Accounting - Business Plan Report Friends Cafe - Assessment Answers

EXECUTIVE SUMMARY

A business startup would succeed if the people who are engaged in setting up the business know exactly what they are doing and follow a pattern of schedule of work necessary to build the base. The base needs to be built on a robust plan which has its sight on acquiring a good number of customer with a good service menu coupled with competitive pricing and the plan is dependent upon a better and experienced supplier base. Thus there is a need to make sure that the idea is backed up by adequate planning starting from selection of a location, hiring competitive set up people who would be required to manage the operations, select suppliers who would then be needed to supply quality raw materials at reasonable prices so that the business remains competitive in the market in the face of existing other businesses.

Each and every project depends upon the financial metric to be sure of the success. For this to happen there shall be good market research being undertaken by the friend’s cafe partners to assess the market demand and pricing behavior. Asa market entrant, the friend’s café should look at disrupting the market with better pricing. And this exactly what the partners of the firm has intended to do.

BACKGORUND

Four friends (Riaz, zian, Tan and Tailin) have come together to start a new Start up business which would be setting up a café which would serve coffee and other items to customers in a busy business district near the railway station in Melbourne. The initial plan is to start the business with an intention of picking up customer, providing them with an opportunity to spend some time in the café and relax and that too within a pocket friendly environment. The café would measure at least 40 feet by 20-25 feet in size and can have arrangements for sitting 20 people at a time comfortably. For this they have seen a few locations and at least three locations are being scanned for their suitableness. One particular place has been deemed to be the most suitable for the first cafe as it has very good location overseeing the station and located on the frost floor corner of large office complex with two face open and has a large entrance. The place has adequate parking and other amenities which would be quite beneficial for many officegoers and travelers. Further the same building houses at least a few multinational offices, travel companies, a hotel on the 2nd and 3td floor and many other shops in the ground floor. Also there is big departmental store in the same floor which would help in attracting customers daily.

The 4 partners are willing to contribute an initial sum of $10,000 each for the venture. The rest of the funds needed for the business would be collected from short term bank loan and other creditors. The aim is to generate 30% return for the investors - partners in the initial years and look for expansion as soon as the first café stabilizes in terms of customer satisfaction and generates interest in the area. The premise currently being scouted would be leased for at least a period of 3-5 years.

MARKETING

Marketing is always at the heart of the success of a new business. It’s not the quality of service alone but the way customers are given an opportunity to come and experience the facilities – would eventually determine how successful a business becomes. For this the café aims at attracting coffee mad Australian commuters and travel people. The café plans to have a menu which is wide and would include a variety of coffees such as hot and cold coffees and cappuccinos etc. apart form cakes and breads. The products would be offered at the industry leading prices. The products would be leading in their respective categories with the café chain planning to hire experienced staffs who have worked with leading coffee brands in UK. This would help in the maintenance of service quality (Atrill, 2013).

Hoarding would be put at strategic places to let the customers know the location better and relaxing environment would be created for those visitors who would be frequenting the café. Interior would be made as per modern tastes and the same would be designed by a leading designer in Melbourne. To top it all the prices would be at least 30% lower than what the competition offers. Further in it the initial stages those who become regular customers would be given loyalty cards (3-5% saving for those who would use the card) with a provision who spends more than $50 would be allowed to have discounts of 3-5% depending upon the meu they would choose to use (Datar, 2012).

OPERATIONS

The operations of new company or firm or a new shop like friend’s café is needed to be of top class to be able to attract customers. The staff of the café are trained and are being recruited from an experienced back ground. Their expertise in making good coffee and a variety of other projects are quite good. The production department would have three people of which the head chef would be an individual with more than 15 years of experience in the field (Duchac, 2011).

The restaurant café is basically a self-service joint and thus does not need a large no of people. keeping in mind the decorum and cleanliness that is required to be maintained across the time, there would be two helpers to look after the same. The Billing clerk would be appointed to look after dispensing cash and receiving payments and would be given the task of looking after the whole human resource. There would be security guard to look after the whole place. The detail of the human resource and the payment thereof is presented as follows:

The plan is to keep the salary bill under control in the beginning, however in the case of customer footfall increasing in the future the staff would be paid a 10% increase in coming ears and the partners have agreed in principle to employ more number of personnel if required and if the situation demand so.

FINANCIAL PROJECTIONS

FINANCIAL FORECASTS

START UP COST SUMMARY

The café would require substantial investment in the beginning as the same would built to have feel of an upscale café and no compromise would be made as to maintenance of quality service offerings. The raw materials for all the coffee and other offerings would be procured from experienced suppliers having procurement form south America and Jamaica. Such suppliers have been identified. Talks are on regarding supply prices and quantity discounts and soon a 3-year deal would be mad with them (Dyson, 2007). They would require to supply materials with a lead time of 3-4 days. The funds which would be needed are sated as follows:

As shown above the initial cost of starting the café would be $200,000 which is agreed to be contributed by the 4 partners ($100,000) and the balance fund of $100,000 form a lender. The Lender has agreed to provide the loan @ 6% per annum. The interest would be paid annually on the loan.

For further expansion in the coming years the partners have agreed to use the profit or cash inflows and borrow form the bank at a lower interest rate. Banks can lend to this kind of cafes at 4.5% after the café is at least 6 months old and has an operational cash flow to show (Dyson, 2007).

SALES / SERVICE REVENUE BUDGET

The café would serve three different varieties of coffee and each type would include 5 different tastes. Further each taste would include three different sizes. For uniformity the prices would be made uniform in the beginning and lower than what the competing firms offer currently.

The monthly sales estimations are approximately $52,425 initially and it is expected to go up in the coming year as words spread and the café would add more items to the menu. More varieties of the same items would also be added. Sandwiches of different varieties and pancakes can be added to the menu in the coming year. In the second year the revenue is expected to touch $65,000 and increase would be approximately 25-30% per annum. Current annual sales in first year thus amount to $629,100. Due to promotional deals and combos which would be introduced there would be an estimated discount of approximately 2% and after the discounts the net Annual revenue would be expected to $616,518 (Eisen, 2013).

In the next two years (year 2 and 3 ) the Revenue and discounts would be as follows:

COST OF SALES ESTIMATION

Cost of sales are estimated to be around 50% of the total revenue generated by the cafe including materials and wages etc. most of the raw materials required would be procured from a single supplier who is capable of supplying the same as he was in business of the last 10 years and knows the business well. The supplier agreement has been to pay of the purchase in the immediate next month. The whole purchase would be on credit and raw materials would cost approximately 40% of sales in each month and year. The estimation of cost of sales is presented below for a monthly basis and for the first three years of operations (Elliott, 2014).

Monthly cost of sales would be approximately 45% of the gross revenue and cost of sales would include raw materials cost, labor cost (those engaged in production) and other direct production costs. However, the gross margin is lower than 55% (53%) because of direct discounts given to customers on account of loyalty cards and combo deals. That consumes 2% of gross sales. The gross profit would be expected to be $333,423 in the year 1 and $416,778.8 in the year 2 and $520,973.4 in year 3.

SELLING AND ADMINISTRATIVE EXPENSES BUDGET

The selling and administrative expense budget is an important aspect of making the expense budget since the same can be quite substantial. Thus there shall be an attempt to minimize this budget through appropriate planning measures such reducing unnecessary labor expenses, reducing electricity bills etc. this segment for the friend’s café comprises of wages paid to office and support staff, electricity expenses, interest expenses, marketing and advertising expenses planned for the year and other miscellaneous charges (Hoggett, 2011). The same is presented as follows:

Office wages are expected to increase by approximate 8-10% each year. The interest expenses are expected to decline in year 2 and year 3 as the loan would be repaid ($20,000 annually over the next three years). Thus interest expense is expected to decline year 2 and year 3. However, as revenue is expected to increase by an estimated 25% each in the next two years the related expenses are expected to rise. Thus there are provisions for them in the selling and administrative budget. Such expenses would include Advertising Expenses, Supplies and Miscellaneous charges.

SCHEDULE OF COLLECTION FROM CUSTOMERS

As the café is run on a busy market, there is hardly any sale which is expected to be on credit. Most sales would be cash sales and some of the them would be paid through cards. The partners expect the payments by cards would comprise of approximately 70% of the same. This is why there is adequate provision for credit card and debit card collection machines. For the sales made through cards the realizing bank would be required to be paid .5% of the amount. This expense is included in the selling and administrative budget (Horngren, et al., 2011).

So the café would not have any accounts receivables or short term debtors. Thus the frim does not have any problem of providing credit to customers and provide them with a time period to pay. This solves the issue of bad debts. However, the café partners are willing to provide credit to those institutional customers which gives them bulk orders for parties and special occasions. Such customers might be given a credit period of 7 days. However, the same is not incorporated into the budget as no estimate is available for the same.

SCHEDULE OF PAYMENTS FOR PURCHASES

Raw materials would be procured from a single supplier who has agreed to supply all the required material on daily basis. Coffee beans and other raw materials which can be stored for longer days would be required to be supplied on a weekly basis. However other materials like milk and fresh ingredients would be supplied daily – early morning. The Supplier has agreed to give a credit of 30 days. This means payment to the supplier would be made in the second month. Thus at the end of the year, 1 month’s accounts payable would be shown in the books. The accounts payable would be 35% of monthly gross revenue (Weetman, 2013). The total purchases for the month and the accounts payable for the next three years are shown as below:

Purchases of raw materials are calculated on a monthly basis which is 35% of the gross monthly revenue expected. So total raw materials purchased is monthly consumption multiplied by 12. At the end of the year one month’s payment is yet to be made and thus shown as accounts payable. So payment for December of year 1, would be made in January of the next year or year 2. Similarly, the total cash payment made to suppliers are calculated as 11 months payment for the first year. in the second and third year total cash payments made to suppliers equal 11 months’ current year payment plus 1 month’s payment for last year (Maynard, 2014).

CASH BUDGET

The cash flows of the Friends Café for the first year is presented as follows:

As can be seen form the above cash budget the monthly budgets are showing increase inclosing balances for each month of the first year which means the café is able to generate positive cash flows for most of the moths and at the end of the year the café has a cash balance of $239.971. the same can be sued to improve the menu, add new items and add amenities which might be need in the coming years. The partners can also be paid a dividend if the partners so desires (Wittman, 2011).

INCOME STATEMENT

The income statement of the Friends Café project is presented below:

The firm has been able to generate a gross margin of 53% after considering the discounts on sales and 55% if the same is not considered. In the year 1, the café is looking to generate a net margin of 25.27% which is good and the same is going to increase further in the next two years. So the project if implemented successfully and with the right intent, it would be able to generate a good amount of cash flow and profitability (Schroeder, 2013).

FUNDING NEEDS

The café needs an initial funding of $200,000 which is required to buy the fixed assets and make the necessary payments for decoration and other requirements. Of the same the partners have decided to invest $100,000 and the other half is borrowed at 6%. The partners have tied up with the supplier who have now agreed to provide a month’s credit thus eliminating too much working capital requirement.

IMPLEMENTATION TIME TABLE

The project if started Right away would take approximately 2 months to take effect. The partners would be required to enter into the leasing contract right away without wasting any time since the same would cost them the place. And finding a better place to start the project would be quite difficult. The interior designer has asked for four to six weeks’ time to make interior work and further 2 weeks would be needed to fix the furniture’s and kitchen equipment’s. The interior designer has agreed to employ a electricity work engineer to do the electricity fittings and this would save time. So the project would be up and running in three months’ time if the project is initiated right now.

CONCLUSION

The friend’s café project seems to be heading in the right direction. As the partners have taken the decision to start the project in the right time and have identified the right place for the same, they have a head start. Further the revenue projections are in the right directions. Because the project has found the right place the customer flow wouldn’t be a pressing issue. What the business has to do is to make the right menu and offer good quality product and ambience at a fair price. The cash budget and the income statement has indicated towards a profitable venture. Even of the venture is being intended to be started with a large debt, the cash flows are an indication that the repayment of the interest and the principal is not going to prove difficult. Further the project seems to generate adequate amount for the partners to start thinking about adding another branch. They shall plan ahead, use the additional cash flows and look for loans at a cheap rate. The signs are all towards a good beginning and time must not be wasted to initiate the same (Atrill, 2013).