It is absolutely essential that as a business owner, you track your finances and operation costs. Do not avoid the mathematics. Keep them up to date! You cannot determine if your business is successful unless you are fully aware of all the costs and revenues. It is not difficult to calculate your profit margin and your average profit margin percentages, with some basic, straightforward arithmetic.

What are the costs?

All the expenses spent to run your business are your costs. These include, ingredients, materials, salaries, postage, rent, taxes, salaries, cleaning materials and costs, electricity, trash collection, telephone bills, paper and inks, vehicle expenses, pens and office supplies, and don’t forget to allow a percentage for “wastage”. Staled items that are discarded have cost money. If they are not sold, then take into account all the incurring expenses.

If your business is home based the average percentage of total costs is approximately 30% of your overall home expenses. The percentage of water and electricity used, may exceed 30%. Pay attention to your utility bills. Keep a log of your business mileage. Pre-printed mileage logs can be purchased for a nominal fee at any office supply store.

Pay yourself. If you are a sole owner and wear many different hats to get the work done, calculate the salary for the relevant job. Obviously this will differ from state to state and based on location. If you are well experienced and skilled in your art, do not undersell your professionalism. Find the hourly rate paid to a plumber, an electrician, and a lawyer in a small law firm. Total the three and divide by three. Your skilled labor hourly rate should be close to this number. Don’t undersell yourself, this is the price for the excellent work you do. If you are new to the game and still very much learning the trade, then determine your worth accordingly. What would an apprentice mechanic get based on his years of experience? Find out!

So, if you are the chief bottle washer, baker and cake decorator, price each job accordingly.

Determine the average rate for a cleaning service (you may be pleasantly surprised) and the hours doing this specific work, the hours and rate of a baker, and the hours and rate of a skilled artisan of your caliber.

Calculate the amount of hours and pay, doing each job, as each job has its own value. Knowing these figures will help you when determining your art charges for decorating custom designed cakes.

Let me give you a generic example. A skilled artisan’s work is charged at $60 per hour. That breaks down to $1.00 per minute (keep this figure in your head, don’t verbalize it to your customers). We call this proprietary information, which should be kept private. If your basic price for the cake is $30, which includes 10 minutes of decorating time, any time over and above the 10 minutes should be charged out at $1 per minute. The estimated decorating time for the cake will be 65 minutes. Deduct the 10 minutes allowed in the base price and add an additional art fee of $45. The total cost of the cake is $30 + art fee $45 = $75.00

Be confident in the quality of your product, and don't be afraid to set a price that you think truly reflects the time, effort, and expertise that goes into its creation.

What are your revenues?

The amount of money your business takes in from sales of products or services. These business finances are called revenues.

What is your profit?

Profit is the amount of business revenue that exceeds your costs. These are usually calculated for a standardized time period, such as each quarter, six months and/or annually.

If your business accrues costs of $10,000 per annum and the sales for the same period is $15,000, your profit is $15,000 - $10,000 = $5,000 for the year. It is prudent for new businesses to watch their costs and revenues on a monthly basis, eventually extending that to per quarter. I personally think that assessing these values annually is not satisfactory. You need to keep your finger on the pulse and to change your mode of operation based on necessity.

What is your profit margin?

Your profit margin is your profit calculated as a percentage of your costs.

For example, a business with profits of $5,000 and the costs being $10,000 gives an annual profit margin of $5,000 divided by $10,000, which is 50%.

What is your average profit margin?

Your average profit margin is calculated as a percentage, which is your business’s profit margin over a long term, usually several years of business activity. Calculate this by totaling all your costs and all your profits, and determining your overall average profit margin.

Example: A business with costs over a three-year period of $10,000 in first year, $5,000 in the second year and $20,000 in the third, has total three-year costs of $35,000. If profits are $5,000 in the first year, $2,000 in the second year and $4,000 in the third year, then the total three-year profits are $11,000. The average profit margin for the three years is $11,000 divided by $35,000, or 31 percent.

So be diligent, and disciplined; and focused on your numbers.

What should I charge for my cakes?

This is the most frequently asked question by cake artist when they begin to sell their cakes. As with real estate, the price of cakes varies widely by location and is largely determined by your local market. Finding the right price point requires research of your competitors' prices, and a solid understanding of your own costs. It is natural, when you are starting your cake business, to feel unsure of yourself and your skills, and hesitant about charging appropriately for your cakes. Cake artists are their own worst critics. If you value your cakes and price them appropriately, your customers will too.

Do not fall into the trap of doubling or tripling the cost of your ingredients. This method of pricing is arbitrary and not rooted in any kind of business theory. More often than not, it results in grossly underpricing your cakes. The expense of custom-made cakes is not in the ingredients, but in the time and labor invested.

Know your market!

Call other custom bakeries in your area and ask them how much they charge per slice for wedding cakes, and their pricing for party and sheet cakes. Set your prices close to theirs, or maybe just slightly lower if you are still developing your skill level. Do NOT undercut them – this causes resentment and dissention to other decorators and businesses in your area and community.

Commercial bakeries have higher overheads therefore, may need to sell at higher prices to cover their expenses and to make a profit. Your overheads may be lower, however, home decorators generally spend much more time on their cakes. Remember, time is money, and your time is valuable. Charge accordingly; maintain the value of your goods. Do not significantly undercut their prices, you are not only lowering the value of your own cakes, but you could indirectly effect their business so detrimentally that they may have to lay off employees, or even close. There is no honor or pride in being the "cheap cake baker". Don’t run the risk of antagonizing them. Professional networking is a powerful business tool. Build good relationships with your competitors. Professional relationships will enhance your business reputation and increase your bottom line through referrals.

Should I charge by the cake or by the serving?

Cakes are generally charged per serving in the cake baking industry. The more people the cake serves, the larger the cake must be, and therefore, the larger cake will involve more work and take longer to decorate. Just like bread is sold by the loaf and milk is sold by the gallon - cake is sold by the serving. Research the cakes sizes and relevant portions it serves.

How should I determine the difference between party cakes and wedding cakes?

In my bakery, the wedding cakes were baked higher. They were cut into four, with three layers of filling in between the layers. The wedding cake should be tall and impressive. Therefore, the extra layer of cake and filling gives the wedding cake additional height. Wedding cakes are generally sold by portion.

Party cakes on the other hand are only cut into two or three with one or two layers of filling. They are not baked as high as a wedding cake. Party cakes are usually sold by the price of the cake dependent on the size, and then the additional artwork is charged for separately. If a customer wants a party cake to be tiered, charge for a stacking fee, based on the cost of the materials and the additional time it takes to do the stacking.

Here is a word of advice from Buddy, The Cake Boss, “Here's a real-world example: If your home was paid off, and the time came to sell, you put your home on the market for much less than your neighbors' homes just because you didn't "need" the full market value, you would lower the value of everyone's homes on your street and make your neighbors angry” the same reasoning applies to the baking industry” so, always keep this thought in the back of your mind "Wow! Look what my custom cakes are worth!"

Don’t compare your prices to those of an in-store supermarket bakery!

Never compare your prices to Wal-Mart, Sam's Club, Costco, or a supermarket bakery. People can't get the same quality of cake in these stores that they get from you. Their cakes were made months previously, flash-frozen, and shipped in. The employee is given only a few minutes to decorate a cake, with ready-made icing from a bucket. That employee also probably had 50 other cakes to decorate in the same shift. The difference between your cake and a supermarket in-store bakery cake can be likened to the difference between inexpensive off-the-rack clothes and a hand made, tailored outfit. You would not expect to pay the same price for the huge difference in quality.

You'll be surprised at the amount of customers who realize and appreciate that you are providing the kind of cake that would match an invitation, fabric swatches of bridesmaids' dresses or a specific theme to ensure a perfectly color coordinated wedding cake or themed celebration cake. Custom designed cakes and cookies are edible works of art that require skill and artistry, and often take days to complete. Therefore, don’t be afraid of losing a sale because you charge accordingly. What is the point of making a sale when you are working for less than minimum wage and possibly losing money?

How do I charge friends and family?

This is always difficult! Here are some options to consider:

Have standing rules:

If you offer to do the cake, it is free.
If they request the cake, they pay for it (either full price or discounted some percentage).
If the person wanting the cake lets you have free reign of the design, then this is a great way to practice, so reduce the price.
Start as you mean to continue; don’t do cakes for free. Once you have given a cake for free, it is so much more difficult to request payment at a later date.
Friends and family should pay full price like everyone else. 
Don’t feel obligated to make a cake for every family function, or every family/friend who wants one. There are only so many hours in the day! It's ok to say to say NO you're too busy, especially if it's a last-minute request.
However, it is also acceptable to offer friends and family a standard discount off your regular prices (15%, 25%, 50% - whatever you are comfortable with and depending on the closeness of your relationship.)
To recap, here are four important matters to consider when pricing cakes:

Ingredients and supplies: 
In order to know what to charge, you must understand how much you are spending. Take the time to calculate your ingredient costs, and overheads. Don't forget the cost of the boards, boxes, foil, paper towels and dowels.

Time: 
Don’t only consider the time you spend on a cake, remember the time consulting with the customer, planning a custom design, shopping, baking, cooling, making fillings, frostings, fondant, and sometimes custom art work like flowers and edible decorations. You deserve to be compensated a fair hourly rate for the time you spend creating a cake masterpiece. Don't forget to include the cleanup time! This can be a huge job if it has been a big cake.

Overheads: 
Gas or electricity used for your oven; your utilities, your cake pans, your mixer, your dishwasher, and soap etc. Adding a nominal fee for their use should be added to the cost of the cake. We refer to it as “wear and tear.”

Delivery: Calculate the distance for the round trip. Determine the national AAA rate for the type of vehicle you are using. Add in the labor costs of the driver in hours, to include delivery, set-up and return. Add an extra hour to every trip to allow for traffic jams, bad weather, etc.