Moving from a home kitchen to a production kitchen

Moving from your home kitchen to a production kitchen pays when your home can no longer handle orders you already have and the margin on those orders covers the new fixed cost with room to spare. The key sum is: monthly fixed cost ÷ contribution margin per unit = extra units you must sell each month just to pay for it. Before signing a lease, compare it with a shared kitchen rented by the hour: it is nearly always the lower-risk middle step.

Signs your home kitchen is not enough

• The bottleneck is equipment, not your hours: the oven takes too few trays, the fridge is full, the bench is too small.
• You turn away orders with a good margin several weeks running, even with your production plan in order.
• A customer wants something your home kitchen cannot offer, such as a shop that needs you to meet commercial premises rules.
• Your family lives in your business's kitchen, or the other way round.

If what you lack is hands rather than space, look at whether a helper pays first.

The three options

Stay at home. No new cost. Your ceiling is what your home kitchen allows.

Shared kitchen by the hour. You rent hours in an equipped commercial kitchen used by several businesses. You pay per hour, buy no equipment and can leave if sales drop. In return, you work to their schedule and have less control.

Your own unit. Rent, utilities, equipment, fit-out and a deposit. You control everything and can produce more, but the fixed cost arrives every month whether you sell or not.

How to do the sum

1. Work out your contribution margin per unit: price minus variable cost.
2. Add up the monthly fixed cost of each option: rent, utilities, insurance, internet, cleaning.
3. Add up the set-up cost: equipment, fit-out, permits. The deposit goes separately because you get it back.
4. Divide the fixed cost by the margin to see how many extra units you need a month.
5. Compare with the demand you really have, not the demand you hope for.
6. If the unit makes a profit, divide the set-up cost by that monthly profit to see how many months it takes to pay back.

If leaving home saves you something (gas, electricity), subtract it from the new fixed cost.

Worked example: brownies that no longer fit the home oven

You sell brownies at $3.50 with a variable cost of $1.10: a contribution margin of $2.40 each. Your home oven tops out at 1,200 brownies a month and you are already there.

Shared kitchen. $25 an hour. With commercial ovens you make 50 brownies an hour, so each extra brownie costs 25 ÷ 50 = $0.50 in kitchen time. It leaves you 2.40 − 0.50 = $1.90. No set-up cost.

Your own unit. Rent $1,400 + utilities $300 + insurance $100 = $1,800 a month. Set-up: used deck oven $4,000, steel benches and shelving $1,500, fit-out $1,000, total $6,500. Plus a deposit that is tied up until you leave.

Unit break-even: 1,800 ÷ 2.40 = 750 extra brownies a month. You have to go from 1,200 to 1,950 a month just to match what you earn at home today.

What you keep each month on top of today's earnings, by sales level:

At 1,700 a month, the unit loses you $600 a month compared with staying at home, while the shared kitchen adds $950. At 2,400, the unit makes money, but the shared kitchen makes more.

When does the unit match the shared kitchen? When the hourly fees equal the rent: 0.50 × extra brownies = 1,800, which is 3,600 extra, 4,800 a month in total. Only above that does the unit earn more.

Even at 6,000 a month, the unit leaves you 9,720 − 9,120 = $600 a month more than the shared kitchen. The $6,500 set-up cost would take 6,500 ÷ 600 = 10.8, about 11 months to pay back compared with staying in the shared kitchen.

What this example says: with these numbers, a shared kitchen is the next step, and your own unit makes sense once you sell well over 4,800 brownies a month, steadily.

The demand has to be steady

A lease is a commitment of months or years. Before signing, look at how much of your demand repeats: customers who buy every week, cafés with a standing order. That is the demand you can count on. One good campaign or a busy holiday month is not enough. The guide on keeping customers coming back shows how to measure and look after that base.

Permits and registration

A production kitchen has to meet rules your home kitchen may not have needed. Check with your local council and food safety authority before you choose premises, because the requirements can affect how the space must be fitted out. The guide on permits and registration lists what to check.

Making use of the new kitchen

A production kitchen gives you hours your home did not. If you have spare ones, you can use them for a second line or a second brand that shares ingredients and equipment; the guide on running more than one brand from one kitchen explains how to split the rent between them without fooling yourself with the numbers.

Moving is the most expensive growth lever. The guide on how to grow a small food business explains why it pays to pull it last, after price, product mix and volume.

Do it with the calculator

Put your recipes into the food cost calculator to get your contribution margin per unit. Divide each option's fixed cost by that margin and you will know how many extra units each one asks of you before you sign anything.