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Adding rent to cake prices

post #1 of 10
5/22/12 at 4:49am
Thread Starter 
How do you do it? I rent a house and I'm planning on starting a home business and was wondering how to add it..
Divide the rent by the days, and then by hours? Then add this to my hourly rate??
Thanks in advance.
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post #2 of 10
5/22/12 at 5:58am
I dont think that most people are THAT detailed as to what they charge- it will help figure out your base pricing. However, if you want to add exact costs you would need to figure out square footage of kitchen space and divide that into the total square footage of the house to give you the area you will be using- you dont use your whole house for cake decorating. This is how it is done for tax purposes.
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post #3 of 10
5/22/12 at 7:18am
As a side note, you may not use this deduction for income tax purposes. The IRS has two words to decide if an expense is deductible. Regular and Exclusive. Since your kitchen is also used for personal reasons, this expense is not allowed.
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post #4 of 10
5/22/12 at 8:22am
The rent for the portion of the house being used for the home bakery (make sure this is legal in your state) would be considered overhead. One way to allocate this to your orders would be to add up your annual rent (again only for the part being used for the bakery) then divide by the total number of orders per year.

If the kitchen is 20% of the house and you use it for the business 40 hours a week (about 25% of the time), you are looking at 5% of your rent being attributable to the business. If your total rent is $2000/month, that's $100/month in business rent or $1200/year. If you have 50 orders per year, that's a fixed overhead of $24 per order (regardless of the size of the order).
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post #5 of 10
5/22/12 at 9:25am
Thread Starter 
Quote:
Originally Posted by jason_kraft

The rent for the portion of the house being used for the home bakery (make sure this is legal in your state) would be considered overhead. One way to allocate this to your orders would be to add up your annual rent (again only for the part being used for the bakery) then divide by the total number of orders per year.

If the kitchen is 20% of the house and you use it for the business 40 hours a week (about 25% of the time), you are looking at 5% of your rent being attributable to the business. If your total rent is $2000/month, that's $100/month in business rent or $1200/year. If you have 50 orders per year, that's a fixed overhead of $24 per order (regardless of the size of the order).



Sorry if I sound that I don't know anything, but it's because I don't lololol I've started my research a few weeks ago and am reading a lot about it. I understand your explanation, but how can I know the number of orders if I haven't even started the business? and I have no idea how to guess or predict. The same with the hours, I have all my days free, but I don't know when I'll be really working full time until the business gets going icon_smile.gif
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post #6 of 10
5/22/12 at 10:44am
Quote:
Originally Posted by karenapple

but how can I know the number of orders if I haven't even started the business? and I have no idea how to guess or predict. The same with the hours, I have all my days free, but I don't know when I'll be really working full time until the business gets going icon_smile.gif


Once you put together your business plan you should have a better idea of the size of the market in your area, your marketing strategy, and who you will be targeting. You won't be able to get an exact number so you will have to estimate for the first few months, if you want to be conservative you can estimate something like 25 orders per year, then if business picks up after a month or two you can readjust the number.

This will result in a higher fixed overhead allocation to each order at first, if volume increases this overhead cost will drop but ideally you will be able to use this to increase your profit margin instead of lowering the price.
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post #7 of 10
5/22/12 at 10:59am
I, personally, do not take into consideration the cost of my home for doing cakes. I would live here anyway. I do, however, take into consideration the extra price for utilities. For instance, my water and garbage company put me into the commercial category for these. I also have extra electricity when I am doing cakes. I have done 10 cakes in one month (my max) and I still did not boost my power bill by a single penny. I do include a portion, though, when figuring out how the actual cost for baking.

Jason does offer good advice if you do want to include the cost of your rent. I would only include those costs if you are renting a particular house for the sole purpose of baking. And I don't mean for only baking, but if you chose the house because of it's convenience for your business.
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post #8 of 10
5/22/12 at 11:21am
Quote:
Originally Posted by MerlotCook

I, personally, do not take into consideration the cost of my home for doing cakes. I would live here anyway.


The way I look at overhead is from an opportunity cost perspective. If you pay $2000/month in rent for your home for personal use, and 20% of the square footage is unavailable for personal use 25% of the time, $100/month of rent that is going to pay for the business to run instead of for you to live there.

While that 25% utilization figure (~40 hrs a week) may seem high if you have low volume, you need to average out workspace utilization with storage space used to store ingredients and supplies for the business, since this storage space is never available for personal use it is 100% utilized for the business.

As mentioned above utilities are another source of overhead, and don't forget things like advertising, accounting, insurance, license fees, and anything else that applies to the business as a whole instead of individual orders.
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post #9 of 10
5/22/12 at 12:51pm
Thread Starter 
Quote:
Originally Posted by MerlotCook

I, personally, do not take into consideration the cost of my home for doing cakes. I would live here anyway.



I understand your point of view, but for me, if I don't try to pay the rent with my income, even if it's a percentage like Jason said, I would feel that I'm still on the hobby area. Of course I'd have profit and pay other bills, but I do want to add the rent because I am using the kitchen and costumers will come into my house for consultations or pick ups. If I wouldn't have the business from home, I'd find another job to help my husband pay the rent, like we were doing before. That's why I want to add the rent... as I would be renting another kitchen.
Anyways, thank you for opinion icon_smile.gif I hope it sounded ok the way I wrote icon_smile.gif

Jason, thank you for your advice. I'll try to work on that and see how it goes.
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post #10 of 10
5/23/12 at 8:58am
I would ask an accountant. In Ohio I cannot use my kitchen or dining room (I hold my consultations in my dining room) as a deduction becuase those rooms are not solely used for my business. I still have to use the kitchen to cook meals for myself and my hubby and I use the dining to eat the food I have cooked.

Now, the office room is another story. That is solely used for the business, so I can deduct the square footage if I wanted to. I don't because, for me, it really isn't worth it.
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