# Nitty Gritty of the Financials



## ObsidianSage

Hi Guys

I'm putting together a high level P&L model, which will serve as a generic template which I could adapt to a specific site (once located)

I am using the Coffee Boys ratios such as cost of sales being 1/3 of sales (ex VAT), rent must be no more than 10%, rates 40% of rent and staff costs 26%.

I'd appreciate some input on the following please:

First, is there a norm for the definition of cost of sales? Shall I assume its beans, water, milk and food stuff, or is it normal to include equipment leasing and running costs?

Second, I'm finding it difficult to get my head around the costs for gas and electricty, leasing costs (if not part of the cost of sales assumption) and insurance premiums. Does anyone have any advice on how to go about calculating these costs from the ground up?

Third, I'm starting to incur small amounts of expenditure, such as web domain registration, which I am paying out of my own pocket. I think its likely that I will set up a limited company for the coffee shop and I want to be able to deduct as much pre-trading expenditure as possible against first year income. Any advice on whether it is better to incorporate now (assuming my opening in 6 months or more away) and inject some initial capital, or just keep a record of these amounts and claim back once trading is under way?

Many thanks


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## pendragoncs

ObsidianSage said:


> Third, I'm starting to incur small amounts of expenditure, such as web domain registration, which I am paying out of my own pocket. I think its likely that I will set up a limited company for the coffee shop and I want to be able to deduct as much pre-trading expenditure as possible against first year income. Any advice on whether it is better to incorporate now (assuming my opening in 6 months or more away) and inject some initial capital, or just keep a record of these amounts and claim back once trading is under way?
> 
> Many thanks


I'm not an accountant....but i believe you can.

Theres some stuff on the HMRC website about pre-trading expenditure. But i think if the expense would have been incurred if you were trading and was for the business e.g. business domain reg. Then you can claim it. I think you just add it to you accounts as if it was incurred on your first day of trading.


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## MikeHag

Accounting is a pain (I can say that, being a former accountant!). There is accounting and accounting, depending on who the intended user of that accounting is. In your case the intended user is the business owner, not an external party such as HMRC, so to a certain extent the definitions have an element of flexibility...

1. COGS (Cost Of Goods Sold) for a product is all the costs directly attributable to that product, and excludes indirect allocations of costs from, for example, equipment purchases or leases. Put materials in there, and you can also include (if you wish) any variable labour costs that increase/decrease as a result of higher levels of demand... peak hours etc. What you are trying to do is match up revenue of the things you have sold against the directly attributable costs of those items. Running costs are not included as they are not directly atrtibutable.

2. Gas, elec, leasing, rent, rates, etc are Overheads. These are the indirect running costs that it is difficult/impossible to trace back to specific products/services. Rates for your local area are often published online by assessors, or if you know your property address you can ask the council what the rateable value is, and then the rates are around 42% of that. Rent is related to rates, but is probably best estimated as 120% of the rateable value. Utilitity estimates can be obtained from providers but I wouldn't bother and just estimate them based upon the equipment you plan to use. Business and Insurance, stick £800-2000 in depending on the nature of your business... coffeeshop v restaurant... I just did my various insurances last week and you need something like 10 different types of insurance for a hospitality business, plus paying your landlord's property insurance, so don't underestimate it.

3. Why limited company? Have you looked into which would be the most tax efficient structure for you? A sole trader structure is often best for small businesses like this.


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## MikeHag

BTW have you seen this?

http://coffeeforums.co.uk/showthread.php?4950-P-amp-L-Forecast-template


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## ObsidianSage

A Ltd company is only my gut reaction, I know that I need to do the comparison at some point.

I've seen the p&l template (thanks). My question is more about practical ways of estimating the overheads. I'll be fine once I have a starting point that is based on real life info rather than finger in the air estimates.

Cheers!

Dan

Sent from my GT-I9000 using Tapatalk 2


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## MikeHag

OK. Well you can generally claim pre-startup costs if you can adequately convince HMRC (if they ask) that the costs relate to your new business. The best way to do that is having an invoice with your business name on, but even that is not absolutely mandatory. In my case I have pre-startup costs going back to 2011 in my own name, and in the name of a working title I was using for my business, and have only recently pulled these together to be attributed to the new business under its proper name. But I'm doing this on the advice of an accountant, and I think speaking to one in the early stages is a good idea. Incorporating a ltd company too soon is not only unnecessary in my view but will also create additional administrative burden as well as several hundred pounds of wasted accountancy costs.

As for overheads, without historical data finger in the air is as good a starting point as anything as long as you keep going back to it and trying to make it more accurate. You'll never know what your actual annual electricity bill is going to be until you've been open for a year, so don't spend too much time trying to estimate it accurately. (Or you can list all your equipment and the kWh they each use, and find out the cost per kWh, and try to multiply it out over a year... but the chance of it being accurate is slim.) Just be conservative and err on the side of over-estimating the cost. I've estimated around £7k for my annual utilities bill if that helps. It will be wrong, but I will monitor the actual spend during the early months and then restate my annual forecast once I know a little more about the monthly cost.

Is there a particular cost category that you're finding most difficult to estimate?


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## Obsy

I, like Mike, also have accountancy in my background and he's right in what he says. Always err on the side of caution when estimating overheads. There is no scientific, accurate way of doing so unfortunately. You can monitor meter readings monthly and do a quick calculation based on your tariff and adjust your estimate as you progress through time.

You should compare the pro's/con's of sole trader and limited company - you can always change to a limited company further down the line. If you'll have one premise/outlet in your business then the sole trader route is preferable. You can claim pre-trading expenditure but Mike is correct in that you'll need to be able to prove to HMRC if they ask that this was incurred in the formation of the business. If some expenditure is to be pro-rata (e.g. printer bought for domestic use but used for business purposes) then have some workings for the basis you use (sign and date this).

I know an accountant can be costly, especially when you're not trading and seems unnecessary but it could save you time, headaches and money futher down the road if you engage the services of one. Another way to save some cash if you don't intend to do your own book keeping is to find out how much the accountant charges for this aspect and compare to that of a book keeper (can be as much as £40 per hour) so you only pay the higher accountant's rates for the final accounts and not the day to day figures.


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## bdt

I've had a look over the accounts of two separate cafés in the last week who had utilities bills of around £5K and £6K each. Interestingly, the higher bill was from the smaller place with less covers (just under 30) but they have alot of equipment that I guess would use alot of power such as fryers that run all day and an ice cream display freezer, etc.

Best piece of advice I got from my accountant was not rgistering for VAT at day 1 and only doin it when you hit the minimum threshold (£77k). He tells me you can still go back and reclaim vat on any assets you still own, "certain services" within the last 6 months and any stock you've paid for and still have in your possession. I forget the exact amount but I'm sure it amounted to about an extra £10K of gross profit in the first year opposed to if you'd have registered for VAT at day 1.


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## bdt

By the way, I've struggled to stick to the coffee boys ratio for wages in my business plan. Would appreciate anyone elses thoughts on how realistic this is

I think in the first year I'm projecting around 38% and 33% in the 2nd, all going to plan.


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## Obsy

All depends on how you've calculated your staff costs as there are a number of variables that will affect the % of the overall total.


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## ObsidianSage

I ought to re-state that I am currently employed as an accountant!!! I'm sure I've said it somewhere on the forums before. However, I find that this sometimes hinders me. For example, the concept of prudence is instilled in us from the very start of our accountancy training. 20 years later (or so) I find this means that I frequently build contingencies into models to cover uncertainties. This is alright when you have turnover measured in millions, but when you are looking at say £250k pa turnover with tight margins, shoving in what I might have previously considered a modest contingency can suddenly ruin the bottom line.

I guess it therefore means really going as in depth as possible for each P&L line to ensure they are realistic as possible, and to refrain making too many allowances for unknowns. The difference is, this time I will be business owner, rather than the man from the accounts dept, so I will actually be in a position to stop unecessary expenditure before its incurred.

Strangely Mike, in my base case, I've put in £5k gas/electric + £2k for telephone, post and stationery - there may not be much in the way of post and stationery, but I'd forgotten about water rates, so all in all £7k for the lot. I've also put in £2k for travel, but I'm not sure why - I won't be able to claim for turning up for work every day, and I expect most of the things I need to be delivered.

Leasing, which I referred to earlier on in the thread, is a seperate overhead in my model. I've just put in £3k pa, but I have no idea how realistic that is presently. I'll need to do some more work.

Even though its my current profession, I will still employ an accountant to at least deal with HMRC and maybe operate the payroll on a bureau basis. Otherwise, it will be all to easy slip into an admin role and forget about developing the business.

Thanks Mike, Obsy (and hope to see you at the Hasbean day Emma).


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## MikeHag

Year 1:

Part time/variable: 23%

Full time/fixed: 11%

TOTAL 34%

I don't like the high ratios but I think it's best to be prudent. I'd rather find out I can reduce my staffing needs than find I have underestimated how many I need and as a result delivered poor customer service.

I think it depends on your offering and staffing strategy. I haven't read the coffeeboys books for a while but they tend to talk about coffeeshops, sandwich shops, and that damn chippy that John keeps going on about... none of which would require a well trained full time chef on a salary that will keep him/her motivated, so they can get away with more unskilled labour, lower staff costs and high staff turnover that is typical of the industry (although skilled baristas are the equivalent of a skilled chef in my book).

**EDIT** Just read your last post, OP.


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## ObsidianSage

More replies while I was typing. Thanks!


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## ObsidianSage

Wow, I hope those staff costs are fully costed (incl NI and pensions). I hope that also includes you own earnings (Mike & bdt) otherwise I am way off the mark.


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## ObsidianSage

MikeHag said:


> and that damn chippy that John keeps going on about...


Yeah he was going on about it again at the Caffe Culture show last month, couldn't help himself, you know all the awards - didn't they sell it to a plumber or something in the end?


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## MikeHag

A few other things not to forget...

- Do a google search for Small Business Rates Relief. Definitely applies in my region, and maybe in England too.

- Bank charges - not so bad for the first 18 months, but after that the charges build up. Ticks me off that you're charged when you deposit and charged when you withdraw.

- Licenses... music, personal and premises for alcohol

- Planning permissions if necessary (outside seating, for example) - this can translate to thousands in architect and council fees

- Legal. Don't ever think you can do the lease stuff on your own unless you're already experienced in this sector. Recipe for disaster. Get a solicitor who is very familiar with assessing and negotiating retail leases on your behalf.

- Comms/marketing. Websites and logos can be done free by yourself but you might want a professional finish.

- Pressure vessel inspection... I'm mentioning it but I'm not gonna say anything more on the topic!!


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## MikeHag

ObsidianSage said:


> Wow, I hope those staff costs are fully costed (incl NI and pensions). I hope that also includes you own earnings (Mike & bdt) otherwise I am way off the mark.


Includes p/t pay rate at £6.08 (which is actually my minimum, and we will pay higher as staff get better) plus 20% for NI etc (pensions??? Don't think so







) No, doesn't include my own earnings. I'll take drawings from what is left over at the end of the year, or nothing at all.

I've based my figures on research done over around 18 months, going in cafes at various times of the day and calculating a typical ratio of staff to customers. I do think I'm overstating my staff numbers so you may not be as far off the mark as it might seem!!


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## bdt

Yes, that includes a wage for me. If I remember rightly, I've calculated I should need around 140 staff hours per week of which I think I'll work around 50. So, in theory 50/140ths of the annual wage bill would go to me. I know in reality this wouldn't all be paid as salary - would be a combination of small salary and dividends.

Once I open another 6 coffee shops I'll be bringing in enough to justify employing Jimmy Carr's accountants









I'm also sure my accountant said employing part-time staff earning less than around £100 a week means no NI is payable by either the employee or employer (I stand to be corrected on this though as I maybe picked it up wrong).

Apart from the NI savings, I prefer the idea of employing 4 to 5 part-time staff instead of, say, 2 full-timers as if I did the latter, one person going off sick means 50% of my work force is off ill and there's only one other person you can call in to cover for them. More (flexible) PT staff should hopefully mean being left in the sh*t less often by someone calling in sick or leaving at short notice.


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## MikeHag

bdt said:


> I'm also sure my accountant said employing part-time staff earning less than around £100 a week means no NI is payable by either the employee or employer (I stand to be corrected on this though as I maybe picked it up wrong).


Will have too look into that... hasn't been mentioned but very important if true! A quick google search suggests there's something in it, so thanks







Very doable with part timers working 15 hours per week (don't think that's enough hours for our baristas but would work for some roles)


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## ObsidianSage

Hmn, two different approaches to the owners earnings. Well mine has to pay me a salary from day one and consequently, I'll be working plenty of hours in the shop myself and making the rest up with one other full time and a few part timers. Liking your approach though bdt and the Jimmy Carr reference - I'm also doing this with one eye on the news.


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## bdt

He also mentioned there's a very specific amount of salary you can pay yourself where you don't physically pay NI but you still get credited for the purposes of building your state pension years - similar to a mother taking a career break to bring up kids, etc. Will confirm this after the next time I speak to him though


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## bdt

ObsidianSage said:


> Liking your approach though bdt and the Jimmy Carr reference


Cheers but in all seriousness, I do feel a complete hypocrite having a chuckle at his expense whilst working out to the penny how to minimise my own tax bill!


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## ObsidianSage

There's minimising your tax bill and then taking the pi$$.


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## vintagecigarman

If your employees earn less than the NI Lower Earnings Level (currently just over £100 per week) then you don't pay employer's NI. If you are self employed and earning less than around £5k per year you can apply for exception from paying Class 2 NI.

But any years spent not paying NI don't count for benefit or pensions.

Don't forget as an employer that you will also need to budget for paying Statutory Sickness and Maternity Pay.

(I was employed enforcing compliance with NI at one time.)

Sent via Tapatalk


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## bdt

What I think the acountant meant was paying yourself a salary of £5565 per annum (£5564 being the amount that NI doesn't apply to) so you only actually pay 11% NI on £1 of your earnings but you are still credited with having made contributions (all 11p of them) that year therefore it does count to your state pension entitlement. Thinking about it, the only downside to this is that by not taking a salary of £8,105 (the current personal allowance that's tax free), you're missing out on some tax free income which gets taxed at a higher rate if left in the company bank account as profit.

I suppose that seems to me one of the main benefits of going down the Ltd company route as it gives you options on how to pay yourself, etc to minimise tax opposed to going as a sole trader where all your profit presumably is just taxed at the highest rate.

Another main benefit for me was the protection that a ltd company provides. OK, any bank lending etc I'll have to give a personal guarantee for so will make no difference but my £12K per annum rent on 10 year lease means a £120,000 personal liability to me if the business goes belly up!


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## MikeHag

Be careful though. With a limited company there's double taxation of the profits. First the company pays corporation tax on it, and then you pay income tax on earnings/dividends. Again, a decent financial accountant with knowledge of the industry should be able to advise of the best approach.


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## bdt

I'm sure you're OK so long as you're not into the higher tax rate but don't quote me on that.

True, as much as possible I'm letting them take care of tax issues and I'll concentrate on running the place and making great coffee









Having said that, I'm going to try to do as much of the bookkeeping myself. Not so much to save money but I'm a great believer that business owners should have a good grasp of their own business's finances. Have spoke to a few clients before who run businesses and it frightens me how clueless they are about their own financial position. Have seen a few who thought they were doing well go out of business soon afterwards too.


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## MikeHag

That's an important point for any non-accountants out there. The accountant does the accounts for HMRC/Companies House, but not the daily/weekly bookkeeping, and it latter (done by the business owner/manager) that is used to manage the business finances, not the formal accounts.

Going back to Ltd v Sole Trader, my understanding is that going Limited is preferable if you ARE a high rate tax payer, and Sole is best when lower profits are expected. But I haven't looked into it for a while TBH. There's also the fact that some suppliers don't like supplying new Ltd Co retailers... a sole trader is a safer risk for the supplier.


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## bdt

Yes, I suppose the more you are earning, the more beneficial a Ltd Co is.

That's a good point re suppliers as I've found it can work both ways. Some maybe think a Ltd company is more reputable than dealing with an individual but others have maybe had their fingers burned by a Ltd company gong out of business so would prefer to deal with an individual who they could still ultimately pursue even if the business stopped trading.

For me, the issue of signing a long-term lease was one of the biggest issues. Would feel very uncomfortable doing that as a sole trader as, if the business failed, I could personally be liable for upwards of £100K.









As much as anything, I like the idea of totally (and legally) separating my own personal finances from the business's


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## MikeHag

That's why a Ltd Co is often disliked by suppliers. A lot of people start a ltd co with the view that it offers a back door when the going gets tough, which leaves others making the loss that the business has incurred... a trail of destruction that the families of suppliers have to pay for. Ultimately someone has to pay for things that have been purchased.

Signing a 10 year lease isn't such a terrible thing as long as you have done it properly and involved a solicitor. You build in break clauses at appropriate points, and to be honest the amount of startup capital it can take to buy or build a cafe business means that you are fairly unlikely to take advantage of the break clause unless your pre-startup research hasn't been effective. There is also the option to sub-lease, or to transfer the lease to someone else.


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## bdt

Yeah, fair point. Suppliers I've spoken to so far don't seem to have an issue but that's not to say others won't.

I've seen what similar cafés sell for as a going concern so fairly sure I've got a decent exit strategy if (in the extremely unlikely event!) that things don't work out to plan. It's always a concern but, as you say, you can only do as much research as possible but there is always a risk - else everybody would be in business for themselves!


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## finky

bdt,

Just curious, but what multiple of earnings do cafes go for? We are opening in a few weeks and I like to dream about building a business with XYZ profits and selling it on 10X that......!


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## MikeHag

finky said:


> bdt,
> 
> Just curious, but what multiple of earnings do cafes go for? We are opening in a few weeks and I like to dream about building a business with XYZ profits and selling it on 10X that......!


So you'd be looking for a buyer who was prepared to make no profit for 10 years?


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## finky

Businesses are vaued on multiples of earnings , and if there are no earnings can be valued on revenue if the proposition is deemed sound (Ocado)......growth businesses trade on big multiples (Asos/Mulberry) and dull defensives are accordingly cheaper but less volatile.

An expert tells me that Costa could be worth 13x , so i apply a small biz discount to myself and might arrive at 10x, but it's early days.

In terms of time frame, you are buying an income stream in the belief that you can improve/grow it and perhaps scale it to get better returns.


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## MikeHag

Good luck with that! Are you talking about a single shop or a chain? Think you might find that approach to valuing a business cannot be used across the board. Valuation methods differ depending upon the business and thru negotiation. A large listed company like costa cannot be valued using the same approach as a sole trader/small private ltd co, where valuation comes down more to a combination of net book value, goodwill, past annual earnings and just hammering out the price by negotiation. With a small cafe business you'd be lucky to get 4 years of multiple in my view. Investment is about risk v return, and small shops are high risk, low return.


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## bdt

finky said:


> bdt,
> 
> Just curious, but what multiple of earnings do cafes go for? We are opening in a few weeks and I like to dream about building a business with XYZ profits and selling it on 10X that......!


Think Mike's spot on with that. There's so many different methods that can be used depending on the type and size of business. This was something I had a look at recently when considering buying an existing place opposed to starting from scratch. You can actually find business valuation calculators online that take into account countless variables like turnover, net profit,assets, number of years in existence, etc.

On the subject of a simple multiple of profits, I'm sure I heard a calculation of 3 x annual profits plus the value of any equipment/existing stock, etc as being used sometimes. Recouping initial investment in 3 years seems alot more reasonable to me than ten but, again, it very much depends on the type of business. If it was a freehold business, where you own the building, I don't think 10 years is unreasonable because alot more of what you're buying is actually tangible assets.


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