Background:
In December 2023, a client purchased a café in Victoria, BC, for $240,000. By June 2024, they were losing $70,000 annually. Frustrated with constant expenses and no profits, they wanted to sell the business but received a low offer of $130,000—far below their investment. They approached us through a reference for help.
The Problem:
During our “Right to Fit” call, the client shared concerns about rising losses. A thorough financial assessment revealed the following root causes:
1. High Cost of Sales:
- Increased from 33% last year to 36% this year, reducing profit margins.
2. Rising Payroll Costs:
- Payroll rose from 38% to 42%, adding unnecessary financial strain.
3. Division Performance Imbalance:
The café had three divisions: Soup, Sandwich, and Coffee. Revenue breakdown:
- Soup Division: $113,000 revenue.
- Sandwich Division: $399,000 revenue (the largest contributor).
- Coffee Division: Only $18,000 revenue, contributing just 3.6% to total revenue.
Our Approach:
1. Identify Key Issues:
- Explained that the Coffee division was a loss centre, consuming high payroll while contributing minimal revenue.
- Highlighted inefficiencies in vendor management, leading to increased cost of goods sold.
2. Recommend Strategic Changes:
- Close the Coffee Division: Saved $92,000 annually in payroll alone.
- Optimize Cost of Goods Sold: Suggested switching to more affordable vendors to reduce the cost of sales.
- Introduce a New Curry Division: Proposed adding a high-margin Curry division based on market demand, with a structured strategy for operations and pricing.
The Outcome:
Within a month of implementing these changes:
- Payroll Savings: The closure of the Coffee division saved $92,000 annually.
- Reduced Cost of Sales: Renegotiated vendor contracts lowered the cost of goods sold by 4%.
- New Revenue Stream: The Curry division began generating positive cash flow within weeks of launch.
- Profitability Achieved: The café transitioned from a loss-making business to a profitable one.
Summary:
By focusing on numbers and making strategic decisions, we helped the café owner turn a struggling business into a profitable venture. Instead of selling at a loss, the client now sees potential for growth and expansion.
This case proves that with the right financial analysis and CFO Advisory, even loss-making businesses have the potential to grow and become profitable. Ready to do the same with your business? Let’s talk!
