Individual Assignment Part 3
Introduction
The financial planning in this assignment is based on the steakhouse business proposed in the market and feasibility study of the business plan. The business will be based in Ventura County Main Street location and will target young adults who are looking to dine-out while at the same time providing a relaxing atmosphere. Therefore, the business will be investing a lot on its infrastructure and information technology since it aims at establishing a long-term relationship with its customers through efficient service, quality food and customer relationship management.
Assumptions
In order to develop a financial plan for the business and project the financials, the following assumptions have been made:
- A stable and slow growth economy is considered where inflation rates or interest rates are assumed to be constant.
- Any major changes in the macro environment will not impact the profitability of the business.
- The projections will be based on the assumption that the restaurant will continue to work in the current working environment.
- Tax rates will remain constant throughout the projections.
- The growth rate will increase by 10% each year and the increase in sales will be directly proportional to the growth rate.
- The depreciation will be straight-line depreciation.
Break-even Quantity
The break-even analysis involves variable costs, fixed costs and total revenue. Break-even is the point where the costs equal the revenue. It helps in minimizing the operating leverage of the organization which is the risk or the uncertainty involved with its operations. Variable costs will include part-time employees on hourly wages and cost of goods sold including food and beverages. Fixed costs will include the rent of the restaurant, Salaries & wages of the staff and the administration, Interest, taxes and insurance, and Advertising
The selling price of the main steak dish will be around $8 per plate. Since it is a restaurant business, there will be a wide variety of selling items on the menu of the restaurant; however, since it is a steakhouse business, it will measure its sales with respect to the number of steaks sold. The variable cost of the business is estimated to be 65% of the selling price .
The fixed cost will include rent of $3,000 which is the estimated monthly rental costs of restaurants in Ventura. It will include $2,500 insurance cost annually and the along with other fixed costs, the estimate total fixed cost is estimated to be around $400,000-500,000 in the first year since costs for setting up the production facilities and information technology is also included. The tax rate is based on the market information of tax rates in California which is currently at 8.84% . This rate is assumed to be constant for the first three years.
In order to breakeven, the business requires an extremely high number of sales in the first year since it will have high start-up costs. Therefore, in the first quarter, the business does not expect to break-even since it will be spending more and earning less. However, with increased promotion and advertising and with increased number of customers, the sales required to breakeven will likely be achieved in the second year of the business .
Income Statement
The income statement has been projected for each month for consecutive three years in order to determine the profitability of the business. The business does not earn expect to earn any gross profit in the first quarter of the business. Moreover, the start-up cost of the business is expected to be around $450,000, therefore, the operating expenses for the first year will be high, however, majority of it will be the one-time cost incurred of setting up the business. In order to meet up the high costs, loan will be obtained from various sources such as the venture capitalists and development centers like California Small Business Development Center (SBDC) that support the growth of small businesses . The loan will amount to $300,000 and is estimated to be obtained at an interest rate of 11%. The nature of the loan is a fixed five year loan where the interest will be paid in monthly installments and the principal will be repaid at the time of the maturity of the loan. Moreover, the loan will be used for spending in the equipment and supplies required for building up the desired infrastructure of the restaurant. The production and service facilities bough are expected to have a 10 year life value and will be depreciated on straight-line business for the next 10 years. The salvage value is assumed to be zero .
The income statement indicates a heavy loss in the first year however this mainly includes the cost of loan which will be paid in installments later. In the second year, with the expected increase of 10% in sales and lowering of operating expenses, the business has started earning an attractive profit. In the third year, assuming other factors constant, the sales is expected to rise 10% as compared to the previous year, resulting in an increase in net income.
Cash Flows
Cash flow projections have been based on certain assumptions. Firstly, the restaurant will operate on cash basis. So there would not be any sales on credit. The customers will pay their bill at the counter before leaving. Secondly, at the start of the business there will be cash inflow from the loan obtained worth of $300,000. Moreover, that cash will be used for purchasing equipment. Moreover, in the first month, the business will also invest its own capital worth $50,000 to further cover up various expenses.
Start-up Balance Sheet
The start-up balance sheet is based on the initial loan borrowed and the capital invested for funding the business.
Conclusion
The financial planning of the business indicates that although heavy investments will be required in the beginning, the business still expects to maintain positive cash flows and a strong balance sheet at the end of the year due to its service quality and increased sales.
References
California SBDC. About the California SBDC Network. 2012. 03 December 2012
California Tax Service Center. C Corporations. 2012. 3 December 2012
Fullen, S.L. Opening a Restaurant Or Other Food Business Starter Kit. Florida: Atlantic Publishing, 2005.
Godsey, J.A. Organic Restaurant Business Plan. California: California Polytechnic State University, 2010.
Nugus, S. Financial Planning using Excel. Oxford: CIMA Publishing, 2009.
