The Importance of Financial Management for Baking Business Owners

Managing finances might not be the first thing on your mind when you dream about running your own bakery or home baking business. Maybe it’s a bit intimidating or sounds like a snooze fest. But having a solid grip on your finances is crucial for any business owner. Don’t worry— it doesn’t have to be complex or scary. In this post, we’ll talk about the importance of financial management for bakeries and how you can ace it. 

What Is Financial Management?

Financial management ensures money flows smoothly in and out of your business. It involves tasks like selling products and paying bills, as well as more complex stuff like managing payroll, ordering supplies, and following government rules. 

The bigger your baking business gets, the trickier financial management can become. For smaller businesses, one accountant or bookkeeper works to keep track of all the cash movements. On the other hand, you’ll need a finance team to keep track of everything once you grow. 

The finance team’s main objective is to ensure your bakery always has enough cash to keep running. But there’s more on their plate, like managing loans, keeping the books in check, and looking after investments.

So why bother with all this? Solid financial management keeps your baking business afloat. At its core, it’s about not letting your business go bust. It deals with big challenges— like sudden drops in revenue, maybe from a global pandemic, or other crises like natural disasters or economic downturns.

Good financial management doesn’t just keep you in the game; it also helps your business grow and prosper. When the economy’s doing well, and interest rates are low, finance teams might grab loans or look for investors to raise money. This cash can help expand your business, like opening new branches or upgrading your baking equipment. They might need to tighten the belt when times are tough by reducing staff or shutting down less profitable bakery products.

Another big part of financial management for bakeries is setting the right prices. If you’re a solopreneur, you should figure out pricing that draws customers without cutting too deeply into profits. You should also keep an eye on costs— everything from salaries and office rent to the electric bill and packaging. 

The Numbers You Need to Track in Your Bakery

Let’s take a look at the numbers you need to track for financial management for bakeries: 

Expenses

Keeping an eye on your expenses matters for a couple of key reasons. For one, you need to know what it costs to run your bakery to see if you actually make money and not just bake for the love of it. 

Also, when tax time rolls around, you’ll need to know what expenses you can write off to balance against your profit and reduce your tax bill.

Overheads, like electricity, phone, internet, and rent, are all part of running the show. Since these costs can be pretty high, it’s easier to track them quarterly instead of every time they pop up. This is handy if you run your bakery out of your home kitchen. Just note what percentage of these bills goes towards your business and keep that noted.

How to Track It: 

For online buys, put all digital receipts into a folder so they’re out of the way but not out of mind. For physical buys, stash receipts in a folder or binder to make things easier when you need to find something for your taxes.

Income

Tracking your income is a must, but it’s shocking how many baking business owners don’t watch this closely. 

If you’re using accounting software and a separate business bank account, you’ll have a clear picture of your cash flow. But either way, keep a detailed list of what’s coming from whom and how much it’s adding up to.

How to Track It: 

Accounting software is gold for keeping tabs on your income because it does most of the legwork. However, a simple spreadsheet with details like order name, date, and amount will do the trick, too.

Sales 

Monitoring your sales metrics is crucial, not just for tracking daily profits but also for getting the scoop on seasonal trends and what your customers love. This involves keeping an eye on which treats are flying off the shelves and which ones are hanging around too long.

How to Track It: 

You can keep a daily sales log in a spreadsheet, noting what sold, when, and how much. It’s a great way to spot trends and tweak your stock and marketing moves. In addition, using the graphing tools in the spreadsheet can help you visually track what’s hot and what’s not.

Inventory

Good inventory management means having enough ingredients on hand— no more, no less. This helps you meet demand while reducing bakery waste or emergency shopping trips.

How to Track It: 

Use an inventory system that updates as you use ingredients and stock up on new ones. Regularly check if something’s running low so you can reorder before you scrape the bottom of the barrel. You should also do a physical count weekly to double-check everything’s on point.

Gross Profit 

Your gross profit margin refers to the percentage of sales above the cost of goods sold. It’s a crucial number that shows how financially healthy your bakery is.

How to Track It: 

Calculate this by subtracting the cost of goods sold from the sales revenue and dividing that by the total sales revenue. Keep an eye on this every month to make sure you’re staying profitable and seeing where you can improve.

Break-Even Point

Knowing your break-even point is very helpful because it tells you how much you need to sell to cover all your costs before you start making a profit.

How to Track It: 

Add up all the fixed costs (like rent and salaries) and variable costs (like ingredients and packaging) to figure out the total dough (pun intended) the bakery needs to cover everything. Review and tweak these numbers regularly to keep up with any changes in costs or pricing. 

Financial Management for Bakeries: Top Tips and Tricks

Whether you’re kneading dough or crunching numbers, mastering the financial side of your baking business is key to keeping your oven hot and your shelves stocked.  Here are the top tips and tricks to ace financial management for bakeries: 

1. Open a Separate Bank Account for Your Bakery

One of the most important things for financial management for bakeries is getting a separate bank account for your business. Mixing personal cash with business funds can get messy fast. In addition, having a dedicated account makes your setup look more professional to customers. It also simplifies tracking your cash flow, which is important.

While you’re at it, why not open a business savings account, too? Tuck away a set percentage of each sale’s earnings into savings. This way, you won’t be tempted to spend your profits on a whim.

You can also set a specific day each month to pay yourself a salary and stick to it. Randomly dipping into your business funds for personal expenses can lead to confusion, especially as your business grows.

2. Know Your Current Financial Situation

Before you can even think about budgeting or planning financially, you need a clear picture of where your business stands right now. That means knowing your income and expenses, reviewing your profit and loss statements, and spotting any areas where you might overspend or not spend enough.

Then, go through all your financial documents, such as bank statements, receipts, and invoices. This will help you understand your bakery’s financial health and prepare you for any future financial hurdles.

If you’re new to this, consider using accounting software. They’re great for keeping track of your finances, from income and expenses to invoices and account management.

3. Create a Budget

With a solid understanding of your financial status, you can now start putting together a budget for your bakery. A budget is basically your plan for expected income and expenses over a certain period.

List all possible income sources— direct sales, wholesale orders, you name it. Then, jot down every expense, both fixed ones like rent and variable ones like ingredients. Don’t forget to include occasional costs like taxes or insurance. Once you’ve got everything on paper, allocate your funds wisely to cover your expenses while aiming for a profit.

4. Make a Financial Plan

Use your budget as the groundwork for a financial plan or forecast. This plan will help you predict earnings and spending based on your current finances and expected market changes. It’s your blueprint for making informed decisions about where to invest and how to price your products. 

5. Have a Financial Buffer

Have you ever read those business guides about keeping a financial buffer? They’re onto something. Aim to have about 3 to 6 months’ worth of business expenses saved up. This cushion will cover running costs during lean periods or unexpected downturns.

It might mean tightening your belt for a while— perhaps by not paying yourself initially or minimizing expenses. However, having this buffer can give you peace of mind and stability.

6. Keep Detailed Accounting Records

Make it a weekly ritual to check on your bakery’s finances. Pick a day and time, grab a coffee, and sit down to review your cash flow. It might sound dry (especially if you’re not a numbers person), but it’s crucial.

If you’re just starting, you don’t need an accountant for this. Set up a simple bookkeeping system with columns for dates, credits, and debits, and keep all your receipts organized. This habit will help you stay on top of your spending and earnings, and it’s a lifesaver during tax season.

7. Diversify Your Products

Think about diversifying once your cake business is up and running smoothly. Starting with one great product is fine, like those awesome minimalist cakes you’re known for. But as you grow, so should your product line.

Expanding your offerings helps safeguard your business against competition and slow periods. For example, you can sell custom cake toppers or trendy, cute cupcakes. These additions can open up new revenue streams without needing a huge upfront investment.

Think creatively about new products or services you can offer with minimal effort to maximize profits and keep your business exciting.

Frequently Asked Questions

Conclusion

Setting up a tracking system for your business finances can be as simple as using a notebook, a spreadsheet, or accounting software—whatever works for you. Just make sure you have something in place. Avoiding the numbers game in your baking business means you might miss out on setting clear income targets, which can slow down your growth. Remember, happy finances = happy business. 

About HICAPS

Over the years, HICAPS has helped bakers and businesses make delicious products by offering ingredients like ChiffonAide Cake Oil, Magic Whizk Whipping Cream, Red Velvet Flavor Emulco, and Instabake Brownie Mix. 

HICAPS also provides tools and resources to valued partners, such as the free “How to Increase Your Sales Amidst the Pandemic” E-book and free dealer locator that helps look for baking ingredients near me. 

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