Skip to main content

How To Squeeze every Last Penny out of Your Cost of Overhead!

If you are an active roaster in the coffee business the single toughest thing to maintain profitability is to maintain or increase your Gross Margin. Coffee is a commodity and as such the biggest challenge is to keep that gross margin level or drive your costs lower within that category on your P&L! So what is your long term strategy to do this? Do you have one? Most people I have talked to just basically say, well when the coffee market goes up, we just increase our prices. Ok I get that, but that is risky business in itself because your competitor's maybe bought coffee at a lower price or their purchasing philosophy maybe much more in-depth and complicated than your own, leaving you at a very real disadvantage along with leaving yourself open to losing customers based on pricing! Which always drove me crazy.
Do you realize that if a coffee shop owner raises their price 5 cents per cup, it more than covers a price increase per pound of $2.50! I have been in this business for 27 years and I have never seen anyone increase their prices by $2.50 pr/lb! So losing customers due to price is the last thing that should happen. First you have to educate your customers that the products you are selling to them are not the same! This is a key factor in dealing with price wars. Sure you can by XYZ's coffee for .25 cents per pound cheaper but you are not going to get the same product that you have, and often times built your entire business on. This has to be stressed, over and over again. Take the price out of the conversation. So that is rule number 1 in maintaining your gross margin. But let's take a look at what else you can do to reduce your overhead costs and increase your profitability.
#1 Outsource, Outsource, Outsource!!
If you are running a production facility it is simply not necessary to have all your employees, be your employees. Yes you should always have key positions that are your direct employees, such as your Production manager, but as far as packing line help or shipping employees, equipment repairs,  even customer service people, no no no! Use temporary employees whenever and wherever possible! This does 2 things. It obviously reduces your payroll but it also reduces benefits you must pay to them such as vacation, health insurance, payroll taxes, etc.. Even accounting, you don't need a full time accountant on your staff, especially if you are a small to medium sized business. I would recommend buying quickbooks and doing it yourself or what I did, was that, and then pay a CPA, preferably a sole proprietor, not a firm, come in once a month and generate your P&L and balance sheet for you. You will save a ton of money by doing this, and you aren't sacrificing anything in the short or long term!
#2 - Write RFP's for everything!! Get at least 3 quotes on anything you do, whether it is office supplies to packaging materials to health insurance etc..., the more quotes you get the better.
#3 - Always back end a sales person's annual salary! A sales person who can live and pay his bills on his/her base salary is suicide! Give them a reasonable base salary, but give them no ceiling in incentives where they can earn for writing new business and the payout should always be based on a formula and percentage of what the company is going to make on the new business! This again limits your payroll and all associated expenses a business must pay to keep employees, as well as highly incentivizes the sales person.
#4-  Constantly evaluate your product offerings and don't be afraid to eliminate all slow moving items! This cuts your inventory carrying costs as well as increases productivity in production. Remember time is money and the less time your production line has to change over it is costing you money!
#5 - Automate everything you possibly can! That includes mail. Hire a mail service that scans all of your mail and gives you the ability to access it from anywhere. The last thing you need is someone in your office manually opening the daily mail, it makes no sense. These services are readily available and extremely cost effective!
#6 - Reduce your DSO with beneficial credit terms. If you can effective reduce your days sales outstanding you will immediately see a measurable increase in your cash flow. So whenever possible push your customers to pay within 10 days with a 2% incentive. Simply put, get the money as quicly as possible. On the other hand, utilize the same tactic when paying vendors, you would be surprised how much you will save annually paying quicker with a cash discount!
These are just some simple rules to incorporate in your business. This works in many businesses not just coffee obviously. I was just using this as an example.
Again, if you are looking for a consultant to help you in any facet of your business, I am available. Feel free to look at my Linkedin profile or contact me by email @ or I will be able to help you in almost any facet of your business, and if for some reason I can't, I will always point you in the right direction if necessary.
I hope you found this post helpful and have a great weekend! I appreciate you following this blog, and please feel free to sign up for my email list on the right hand column of this blog. Thanks again
Joe Leary
Leary Consulting LLC

Popular posts from this blog

The Art Of Creating A Great Coffee Blend

THE ART OF CREATING A GREAT COFFEE BLEND!This is pretty much where the rubber meets the road, in the coffee industry. Coffee blends make up the vast majority of successful products within this industry. Single Origins and Estate Coffees are wonderful, but, coffee blends are generally the mainstay of most consumers purchases. There are several reasons for that.
Today I want to explain and explore how you would go about finding the right coffee blend for you and, what goes into the process of roasting and blending coffee and the underlying reasons. I hope you find this enjoyable and entertaining. After all it really is the "Art" side of the coffee industry. It is also the down and dirty business side of the industry. Let's take a closer look at what goes into this process.

Most of you know that coffee is an agricultural product. With any product that is cultivated and grown, there are natural cycles that occur. Coffee is no different. Coffee is grown in very specific areas of…

The Coffee Roasting Process and Its Effects On The Products You Drink!

By Joe Leary/Principal/Lead Source Digital Marketer's & KYC Consulting on LinkedIn

Today I would like to explain just how much the roasting process effects the coffee we consume on a daily basis. I sincerely hope you find this article enjoyable, interesting and informative.

I am going to attempt to explain the 4 major roasting processes and what it does and doesn't do to the world's second most popularly traded commodity. Before I get started, there is something you need to know about coffee. When coffee is roasted it goes through a process, within that process the beans are altered by temperature and generally gas, LNG, electricity and even wood.

During this process the beans reach levels within that process that makes the beans, "crack". Depending on how light or dark they are being roasting they "crack either once or twice. This alters the flavor profile tremendously, so please keep that in mind while reading this article.

I have included some pictures, t…

Has The Coffee Roasting Business In The U.S. Taken Its Last J.A.B.?#coffee#coffeebusinessnews

Has The Coffee Roasting Business In The U.S. Taken Its Last J.A.B.?
Unless you have been hiding in an unmarked oil well over the past few months, you already must have realized there has been a significant change in the coffee roasting industry. The $40 billion U.S. market has another bully on the block and watch out Nestle, these gentleman are playing for all the marbles.#entrepreneurship

Coffee beans, which is the second largest traded commodity in the world is apparently a target of one of the richest families in Europe. The Reimann family has not so quietly, been actively targeting U.S roasters and using a “price is not an issue" formula!

The cash is there, and they are clearly not afraid to be buying based on future earnings projections. This isn't a strange occurrence for J.A.B., they purchased D.E. Master Blenders, Douwe Egbert for a cool $10 billion. Many analysts refer to this transaction as, "a pure play coffee company".

Their coffee portfolio no…