BUS3ENT: Business Plan - Technical Feasibility

Solution Code: 1AHAA

Question: Business Plan

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Business Plan Assignment

Assignment Task

Market Feasibility

What is the size of the market?
What is the growth rate of the industry?
Is the market at full capacity?
Where are customers getting the product now?
Where are the customers?
How many would purchase from you?
What external factors come to bear? Government, Industry Dynamics
What keeps new competition from entering this market? (Barriers to Entry)

Technical Feasibility Questions to Answer

What are the options for developing the technology (customer, off the shelf, design yourself, subcontract)?
What are the options for producing the product or service?

In House
Subcontract
License
Joint Venture or Partnership
Combination

3.What are the options for Sales and Distribution?

In House
Whole Sale
Distributors or Sales Representatives
License
Joint Venture or Partnership
Combination

4.What resources are required for development and are they available to you (skills, raw materials, components, suppliers, facilities & equipment)? What are the laws and regulation relating to the business?

Industry Standards or Regulations
Personal Certifications
Intellectual Property (Patents, trademarks, copyrights)
Environmental Liability

Has the research discovered any moral or ethical issues that you are uncomfortable with? What technological changes are changing or emerging that may affect the business? Financial Feasibility 1. What are the projected Revenues from the sale of your product or service?

From the Market Research, what is the projected sales volume in "units sold?" and in "dollars sold"?
From the Market Research, what is the selling price per unit?
What is the total expected revenue?

2. What are the financial dynamics and opportunities?

Costs Structure (per unit basis)

- Price per unit minus - Variable Costs (Cost of Goods Sold & Controllable Costs) per Unit equal - Gross Margin per Unit minus - Fixed Costs per Unit equal - Net Margin per Unit 3. How much investment is required?

One Time Assets and Startup Expenses

- Plant & Equipment - Leasehold Improvements - Initial Inventories - Research & Development - Legal - Experts

Operating expenses prior to break even

4. What are the financial risks?

Payback (Investment required divided by net margin per unit - Date when units calculated above are sold & collected.)
Risk vs. Reward (Personal feelings of the risks and rewards)
Opportunity Costs (Can you get a better return somewhere else?)
Personal Financial Risk (What will you have to give up. Sign over mortgage etc.)

What are the possible sources of financing?

Chances of getting the money?
What will you have to give up?

General Financial Numbers that would indicate attractiveness of Venture

Gross Margin 20 - 30% plus
Net Profit Margin - 10 to 15%. Plus
Return on Investment - 15% plus
Payback - 3 years or less.
Break even - 2 years or less
Note: These numbers must not be looked at in isolation over a one year period. You need to look at the numbers over a 3 year period and as a whole, not just individually. Industry averages can be quite different.

Human Resource Feasibility Questions:

What technical and management experience is required?
Who are the owners and what are their roles? (Entrepreneur, Manager, Tech. Expert)
What is the ownership structure?
What are the manpower requirements?

- How will you find the right employees? - How will you compensate employees (pay for time, for production, for knowledge, or a combination)? - How will you motivate employees? - What training will they need on an ongoing basis? 5.What is the company’s growth strategy? - How will quality be managed and maintained÷ - How will organizational structures change with growth? - What career paths will employees have available?

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Solution:

Introduction‘Sumptuous Treats’ is a moderately priced, air conditioned 86-seat restaurant serving family customers with dine in facilities. Employing chefs cooking local cuisines, the Hills District, North Sydney based restaurant specializes in preparing and serving 3 and 4 course meals including Grubs, Lamb roasts, Fish, Barbecued snags, Pavlovas, Sausage rolls, Meat pies, Seafood pizzas, Bacon rolls, Grilled kangaroos and Hamburgers as specialties. Families have the choice to customize their meals and can also opt in for standard meals offered. Ownership The restaurant will be owned by John Williams on a sole-trader basis. He will be leasing a 3,600 square feet space located at Hills District, North Sydney, owing to a good connectivity of the area with the rest of the city. Business Objectives The business objectives are as follows:

To be the leading local cuisine restaurant in North Sydney area
To serve family customers of all sections with affordability as well as quality
To maintain the rent rate at below 6% and occupancy rate below 10% of total sales on a monthly basis
To maintain a Prime Cost Ratio of less than 60% on a weekly basis

Mission Statement Our mission is to serve our family customers with delicious meals on an affordable and both customized and standard basis. It’s our endeavor to provide a lilting ambience to our guests along with a fine dining experience that satiates both the appetite and the pockets. We would top this up with exemplary customer service on a daily basis. Restaurant Timings The restaurant will be open 7 days a week and the daily timings would be 11 AM – 10 PM. The leased location is semi-furnished and will require some level of renovation and décor. Services ‘Sumptuous Treats’ would be open 7 days a week for lunch and dinner and will operate in 2 shifts – 10 AM – 4 PM and 4 PM – 10 PM. The restaurant will operate at full capacity of 20 employees during the peak hours of 1 PM – 3 PM and 8 PM – 10 PM. John will also use ample storage facilities and pre-production techniques in order to cater to varying loads during peak hours. There will be a pre-determined schedule for procuring raw material, maintaining the required food inventory levels and prepared food ready to be served. This schedule will be executed by the restaurant manager designated by John. He himself will be monitoring the daily and weekly schedules and will do planning in advance by studying the recent customer footfalls and demand. Market Feasibility Market Size, Growth Prospects & Potential Restaurant & Catering industry is a pretty diversified and big market in Australia. It is a $24 billion industry with an annual growth rate of around 6.2% in 2015-16. All over Australia approximately 35,000 businesses are associated with the restaurant business employing 545,000 human resources. With changing lifestyle choices of the Australian customers, restaurant market has grown manifold in the last decade with a forecasted annual growth of 3.6% in the coming five financial years. In addition as per the reports (“Australian restaurant industry to grow $11B over 5 years,” 2015), the whole industry bears bright prospects in future. As mentioned in the submission report of Restaurant & Catering Australia (R&CA) for the Federal Budget of 2016-17, the sector is growing at a higher rate than any other sectors of Australian Economy. At the same time, it has been forecasted that the employment growth of the industry by 2018 is around 16.9% with a creation of approximately 93,600 jobs. Thus, it can be concluded that the market is yet to realize its full potential. Customer Market of Restaurant Industry The restaurant and food service marketplace of Australia possesses diverse characteristics. It is observed that the Hills District Area has a significant market demand for restaurants serving family customers with comprehensive range of food choices. There are many restaurants in the area that specializes on individual and a small set of interrelated food items. The start-up aims to serve the needs of the consumers who likes t explore a large no. of standard dishes as well as better customizable items. The general consumer preferences in the area include the following:- i) Preference to the locally grown products; ii) High customization needs from the range of food options; iii) Full course meals along with options such as Grubs, red meat, fish, pizzas, rolls sausages etc.; iv) Various dishes suitable for children and elderly people; v) Hyper local orientation and culinary expertise. Barriers of Entry & External Forces The regulatory affairs associated with restaurant & catering industry of Australia are major barriers of entry for the new ventures. Stricter procedures at federal, state and local government sector prove to be a major obstacle for factors venturing into the sector. Multiple licenses and approvals are needed to start a business and the requirements vary as per different jurisdictions. On the other hand, raising sufficient capital is another barrier of entry in restaurant market in Australia. The founders often use tactics such as leasing of premises, furniture as well as different necessary equipment as specific to the industry. These reduce the cost as compared to outright buying of the particulars. On the other hand, many operational costs are reduced when a new franchise business is established. However, Sumptuous Treats is a firm based on sole trader framework and hence, it will have to face the consequent barriers of entry as a new business. Restaurant industry is a labour intensive industry and hence comes under huge governmental and political scrutiny. The large restaurant chains as well individual owners back political candidates of their choice so that they can have the negotiating voice in future situations relating to industry reforms, healthcare reforms, labour wage rate enhancements and issues of immigration. Moreover, many business owners view tax situations and stringent green guidelines for sustainability goals as major external influences. Additionally, governmental mandates influencing menu of the restaurants and catering enterprises is another external factor. The health NGOs and societal initiatives also put pressure on the restaurants on the basis of obesity, labelling, food safety as well as packaging guidelines & policies. Technical Feasibility 1) The prime focus of the business is customer and it uses modern tools to streamline the restaurant business for them. The start-up uses i) Digital Dashboards, ii) High end CRMs, iii) Mobile & Facebook Ordering, iv) Online Discounts & Coupons, v) Table-top e-waiters etc. for providing seamless experience to the customers. 2) The productions of the key food items will be in-house and emphasis is to be given to the hyper-local market. The license has been obtained from all three necessary jurisdictions. 3) The start-up aims to use social media, online marketing and local offline channels to reach to its target audience. The organization does not intend to use sales representatives in the next 2 years. Its distribution channel is limited to the procurement channels for the raw materials with the local vendors. 4) The main requirements of the resources are as follows:- i) Culinary Staff & Customer Service. ii) Kitchen functionalities and instruments. iii) Furniture of the dining area. iv) Regulatory permits are obtained for public health, nutrition & child health. v) Transaction tools and other software related to restaurant delivery needs. 5) The major compliances are fulfilled according to Food Safety Standards in Australia and registration & legal norms are obtained from local authorities. 6) We have devised detailed plans and goals to address the sustainability issues and to respect the culinary traditions of Australia. 7) With sufficient competitor analysis, we have made the most suitable arrangements of technological systems ad devices for running the business. Human Resource Feasibility Technical and Management experience required Technical experience required is as follows:

Chefs must possess the skill as well as the experience to cook and garnish all the locally popular dishes, namely Grubs, Lamb roasts, Fish, Barbecued snags, Pavlovas, Sausage rolls, Meat pies, Seafood pizzas, Bacon rolls, Grilled kangaroos and Hamburgers. They must also be able to adapt to customer demand in terms of bulk cooking and niche cooking as required, without compromising on food quality.
Stewards must possess the skill as well as the experience to receive customer orders, serve the food well, interact with the customers, adhere to their ad hoc needs as well as bill the customer correctly. They must also be able to adapt to varying customer demand in terms of occupancy and footfalls.

Management experience required is as follows:

Restaurant Manager must be able to anticipate fluctuations in demand with respect to season, occasion and other external factors. He must also be able to maintain control over and monitor the overall daily operations of the restaurant. He would be responsible to tackle and resolve customer escalations or complaints, if any. He would also collect and assess customer feedback and take necessary steps from time to time (Stone, 2013).
Owner is required to possess keen interest and experience in managing a busy restaurant business. He would be taking the daily account of operations from the restaurant manager and will decide the future strategy of the restaurant business in terms of potential expansion, extension, status quo or otherwise (Aurik, Fabel, & Jonk, 2015).

The restaurant will be owned by John Williams on a sole-trader basis. In terms of ownership structure, John earns from profit share while the 20 employees take monthly salary from John. Manpower Requirements John would need to find the right employees by interviewing them and testing them in real-time environment on their culinary or stewardship skills. For the post of restaurant manager, John will have to look for someone who has prior extensive experience in managing the operations of a busy street restaurant. The employees will be compensated on a fixed salary basis. They would be paid for a combination of their knowledge, skills, attitude and performance and motivated through announcement of ‘Star Performer of the month’ to be awarded a cash prize equal to monthly salary. Initially, John will fill in to the role of restaurant’s management, however would need to expand the leadership team in medium term to hire leaders for sales, operations, logistics, security, utilities and kitchen (Gallos, 2014). Employees would need to be trained on cooking new dishes as well their serving styles. This needs to be reviewed and executed on a quarterly basis, as demand for new food may come up within a change of season itself. This would also give the restaurant a competitive edge over its rivals. Financial Feasibility Sales Forecast We expect a moderate increase in sales revenues for ‘units sold’ over the next 3 years on an average (adjusted for inflation. The growth becomes 10% in year 2 and 15% in year 3. The Sales Forecast for ‘units sold’ for the next 3 years is detailed in the following table:

Annual Sales Forecast	Year 1	Year 2	Year 3
Food Revenues	55,000	60,500	70,840
Total Sales	55,000	60,500	70,840

Table 1: Annual Sales Forecast in terms of units sold Average unit price for year 1: AU$ 20 Average unit price for year 2: AU$ 22 Average unit price for year 3: AU$ 25 Average catering charge for year 1: AU$ 2 Average catering charge for year 2: AU$ 3 Average catering charge for year 3: AU$ 5 Average unit cost for year 1: AU$ 10 Average unit cost for year 2: AU$ 11 Average unit cost for year 3: AU$ 12 Average payroll cost for year 1: AU$ 3 Average payroll cost for year 2: AU$ 3.5 Average payroll cost for year 3: AU$ 4 The Sales Forecast for ‘dollars sold’ for the next 3 years is detailed in the following table:

Annual Sales Forecast (AU$)	Year 1	Year 2	Year 3
Food Revenues	1,100,000	1,331,000	1,771,000
Catering Revenues	110,000	181,500	354,200
Total Sales	1,210,000	1,512,500	2,125,200
COGS	550,000	665,500	850,080
Payroll Costs	165,000	211,750	283,360
Total Prime Cost	715,000	877,250	1,133,440
Controllable Profit	495,000	635,250	991,760
Net Margin per unit	9	10.5	14
Interest @ 7%	17,254	17,254	17,254
Depreciation @ 10%	12,760	11,484	10,336
Insurance	75,000	75,000	75,000
Rent & Misc.	75,000	77,500	80,000
Profit before tax	314,986	454,012	809,170
Tax @ 28.5%	89,771	129,393	230,613
Profit after tax	225215	324,619	578,557
Net profit margin	18.61%	21.46%	27.22%

Table 2: Annual Sales Forecast in terms of dollars sold Investment Required The initial investment required can be divided in to expenses and assets. Expenses are not productive; they don’t give you returns while assets give you productivity based business returns. They however, depreciate with time which decreases their productivity as well as inherent value.

Starting Expenses	Amount (AU$)
Working Capital	1,90,000
Pre-launch Expenses	15,000
Building Furnishing	60,000
Lease Deposit & Permits	1,500
Contingency	12,000
Outdoors	3,500
Designing, Logo and Name	1,200
Total Expenses	2,83,200

Starting Assets	Amount (AU$)
Air-conditioning	10,000
Cutlery	1,000
Décor	3,000
Furniture	5,000
Kitchenware	4,000
Exhaust ware	12,000
Commercial Dishwasher	8,000
2 Commercial Freezers	8,000
Cold station	4,000
20 food blenders	1,200
Ice maker with storage	5,000
Beverage cooler	4,000
2 Sandwich makers	6,800
2 commercial burners	4,500
6 shelving systems	800
4 reach-in coolers	8,000
3 work tables (stainless steel)	1,500
Fire protection system	5,000
Bowl sink	2,000
20 tables	25,000
Table clothes and napkins	1,500
Fireproof safe	800
POS system	5,000
Office computer	1,500
Total Assets	1,27,600

Total Investment Required	4,10,800

Table 3: Total initial investment required Sources of Financing and Use of Funds John will follow a debt-equity ratio of 2:3, which means that he will self-finance AU$1,64,320 and will procure the remaining AU$2,46,480 through a secured business loan from a bank. The following table outlines the source and use of funds:

Sources of Funds	Amount (AU$)
Owner’s investment	1,64,320
Bank loan	2,46,480
Total Source of Funds	4,10,800

Use of Funds	Amount (AU$)
Capital equipment	1,27,600
Working capital	1,90,000
Administrative expenses	81,200
Contingency fund	12,000
Total Use of Funds	4,10,800

Table 4: Source and Use of Funds Financial Risks John faces little financial risk as his creditworthiness is greater than average and he doesn’t have any existing debt to pay off. Payback in year 1 = 4,10,800/9 = 45,644.44. This means the restaurant will ‘payback’ the initial investment with the sale of the 45,645th unit. Opportunity cost is visibly lower than the investment amount because John is interested, focused and competent in running this restaurant business. Moreover, there is no personal financial risk involved for John. Financial Analysis that indicates the venture’s attractiveness Gross Margin for year 1 = Controllable Profit/Total Sales = 495000/1210000 = 40.91% Gross Margin for year 2 = 635250/1512500 = 42.00% Gross Margin for year 3 = 991760/2125200 = 46.67% Net profit margin for year 1 = Profit after tax/Total Sales = 225215/1210000 = 18.61% Net profit margin for year 2 = 324619/1512500 = 21.46% Net profit margin for year 3 = 650057/2125200 = 27.22% Return on investment (for year 1) = Profit after tax/Total investment = 332465/410800 = 81% Payback happens at 45644.44/55000 = (0.83) of a year or 303 days. Breakeven Analysis Total Fixed cost associated with the restaurant in year 1 = Starting expenses + Fixed expenses running through the year = 283200 + 345014 = AU$ 628,214 Variable unit cost = AU$ 10 Average unit price = AU$ 22 The table below shows that the breakeven for the business is achieved at unit sales of 52,352 and total dollar revenue (in AU$) of 1,151,734. This means that breakeven point is achieved just before the end of first year in 52352/55000 = 348 days (Cram & Friedrichsen, 2012).

Net Units	Net Revenue	Fixed Cost	Variable Cost	Total Cost	Total Profit
0	0	628,214	0	628,214	-628,214
5,500	121,000	628,214	55,000	683,214	-562,214
11,000	242,000	628,214	110,000	738,214	-496,214
16,500	363,000	628,214	165,000	793,214	-430,214
27,500	605,000	628,214	275,000	903,214	-298,214
38,500	847,000	628,214	385,000	1,013,214	-166,214
44,000	968,000	628,214	440,000	1,068,214	-100.214
49,500	1,089,000	628,214	495,000	1,123,214	-34,214
52,000	1,144,000	628,214	520,000	1,148,214	-4,214
52,352	1,151,744	628,214	523,520	1,151,734	10
55,000	1,210,000	628,214	550,000	1,178,214	31,786
60,000	1,320,000	628,214	600,000	1,228,214	91,786
70,000	1,540,000	628,214	700,000	1,328,214	211,786

Table 5: Breakeven Analysis

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