🍞 Costing, Pricing and Profit

You cannot price what you have not costed, and you cannot cost a loaf by guessing at the flour. Costing starts with the formula, because the formula tells you exactly how many grams of each thing go into each loaf. Everything else is multiplication.

Work it through with a published formula. In baker's percentage, flour is always 100 percent and every other ingredient is a percentage of the flour weight. A published white pan bread formula reads: flour 100, water 62, yeast 3, salt 2, sugar 4, shortening 3, defatted milk solids 2. Add those up and the total formula percentage is 176.

Now scale it to a real bake. You want 20 loaves scaled at 900 g of dough each, which is 18,000 g of dough.

1. Flour needed = (18,000 divided by 176) times 100 = 10,227 g. Round to 10,230 g.
2. Water = 10,230 times 0.62 = 6,343 g.
3. Yeast = 10,230 times 0.03 = 307 g.
4. Salt = 10,230 times 0.02 = 205 g.
5. Sugar = 10,230 times 0.04 = 409 g.
6. Shortening = 10,230 times 0.03 = 307 g.
7. Milk solids = 10,230 times 0.02 = 205 g.

Check the total: about 18,006 g. That is your batch.

Now price it. And here is the rule that makes this module honest: this course does not know what anything costs where you live, and it will not pretend to. The numbers below are written in an illustrative unit, CU, and they are invented purely so you can see the arithmetic working. Cross them out and write your own.

Use the delivered price, not the shelf price. Delivered price is what you paid, plus transport to your door, plus any loss in handling such as a torn bag. If you buy a 50 kg bag of flour, divide the delivered cost of that bag by 50 to get your price per kilogram.

Illustrative prices per kilogram: flour 1.00, yeast 6.00, salt 0.60, sugar 1.40, shortening 3.00, milk powder 8.00. Water is treated as effectively zero here, though if you buy or truck water, put it in.

• Flour: 10.230 kg times 1.00 = 10.23 CU
• Yeast: 0.307 kg times 6.00 = 1.84 CU
• Salt: 0.205 kg times 0.60 = 0.12 CU
• Sugar: 0.409 kg times 1.40 = 0.57 CU
• Shortening: 0.307 kg times 3.00 = 0.92 CU
• Milk powder: 0.205 kg times 8.00 = 1.64 CU
• Batch ingredient cost = 15.32 CU

Divide by the loaves the batch actually produced. Not the loaves you planned. Count them after cooling. 15.32 divided by 20 = 0.77 CU of ingredient per loaf.

Look at what the arithmetic just told you. Flour is 10.23 of 15.32, which is 67 percent of the ingredient cost, even though the fancy ingredients cost far more per kilogram. That is a consequence of these particular illustrative prices, not a law. There is no reliable published benchmark for what share flour should be of a bakery's ingredient cost, so do not adopt 67 percent as a target. Run your own numbers and find your own share. But the pattern is worth knowing: in a lean bread, the cheap ingredient you buy in bulk usually dominates, and a small percentage change in the flour price moves your cost more than a large change in the yeast price.

Test that. If flour rises 10 percent to 1.10 CU per kilogram, the flour line becomes 11.25 CU, the batch becomes 16.34 CU, and cost per loaf becomes 0.82 CU, up 6.5 percent. If yeast rises 10 percent instead, the batch rises by only 0.18 CU and cost per loaf moves less than one percent. Now you know which supplier's price list to watch.

One more discipline. Ingredient cost is not full cost. It is the first of five lines. Fuel, packaging, labour, overhead and wastage are still to come, and a baker who prices from ingredient cost alone is selling at a loss with a smile on their face.

Ingredients are the cost you can see. Overheads are the cost that quietly eats the difference between a busy bakery and a profitable one, because they carry on whether or not the oven is lit.

Start by listing them. A small bakery's fixed monthly costs usually include rent or a share of the household rent, electricity standing charges and lighting, water, licence and permit fees spread over twelve months, insurance if you have it, loan repayments, telephone and airtime used for orders, transport that you pay for by the month rather than by the trip, and depreciation, which means setting aside money each month to replace the oven and mixer before they die. Most small bakers forget depreciation, then discover that the oven has failed and there is no money to replace it. If your oven cost you a known amount and you expect it to last five years, set aside one sixtieth of that amount every month, and write it in as a cost.

Now convert the total into a rate you can use. The trick is to divide by hours, because time is what your bakery actually sells.

Use illustrative figures, and replace every one with your own. Suppose your total fixed costs for the month are 900 CU. You bake six days a week, about 26 days a month, and each day the premises are genuinely in production for 6 hours. That is 26 times 6 = 156 production hours a month.

Overhead per production hour = 900 divided by 156 = 5.77 CU per hour.

That single number is one of the most useful things a small bakery can own. It tells you what an hour costs before you have touched an ingredient. Now apply it. A bake that occupies the premises for 3 hours from mixing to cooling carries 3 times 5.77 = 17.31 CU of overhead. If that bake yields 60 loaves, overhead per loaf is 17.31 divided by 60 = 0.29 CU.

Notice what that shows you. If the same 3-hour bake yields only 40 loaves because the oven is half empty, overhead per loaf jumps to 17.31 divided by 40 = 0.43 CU. Nothing changed except how full the oven was. Half-empty ovens are one of the most expensive habits in small baking, and the cost never appears on any invoice.

Labour is the next line, and it is costed the same way. Take the wage you pay, including your own wage, because your time is not free. If a baker is paid a known amount for a shift, divide the shift cost by the units produced in that shift. If two people work a 6-hour shift and produce 180 loaves, then labour per loaf is the total shift wage divided by 180. Write your own wage in at what you would have to pay someone else to do your job, or you will price yourself out of a living.

Fuel is the line where sourced figures exist, so use them. A traditional wood oven uses more than 0.5 to 1 kilogram of wood per kilogram of baked wheat flour. Your batch in Lesson 1 used 10.23 kg of flour, so budget 5 to 10 kg of wood for that bake.

Energy cost per unit = (fuel used per bake times fuel price per unit) divided by units produced.

At an illustrative wood price of 0.15 CU per kilogram: 5 kg costs 0.75 CU and 10 kg costs 1.53 CU. Divided over 20 loaves, that is 0.04 to 0.08 CU per loaf. Small in this example, and possibly very large in yours, which is exactly why you must use your own wood price.

Improved ovens are reported to cut fuel by 50 to 80 percent against traditional ovens, and one Ethiopian bakery case recorded annual fuel cost falling from USD 1,900 to USD 970, a saving of USD 930 a year, with income up USD 730 a year and payback of about 15 months. Those are real reported figures from one documented case, not a promise about your oven.

For an electric or gas oven, no consumption figures were available to this course. You do not need them. The kilowatt rating is printed on the machine's own nameplate. Multiply that rating by the hours you run it and by your electricity tariff, and you have your figure from your own equipment.

Put the lines together for one loaf: ingredients 0.77, fuel 0.06, overhead 0.29, plus your own labour and packaging. Already the loaf costs far more than the ingredients suggested.

Most small bakers set price by adding a bit to cost, or by copying the shop opposite. Both methods fail in the same way: they leave the bakery working hard for a margin that turns out, when the year is counted, not to exist.

First, get the arithmetic straight, because this is where most of the money is lost. Markup and margin are not the same thing, and confusing them is the single most expensive mistake in small-business pricing.

Markup is a percentage of cost. Margin is a percentage of the selling price.

Take a full cost of 1.20 CU.

• A 40 percent markup gives a price of 1.20 times 1.40 = 1.68 CU. Your profit is 0.48 CU, which is 0.48 divided by 1.68 = 28.6 percent of the selling price. So a 40 percent markup gives you only a 28.6 percent margin.
• A 40 percent margin gives a price of 1.20 divided by 0.60 = 2.00 CU. Your profit is 0.80 CU, which is 40 percent of the selling price.

Those are very different prices from the same cost. The general rule is: to get a margin of M percent, divide your cost by (1 minus M as a decimal). To make 50 percent margin, divide by 0.5, which means doubling the cost. Write that rule down.

Why margin and not markup? Because margin is the language everything else uses. Your break-even, your wholesale discounts and your survival all work off the percentage of each sale that stays with you.

Now, what margin should you aim for? This course cannot tell you and will not invent a figure. One commercial guide published for one country in one month gives indicative gross margins of about 40 to 55 percent on bread and 60 to 75 percent on custom cakes. Those are one blog's estimates in one currency and they are almost certainly wrong for your town. What they do show is the shape most bakeries find: a volume line like bread runs on a moderate margin and pays the bills through units, while an occasion line like a decorated cake runs on a much higher margin and few units. If your own numbers show bread at a higher margin than cake, check your arithmetic before you celebrate.

Set your own required margin from the bottom up instead. Ask: what does the business need to earn each month, over and above all costs, to pay you properly and to fund the oven you will need in three years? Divide that requirement by your expected monthly sales in units, and that is the profit each unit must carry. Add it to full cost and you have a price.

Worked example. Full cost per loaf 1.20 CU. You need 600 CU a month of profit and you sell 1,500 loaves a month. Required profit per loaf = 600 divided by 1,500 = 0.40 CU. Price = 1.20 plus 0.40 = 1.60 CU. Check the margin: 0.40 divided by 1.60 = 25 percent. Now you know exactly what you are asking of the market, and why.

Then test that price against reality. Weigh three competitor loaves and calculate their price per kilogram, because a cheaper-looking loaf is often a smaller loaf. If your price per kilogram is close to theirs, you have a viable price. If it is far above, you must either cut cost, sell a different product, or give the customer a reason that is worth the difference.

A price that holds needs a written repricing rule, decided in advance while you are calm. Something like: if the delivered flour price moves more than 10 percent, recost the whole loaf within seven days and change the price at the start of the next month. Without a rule, most bakers absorb three small rises in a row and only notice when the bank balance stops growing.

Two cautions. First, a price rise is easier to sell when the loaf visibly changes: a slightly larger loaf, better packaging, a new wrapper. Second, never quietly shrink the loaf to hold a price without checking the law. Where your country regulates declared bread weight, the loaf must meet its declared weight after cooling, and that is a matter for your national standards or legal metrology authority, not for you.

Waste is the cost that never appears on a receipt, which is exactly why it kills bakeries. It has to be measured, priced and recovered, and most small bakers do none of the three.

Begin by separating two things that look alike and are not.

The first is weight loss, and it is not waste. Dough loses water in the oven and while cooling. That is baking loss, and it is why your scaled dough weight is always higher than the loaf you sell. Fermentation and scaling losses reduce dough yield too, and can be up to 5 percent and more depending on the work process. No reliable published table of baking loss by product exists, because these are not fixed values, so measure your own in one afternoon:

Baking loss percent = (scaled dough weight minus cooled loaf weight) divided by scaled dough weight, times 100.

If you scale at 900 g and the cooled loaf weighs 810 g, loss is 90 divided by 900, times 100 = 10 percent. To sell a 700 g loaf at that loss, scale at 700 divided by 0.90 = 778 g. This does not increase your cost per loaf; it tells you how much dough each loaf consumes, which is already in the Lesson 1 arithmetic. Get it wrong and you either give bread away or sell short weight.

The second is true waste, which is loaves that never earn anything. There are four kinds and you must count them separately, because each has a different cure:

1. Bakery rejects: burnt, misshapen, under-scaled, dropped. Cured by process control.
2. Returns and unsold stock: the largest and most variable line for anyone selling through traders or a route. Cured by production planning, not by baking better.
3. Storage and transport damage: crushed, damp, pest-eaten, spilled flour. Cured by handling and premises.
4. Product destroyed for safety: mouldy or ropey stock. Cured by hygiene, cooling and pH control, and never by putting it back into the production area.

No published wastage benchmark for small bakeries was available to this course. That is not a gap you should fill with a guess. Measure yours for one week. Rule four columns, count every loaf, and total them.

Worked example, using counted numbers from one bakery's own sheet. A bakery produces 200 loaves a day, six days a week, for four weeks: 4,800 loaves.

1. Rejects 96, which is 96 divided by 4,800 = 2.0 percent.
2. Returns 340, which is 7.1 percent.
3. Storage damage 24, which is 0.5 percent.
4. Total waste 460 loaves, which is 9.6 percent. Saleable fraction is 90.4 percent, or 0.904.

Now recover it in the price, and do it the right way. Most bakers add the percentage: cost times 1.096. That undercharges, and here is why. If your full cost is 1.20 CU per loaf and you bake 100 loaves, you spend 120 CU but only sell 90.4 loaves. To get 120 CU back from 90.4 loaves you need 120 divided by 90.4 = 1.33 CU per loaf. Adding 9.6 percent would have given only 1.32 CU, and at low waste rates the gap looks trivial, but at 20 percent waste, adding 20 percent gives 1.44 while dividing by 0.80 gives 1.50, and the difference is your whole profit.

So: waste-adjusted cost = full cost divided by the saleable fraction.

Then use the measurement to attack the biggest line. In the example, returns at 7.1 percent are three times everything else combined, and returns are a planning problem. Look at which days they come from. If Monday and Tuesday returns are double the rest of the week, cut Monday and Tuesday production by a quarter and change nothing else. Waste falls, cost per saleable loaf falls, and you did not touch the recipe.

One rule that is not about money. Product removed for mould or rope must be destroyed and kept out of the bakery. Contaminated returned bread reseeds the whole premises, and rope spores from returned loaves are a known route back into production. That saving is never worth it.

Break-even is the number of units at which you stop losing money and start making it. Every bakery has one, most bakers do not know theirs, and the ones who do sleep better.

Two cost types, and getting them apart is the whole trick.

Fixed costs do not change with how much you bake. Rent, licences, insurance, loan repayments, depreciation, a salaried employee, the standing charge on electricity. Bake nothing on Monday and you still pay them.

Variable costs change with every unit. Ingredients, packaging, fuel per bake, casual labour paid per shift, transport paid per delivery. Bake nothing and they are zero.

Some costs sit in between. A baker paid a fixed monthly wage is fixed. The same person paid per shift is variable. Put each cost where it really behaves, not where it feels comfortable.

Now the formula, and it is one line:

Break-even in units = total fixed costs divided by contribution per unit, where contribution per unit = selling price minus variable cost per unit.

Contribution is the amount each loaf contributes towards paying the fixed costs. Until the fixed costs are covered you are working for the landlord. After that, every loaf's contribution is profit.

Worked example, with illustrative figures you will replace.

Monthly fixed costs 900 CU. Selling price 2.00 CU per loaf. Variable cost per loaf 1.10 CU, made up of ingredients, packaging, fuel and per-shift labour.

1. Contribution per loaf = 2.00 minus 1.10 = 0.90 CU.
2. Break-even units = 900 divided by 0.90 = 1,000 loaves a month.
3. Over 26 trading days that is 1,000 divided by 26 = 38.5, so 39 loaves a day.
4. Break-even sales value = 1,000 times 2.00 = 2,000 CU a month.

Now you know something concrete: below 39 loaves a day you are losing money, and every loaf above that adds 0.90 CU of profit. If you sell 1,500 loaves a month, profit is (1,500 minus 1,000) times 0.90 = 450 CU. Your margin of safety is 500 loaves, which is 33 percent above break-even. If sales fall by a third, you break even and no more.

Test the levers, because this is where the model earns its keep.

Raise the price by 10 percent to 2.20. Contribution becomes 1.10. Break-even falls to 900 divided by 1.10 = 819 loaves, or 32 a day. A 10 percent price rise cut the break-even by 18 percent. Price is the strongest single lever you have.

Now instead let the flour price push variable cost to 1.25 and hold the price at 2.00. Contribution falls to 0.75. Break-even rises to 900 divided by 0.75 = 1,200 loaves, or 47 a day. A 14 percent cost rise raised break-even by 20 percent. This is why a repricing rule matters.

Now buy an oven. Suppose the repayment and depreciation add 200 CU a month to fixed costs, so fixed becomes 1,100. At the original contribution of 0.90, break-even rises to 1,100 divided by 0.90 = 1,222 loaves, or 47 a day. So before you sign for that oven, ask one question: can I reliably sell 47 loaves a day rather than 39? If the honest answer is no, the oven will not save you, it will sink you. If the new oven also cuts fuel, recalculate the contribution first, because improved ovens are reported to cut fuel by 50 to 80 percent and that raises contribution as well as fixed cost.

One warning about volume. Fixed costs are only fixed within a range. Sell enough and you need a second employee, a bigger premises, another delivery run. These are step costs: they jump rather than slide. When you plan growth, find the step before you reach it, and know what your new break-even will be on the other side of it.

Finally, break-even in units only means something if you count units honestly. Use saleable units, after waste. Selling 1,000 requires baking about 1,106 at a 90.4 percent saleable fraction.

Everything in this module is useless if it is calculated once and filed. Costs move, waste moves, and a bakery that recosts once a year is flying blind for eleven months. The fix is small: one page, once a week, twenty minutes.

Put six numbers on that page and no more. More than six and you will stop doing it.

1. Units baked and units sold. Two counts, taken from the daily sheet.
2. Waste percentage, split into rejects, returns and damage.
3. Delivered price per kilogram of your top three ingredients, with the date.
4. Full cost per saleable unit, recalculated with this week's prices.
5. Contribution per unit, which is price minus variable cost.
6. Break-even coverage: units sold divided by break-even units for the week, as a percentage.

Then add one line at the bottom: what changed since last week, and what will I do about it.

Work a real week. Break-even is 1,000 units a month, so about 250 a week.

• Baked 1,180, sold 1,050, waste 130, which is 130 divided by 1,180 = 11.0 percent.
• Last week waste was 8.7 percent. It has risen.
• Flour is unchanged at 1.00 CU per kg. Shortening has moved from 3.00 to 3.45, up 15 percent.
• Full cost per saleable unit was 1.33, now 1.36.
• Contribution was 0.90, now 0.87.
• Sold 1,050 against a weekly break-even of about 250 units, so coverage is well above break-even for the week.

That page took twenty minutes and it has already told you three things. Waste is up by 2.3 points and needs a cause found before it settles in as normal. Shortening is up 15 percent, which is below a 10 percent trigger on flour but above one on shortening, so the loaf needs recosting. Contribution has slipped by 0.03 CU, which on 4,200 units a month is 126 CU of profit that has quietly walked out.

Now set triggers, written down in advance, so that the sheet forces a decision rather than a feeling.

• If waste exceeds your normal rate by more than two percentage points for two weeks running, stop and find the cause. Look at which day the extra came from, and whether it is rejects, which is a process fault, or returns, which is a planning fault.
• If any ingredient that is more than a fifth of your ingredient cost moves more than 10 percent, recost the product within seven days.
• If contribution per unit falls below a figure you have chosen in advance, change price or change cost within the month. Do not wait for the quarter.
• If sales fall below break-even for two consecutive weeks, cut production before you cut price, because unsold stock costs full cost and earns nothing.

A weekly rhythm also protects you from the two commonest errors in small-business numbers. The first is confusing cash with profit. A month with a big institutional payment landing in it feels profitable and may not be; a month where you paid for three months of flour in advance feels terrible and may have been your best. Profit is sales minus the cost of what you sold. Cash is what is in the tin. Track both, and never make a pricing decision from the tin.

The second is averaging away the truth. An average return rate of 9 percent across the week can hide 20 percent on two days and almost nothing on the others. Always keep the day-by-day figures underneath the weekly total, because the cure is nearly always day-specific.

One last habit. Once a quarter, take the four weekly sheets and redo the full costing from scratch, including overhead per hour, because your production hours and fixed costs both drift. Then check your price against the market again by weighing competitor products and comparing price per kilogram. Twenty minutes a week and two hours a quarter is the entire management accounting system a small bakery needs, and it is more than most of your competitors will ever do.