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How to Start a Cupcake Business

How to Start a Cupcake Business

Cupcakes are a simple yet delicious treat appropriate for both midday pick-me-ups and fancy events. So, if you have the secret for the perfect ratio of frosting to cake and want to turn that knowledge into a business but need help knowing where to start, read on. This article answers your burning questions—and hopefully, your questions are the only things burning, and not the cupcakes.

 

Business Summary

Cupcake businesses take on many shapes. For example, a cupcake business may operate as an order-only business. In this business model, customers place orders online or over the phone, and the business then fulfills and delivers the orders.

Another business model involves sales through storefronts, such as cafés, bakeries, or grocery stores. For example, cupcake businesses may double as cafés and increase their potential for profits by offering a variety of products (i.e., espresso drinks and other baked goods).

Cupcake businesses also offer various sizes, flavors, and levels of decoration. For instance, cupcake businesses may offer

  • Regular, mini, and oversized cupcakes
  • Cupcake cakes, which are single cupcakes arranged into a cake shape and then frosted and decorated
  • Allergy-friendly options like vegan, gluten-free, or nut-free baked goods
  • Customized decorations specific to certain events or brands
  • Ready-to-bake take-home packages for customers to bake cupcakes at home

Industry Summary

Bakery cafés have held stable growth year-to-year, except for a slight setback in 2020. Because cupcake shops operate similarly to bakeries or cafés, they will perform comparably.

As of 2021, the bakery and cafe industry earned $13.6 billion in revenue, a 2.4% growth from the previous year. Over the past five years, this industry has seen an average growth of 2.2%. Additionally, the number of bakery cafes in the U.S. has grown by an average of 1.4% over the past five years, with a total reported 8,641 locations.

Industry Trends

Since cupcake businesses follow similar trends to other bakeries and cafés, looking at trends for bakery cafés can show what trends cupcake businesses may also encounter. For instance, patterns in spending show that the bakery and café industry’s revenue is linked to consumer spending habits and unemployment rates.

As the cost of living increases, consumers tend to spend less on extras. However, this trend has a lesser effect on cupcake shops and cafés. This is because items at a cupcake shop or café tend to be small purchases, which many consumers are still willing to pay for, even in times of recession.

Competition is another trend that negatively affects growth, and cupcake businesses and cafés experience quite a bit of it. Competition makes it hard for new businesses to succeed in communities with established cupcake businesses or dessert cafés.

Target Market

Because competition is high and consumer spending habits shift with economic changes, it helps to define your target markets to make your sales more efficient.

Here are a few key markets to explore:

Small bite eateries and cafés. Cafés or restaurants with quick dine-in or take-out services tend to do well despite economic changes. So, getting your product on the shelves of cafés or small eateries can lead to consistent sales.

Further, if you start a cupcake business with a café, you appeal to a broader market. Not only will you earn a profit from your delicious cupcakes, but you will also be able to offer other products like beverages or baked goods that will boost your overall income.

Grocery stores. Grocery stores or markets get consistent customer traffic, which is vital for sales and gets your product in front of the customer. Aim for markets or smaller grocers without an in-house bakery because they may be more willing to sell your products.

Direct sales: Direct orders from customers are another key market. Many individuals place special orders, and you can charge more per cupcake for a custom design or unique flavor. So, direct sales increase your overall sales volume, but it also increases the profit margin because custom orders sell at a higher price.

Checklist for Starting a Cupcake Business

Whether you’re just starting out or you’ve been in business for a while, it’s important to have a clear idea of what you need in order to be successful. That’s why we’ve put together this handy checklist of what you’ll need to start your own cupcake business.

Step 1: Evaluate your Skills and Interests

Do you like to cook? Are you creative in the kitchen? Do you have a flair for design? If you answered yes to any of these questions, then starting a cupcake business may be right for you!

But make no mistake, starting a business just because family and friends say you make great cupcakes, isn’t necessarily a recipe for success. Running a cupcake business isn’t easy, and your love of baking can be impacted by the grind of owning a business. If possible, try connecting with another cupcake owner outside of your area and see if you can’t shadow there for a few days to see if this is the opportunity for you before investing in this business.

Step 2: Write a Business Plan

A business plan is like a roadmap for your cupcake business. It should not only be used for getting the money you need to start your business, but it will help you chart a course for your business. Without a business plan, it can be easy to get sidetracked by the day-to-day and lose sight of your goals.

Related: How to write a business plan

Step 3: Name the Business

When starting a cupcake business, one of the first things you’ll need to do is choose a name. The name you select will become the face of your brand, so it’s important to think through several aspects of naming a business.

First, try to come up with a name that is unique and memorable. A catchy cupcake business name will help customers remember your business and stand out from the competition. Second, make sure the name you choose is appropriate for the type of business you’re running. If you’re selling gourmet cupcakes, for example, then you’ll want to avoid names that are too cutesy or childish. Also, don’t be afraid to get creative! If you can’t seem to come up with the perfect name on your own, try brainstorming with friends or family members. Finally, be sure the name is available for you to use.

Related: Tips on naming a business

Step 4: Form a Legal Entity

A legal entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a cupcake business, it normally comes down to the sole proprietorship and Limited Liability Company.

A general partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 5: Select Your Location

Before you open a cupcake business, it’s important to find the perfect location. After all, your location will play a big role in determining your success. Here are a few things to keep in mind when searching for a location for your cupcake business:

First, consider the demographics of the area. Are there a lot of potential customers nearby? Make sure to choose a location with a high population density.

Second, take accessibility into account. Is the location easy to get to? Are there public transportation options nearby? You want to make it as easy as possible for customers to reach your store.

Third, consider the competition. Is there another cupcake shop in the area? If so, what are they doing right (or wrong)? Use this information to help you choose a location that will give you an edge over the competition.

Related: Choosing a business location

Step 6: Apply for Business Licenses and Permits

Before you can start selling your delicious cupcakes, you will need to obtain the proper licenses and permits. It is important to check with your local government to find out what is required, as the regulations may vary depending on your location.

In general, most businesses will need to obtain a food handler’s license and have the kitchen approved by the local health department. In many states, if the volume of baked goods is below a certain number, there is a cottage food law that allows the use of an unlicensed home kitchen.

In addition, there are likely general requirements such as a local business license, Employer Identification Number (EIN), and sales tax permit.

Related: Common business licenses, permits, and registrations by state

Step 7: Research Equipment & Suppliers

In order to start baking cupcakes, you’ll need some basic kitchen supplies like mixers, ovens and baking pans, in addition to ingredients and packaging supplies.

Reach out to potential vendors to compile the best sources and prices for the items needed to get started.

Step 8: Find Financing

Opening a small business is a big undertaking. There are a lot of things to consider, from the initial start-up costs to the ongoing expenses of keeping the business up and running. One of the most important questions to answer is how you will finance your new venture. For many small businesses, taking out a loan is a common option, but it’s important to know upfront that lenders will require a new business to personally invest 15%-25% in it.

There are several options available for small business loans, such as a traditional bank loan or if the bank needs additional security, there are government programs like the Small Business Administration’s 7(a) Loan Program. In addition to traditional bank financing, there are also community revolving loan funds that may be available as well.

Related: Finding the money to start a business

Step 9: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 10: Get your Marketing Plan in Place

Before you open the doors to your business, it’s important to get a marketing plan in place.

There are several ways to approach marketing a new business, from participating in local events such as farmer’s markets, sponsoring youth teams, joining the Chamber of Commerce and having a ribbon cutting, and more.

Depending on your market and target audience, traditional advertising such as TV, radio, newspapers, and distributing flyers to neighboring businesses can be an effective way to get the word out about your business.

In addition to local marketing, don’t forget to also promote yourself online through a website and social media platforms like Facebook, Instagram, Pinterest, Twitter and others.

Related: Low-cost ideas to market a new business

Every business is going to need a logo. Make a professional logo in no time with the free logo makers from BrandCrowd and Canva.

Step 11: Get Business Insurance

When starting a cupcake business, it is important to make sure that you are adequately insured. This will protect you in the event of an accident, theft, or other unexpected events.

– The first type of insurance you will need is liability insurance. This will protect you in the event that someone is injured while on your property or if you are sued for damages.
– Property insurance to protect your business equipment in the event of a fire or other disaster.
– You should also consider purchasing product liability insurance in case someone becomes ill after eating one of your cupcakes.
– Last, if you plan to use a vehicle for deliveries, commercial auto insurance should be purchased as well. If you or an employee uses a personal vehicle for delivering cupcakes and are involved in an accident, personal auto insurance will typically not cover any costs.

By protecting yourself with adequate insurance, you can avoid financial ruin in the event of an unforeseen catastrophe.

Related: Types of insurance your business may need

Step 12: Hire Employees

While many people might think that all you need to open a cupcake business is a love of baking, there is actually quite a bit more to it than that.

While there may be overlap, it’s rare to find someone who can cover multiple areas of a bakery. In addition to bakers, you will also need creative decorators who have good attention to detail. Retail staff who have good customer service are important to take orders and make customers feel welcome in your store. Also, having someone dedicated to marketing can help with promoting the business and getting customers to come to the store.

Related: Hiring your first employee

Step 13: Set up an Accounting System

Any business, no matter what size, needs to have some sort of accounting system in place to track income and expenses. This is especially true for a cupcake business, as there are many different cost inputs that need to be tracked.

There are many different ways to tackle this, from a simple as a Excel spreadsheet, or dedicated accounting software.

Staying on top of the accounting not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

Common Questions When Starting a Cupcake Business

How much does it cost to start a cupcake business?

It helps to put together an initial budget before starting a new business so you can plan accordingly. For example, starting a new cupcake business may cost between $4,000 and over $115,000. Here are some of the main costs:

Business formation costs. Business formation costs include business licenses, permits, and insurance.

First, check the state’s website for businesses to find out how much your state charges for licenses and permits. Sometimes a permit is not required, but it is advisable to check the website for guidance. Typically licenses and permits cost below $1,000.

Insurance is variable depending on how much risk your business is exposed to. So, contacting insurance companies or an insurance agent to gather quotes will give you a good idea of the cost.

Bakery space. Will you rent commercial bakery space? A café with a kitchen? Or will you bake out of your home? Answering these questions will help determine how much to budget for location costs.

Operating out of your home will eliminate most of the location cost. But, if you want to bake elsewhere, you will need to find a space with a kitchen or lease commercial kitchen space. You can lease a commercial kitchen space from $500 to over $2,000 monthly.

Renovating an existing space will likely entail setting up an efficient kitchen, building signage, retail counter space, furniture for customers to sit, and more.

Commercial kitchen space can also be leased on an as-needed basis, paying by the hour. Hourly rates can range from $18 to nearly $100 per hour, while purchasing and renovating a retail storefront can easily top $100,000.

Supplies. The lease on a commercial kitchen space typically includes the use of commercial-sized mixers, ovens, and freezers, saving you thousands of dollars in supplies. However, some supplies you need to purchase include cupcake baking sheets, ingredients (flour, sugar, butter), and boxes to transport or deliver the cupcakes.

Generally, it costs the business an estimated $1 per cupcake when baking in bulk. So, if you sell 1,000 cupcakes each month, you should expect to spend at least $1,000 per month on ingredients and supplies.

Employee wages. As business ramps up, hiring employees to help bake and decorate is helpful. The average hourly rate for a baker in the U.S. is just over $14.

Website and marketing. Websites and marketing plans help you to reach a broader base of customers, which in turn, leads to more sales. A professionally designed website for a small business may cost anywhere from $2,000 – $9,000.

How profitable is a cupcake business?

The average retail price of a standard cupcake is between $3 – $5. So, at 1,000 cupcake sales per month, your monthly income lands at $3,000 – $5,000.

However, you can increase your monthly income with special orders and events. For example, it is common to charge more per cupcake for custom or special orders. These cupcakes cost around $5 – $8. You can also increase profits by charging a higher rate on rush orders, deliveries, or unique decoration requests.

What Skills Are Needed to Run a Cupcake Business?

Although you don’t need to be America’s best baker or have studied at a culinary institute to start your cupcake business, it does help to have a few skills.

Baking and decorating. Since cupcakes are the centerpiece of your business, it is important to know at least the basics of baking. Similarly, decorating skills are essential. Apicius, a 1st-century Roman, stated that we eat first with our eyes.

So, if your product is appealing, it is easier to sell. Knowing the basics of baking and decorating (or hiring employees who do) will encourage sales.

Calculation. Baking involves calculating how much of each ingredient you should use to get your recipe right. So, having some math skills will help you accurately order supplies and measure your recipes.
Additionally, a propensity for math, planning, and calculating are valuable skills and help you track spending and sales to ensure the products sell for a profit.

Health and safety regulations. Health and safety are essential skills because you are creating a product to be consumed by your customers. In order to protect the health of your customers, you will need to understand and maintain proper food storage standards and clean workspaces. Additionally, you will need to be aware of product expiration, labeling, and food allergens.

Are there grants to start a cupcake business?

It’s extremely rare to find a grant to start a cupcake business. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

What is the NAICS code for a cupcake business?

The NAICS code for a cupcake business is 311811, which is classified under retail bakeries.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

Final Thoughts

Cupcake businesses have shown that they perform well despite shifting economic changes. So, if you have a passion for baking and want to turn that passion into a business, then a cupcake business may be a great opportunity for you—not to mention a tasty one too.

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