculate equipment depreciation.
This is the cost of your equipment minus whatever money you can sell it for once you are ready to replace it, spread across a number of years. Here’s an example. Let’s say you have a mixer that cost you $1000, and you will use it for five years. At the end of those five years, you will sell the mixer for parts for $200. Here’s how you calculate the depreciation:
(Cost – End Selling Price) ÷ Number of Years You’ll Use It
($1000 - $200) ÷ 5 years = $160/year or about $13/month
Essentially, depreciation ensures that you put a little money towards new equipment each time you sell a cake, rather than trying to find a lot of money in the future. Calculate it for all major equipment.
6. Distribute Your Costs
Once you add up all your overhead costs, it’s time to apply them to your cake pricing. The easiest way to spread your overhead costs out across your products is to use the following formula:
Expected monthly overhead costs ÷ Expected number of cakes you’ll make = Overhead cost per cake
You can now add this cost to the price for each cake you make to help determine a more accurate overall cost. You can even put this number into our cake price calculator for easy reference!
Calculating overhead cost isn’t hard, but it’s important. By adding overhead into your price, you help ensure that your bakery businesses will be profitable—and that’s something to chew on! So as you begin to price your homemade cakes, be sure that you include your overhead costs. Your business (and your bottom line) will thank you!