In this report, a business plan has been carried out for the restaurant named Red Hot Chilli Peppers. The restaurant intends to expand their business operations in the market and for this purpose they are setting up their second business outlet in a busy and posh area in London. The restaurant will offer a taste of authentic Indian cuisine to the customers in London. This is a family themed restaurant which will mainly cater their services to family oriented customers. The restaurant is going to provide a homely ambience to the customers which will provide a memorable experience to the customers. The restaurant is going to offer excellent quality of food which will be combined with an excellent customer service and this is going to play a very important role in helping Red Hot Chilli Peppers to tackle the market competition with the other business rivals in an efficient manner. This will enable the restaurant to create a steady customer base in the market and they will able to generate more profits and revenues from their business by maintaining high customer footfalls throughout the day.
Main Objectives of the new restaurant:
1) To provide value for money to their customers in the market.
2) To provide excellent quality of products and services to their guests that will leave a lasting impression on their minds and compel them to come back again and again to avail our services.
3) To maintain optimum business productivity within the organisation by ensuring the optimum utilisation of the available resources.
4) To establish their presence in the London and generate a profit of 10% at the end of first year.
5) To generate sales to the tune of £250,000 in the first year.
Key factors which can help the restaurant in achieving their goals:
1) Recruiting competent and skilled professionals who will be able to contribute effectively towards the growth and success of the organisation.
2) Providing the staffs with quality training and guidance regarding how to interact and behave with their clients.
3) Providing utmost importance and emphasis on the quality of products and services which are being provided to the guests and always striving to satisfy the expectations of the customers.
In view of the wide popularity and demand for Indian Cuisine in UK, the restaurant Red Hot Chilli Peppers is intending to set up their second business outlet in London. The organisation has made a name for themselves in the UK restaurant industry by offering high quality and authentic Indian spicy food combined with a high level of services to their customers in the market. The organisation continuously strives to provide a good ambience to their customers which effectively complement the quality food which they are offering to their clients. This enables them to attract more customers from the market and as a result they are able to generate more profits and revenues from their business operations in the market. The organisation strongly believes in the motto of “Athithi Devo Vabha” which in English essentially translates to “Guests are God”. With this firm belief in their mind, the owners of Red Hot Chilli Peppers” is trying to cater their products and services to a greater section of the general population and this will enable them to reduce the customer pressure on their existing business outlet.
The organisation conducts their business operations with the firm belief that providing a healthy working environment to their employees will invariably foster job satisfaction which will create happy and enthusiastic employees. This will enable the organisation to foster customer satisfaction in the market by ensuring the delivery of better quality of products and services to their clients (Jones et al., 2014).
The key elements of the restaurant have been described below:
1) Location – The restaurant is located in a busy upmarket area of London which is easily accessible by local transportation. The location of the restaurant has been selected after thorough planning and evaluation. The strategic location of the restaurant is going to play a very important role in ensuring high customer footfalls throughout the year and this will enable the organisation to generate more profits and revenues from their business.
2) Ambience and Environment – The restaurant will provide a homely ambience to their customers which will provide them with a detailed insight regarding Indian culture and hospitality. This is the main USP of the restaurant and this will help them to attract and retain the family oriented guests who are looking to enjoy and spend a memorable time with their families (Kaplan et al., 2009).
3) Quality of Food – The food offered to the customers will be of the highest quality which will provide the customers with an authentic experience of Indian cuisines. The restaurant will provide a memorable fine dining experience to their clients which will leave a lasting impression on their clients.
4) Quality of Service – The restaurant will provide impeccable service to their guests which would leave a lasting impression on their minds and this will compel their clients to come back again and again to enjoy the same memorable experience (Hyun, 2010).
The restaurant is a sole proprietorship business which is owned by an owner of Indian origin. The owner of the restaurant operates the restaurant as a family business with the family members occupying important positions within the restaurant. The main owner of Red Hot Chilli Peppers is a first generation Indian settled in UK for the last 35 years. The owner has been involved in the restaurant sector right from the beginning of his career and has a total experience of more than 20 years in the restaurant sector. The owner started their own restaurant Red Hot Chilli Peppers two years age and within this short span of time has gathered a lot of popularity and demand among the customers in the market. This compelled the owner to expand their operations by opening their second business outlet in London (Spadaccini, 2007).
For setting up their second restaurant in London, Red Hot Chilli Peppers would require an initial funding of £250,000. This will take care of the cost associated with different aspects of their new business outlet. In order to access the necessary funding for setting up their second business outlet, the organisation is considering taking up a business loan to the tune of £200,000 and the remaining £50,000 will be spent from their retained profits. The company has identified an area of 6000 sq. feet at a prime location which is appropriate and most suitable for addressing their business needs and requirements. The market price of this property is £150,000. The cost associated with interior decoration, furniture and other equipments is £25,000. The remaining £75,000 is going to be spent of the daily operational expenses and the salaries of the staffs who are working at the restaurant (Parks et al., 2015).
The second business outlet of Red Hot Chilli Peppers is going to have a maximum seating capacity of 300 people. The restaurant will be located at a prime location which generates massive surge of people throughout the day. The location of the restaurant in the heart of London is a significant aspect which will provide the restaurant with a competitive edge over their business competitors in the market. It will enable the restaurant to ensure high customer footfalls throughout the day (Karlsson & Honig, 2007). The restaurant is to have a dual mode of operations. It would operate as a takeaway establishment during the period from morning to afternoon (10 am to 3pm). After 3pm, the restaurant will open its doors to the customers so that the customers and they can come to the restaurant to have a memorable fine dining experience. This dual mode of business operations is an innovative and clever strategy which will enable Red Hot Chilli Peppers to maximise their exposure in the market and this will enable the restaurant to attract more customers from the market for their product and service offerings. This will enable Red Hot Chilli Peppers to ensure their future growth and success in the market by enabling the organisation to create a steady customer base in the market. The prices of the food items have been kept low so that it is affordable for the everyday customers and they can come in large numbers to enjoy the wide variety of food items which are on offer (Ward, 2016).
Indian food is extremely popular among the UK citizens who relish the spiciness and hotness associated with Indian food. Despite the recession, the demand for Indian food had not diminished in any manner whatsoever. There are presently over 9000 Indian restaurants in UK which continues to cater to 2.5 million customers every week generating total business to the tune of almost £800 million each year. The demand for Indian food is slated to increase further in the coming years. The increasing demand and popularity of Indian food among the British population has created a lucrative business opportunity for the owners of Red Hot Chilli Peppers wherein they can effectively capitalise on the growing customer demands and expand their business operations in the market (Healy & Palepu, 2012). Red Hot Chilli Peppers will be able to generate more profits and revenues from their business operations in the market thereby enabling them to tackle the market competition with their business rivals in an effective manner. People these days have a busy lifestyle and they are unable to spend quality time with their families and this makes the restaurant an appropriate and ideal hangout location wherein people can spend quality time with their friends and family members and enjoy the tasty dishes which are on offer. Red Hot Chilli Peppers is willing to provide their customers with a proper ambience which will have a lasting impression on the minds of their customers (Bowden, 2009).
Market segmentation is extremely essentially for ensuring the long term growth and sustainability of the restaurant. With the help of market segmentation, an organisation is able to identify their target customer segment in the market and understand their needs and preferences in an effective manner. By undertaking a market segmentation of their customers, Red Hot Chilli Peppers will be able to understand which segment of the population the majority of their customers belong to. This will provide them with an effective insight regarding what kind of products and services they are expectation from Red Hot Chilli Peppers and this will enable the restaurant to provide an effective quality of service which satisfies and fulfils the customer needs and expectations (Solomon, 2014).
The process of market segmentation generally consists of dividing a large market of customers into smaller parts based on their common tastes, preferences and expectations. There are various market segments in the restaurant industry and one market segment is completely different from another segment. The process of market segmentation can be undertaken based on the age group, personal income, gender and occupation of a person. Based on these above factors, the market segmentation can be categorised into three types – Psychographic segmentation (based on the lifestyles of an individual and their personal interests), Behaviouralistic Segmentation (based on customer loyalty towards a specific brand) and Geographic Segmentation (based on the location, climate of an area and the cultural aspects of the people in that area) (Jang et al., 2011).
In case of Red Hot Chilli Peppers, the organisation has mainly identified three customer segments in the market and they include the unmarried young professionals, the family oriented customers and the tourists and business travellers.
Unmarried young professionals – These customers in this segment are living a busy lifestyle and they are fiercely independent. They hang out with their friends and colleges after work and come to the restaurant to enjoy the delicious food on offer. These customers are extremely busy as they are continuously trying to juggle their careers and their personal life, they value the little free time which they get to enjoy with their friends (Hyun, 2009).
Family oriented customers – These customers come with their families to enjoy the quality food which is being offered by the restaurant. These customers belong to the everyday budget segment of the market and they are mainly looking for quality food at affordable prices. The organisation has been able provide a homely ambience to their customers and this is the main reason why customers feel comfortable to come in the restaurant accompanied by their families (Li & Wang, 2009).
Business travellers and tourists – The tourists and business travellers also comprise a significant portion of the restaurant’s clientele as they do not have the compulsion of cook at home. These customers prefer the convenience of having dinner at the restaurant which provides them with quality and authentic Indian cuisines (Bowden, 2009).
The target market segment strategy which is to be adopted by Red Hot Chilli Peppers is cost leadership. This is mainly due to the fact that the majority of the customers coming to the restaurant belong to the budget segment of the market. The organisation is providing their products at highly competitive prices and this has played a very important role in helping the restaurant to foster customer satisfaction among their clients. The average price of a full course dinner for four people at Red Hot Chilli Peppers is around £20. The organisation intends to enhance the customer demand for their products and service offerings and this is the primary reason why the prices have been kept low so that more and more customers could come to the restaurant to have a memorable dining experience (Füller & Matzler, 2008). Additionally, the organisation is providing utmost emphasis on providing a high quality of service to their customers in the market. The organisation has made it a priority to never compromise of the quality of food and services which are offered to their customers in the market and this would enable them to create a good reputation in the market which will enable them to attract more customers for their product and services (Hyun, 2009).
Red Hot Chilli Peppers will be able to provide value for money to their customers and this will enable them to attract new potential customers through word of mouth publicity from their existing customers in the market. The target market segment strategy will also play a very important role in helping the tourist and the business travellers to save their hard earned money and this will create a lasting impression on them. Thus, the cost leadership strategy will play a very important role in helping the restaurant to develop a competitive advantage in the market and they will be able to generate more revenues and profits from their business (Karlsson & Honig, 2007).
It has been mentioned earlier that Red Hot Chilli Peppers will operate on a dual model. The restaurant will operate as a takeaway business during the day (from 10 am till 3 pm) and operate as a fine dining restaurant during the evening and night (from 3 pm till 11.30pm). The fact that the restaurant is situated in a posh and busy location in London, there is bound to be a steady surge of customers throughout the day. The close proximity of the restaurant to the business centres makes it an ideal choice for the working professionals to order their lunch from this restaurant. Red Hot Chilli Peppers will provide the convenience of home delivery to their customers and this will help in saving the time of the busy working class population. The delivery charges are also nominal so that the customers do not feel any price pinch while ordering their food (Bowden, 2009). From a conservative estimate, the restaurant hopes to get orders to the tune of 750 during the day from the nearby business centres. Additionally, they hope to get 250 customers during the evening. Thus, the daily business revenues generated by the restaurant will be £20000 (considering the average cost of meal to be £20). For catering effectively to the large number of customers on a daily basis, the organisation has identified many food suppliers in the market and is negotiating the prices of the food products and raw materials which are to be sources from them. Once they arrive at a mutually agreed price point, the organisation will enter into a contractual agreement for 6 months with their different suppliers in the market. This will enable them to ensure an effective supply chain management which will enable Red Hot Chilli Peppers to manage their inventory in a proper manner (Li & Wang, 2009).
There are many business participants in this food and dining industry who are catering to the needs and requirements of the diverse customer segments in the market. These have been discussed below:
Fast food chains – These include the large retail food chains like McDonalds and KFC which are providing fast food to the customers on the go.
Bar cum Restaurant – The business establishments in this category offer the convenience of both food and liquor to the customers depending on their requirement.
Takeaways – This type of business usually provide home delivery services to the customers or the customers have to come to their outlet to take the food which has been ordered by them. These business establishments are small in size and they do not have any seating arrangement for their customers. This prevents them from offering a formal dining experience to their customers (Boo, 2016).
Fine dining restaurants – The businesses in this category offer their customers with a formal dining experience. The customers are offered the services on a first come first serve basis. The customers would have to either book a table in advance (which will be reserved for them) or they have to patiently wait in queue for their turn to come depending on the seating capacity of the restaurant (Ahn et al., 2011).
There are many reputed Indian restaurants in London which are offering their customers with high quality of food and services. The increasing demand and popularity of Indian food among the general population in UK is one of the major reasons which have contributed to this high level of competition among the different Indian restaurants in the UK market who are all striving to get a larger share of this lucrative market. All the Indian restaurants are trying every trick in their book in order to foster customer satisfaction among their clients and retain their customers for the long haul (Leung, 2010). Some of the main competitors which are going to give a tough competition to Red Hot Chilli Peppers are The Sitara, Taste of Nawab, Indian Express and Memories of India. These four restaurants are offering high quality dining experience to the customers in the market. They have been witnessing a high amount of customer footfalls from the last few years due to their good market reputation based on years of trust. Red Hot Chilli Peppers would have to incorporate an effective business strategy in order to effectively tackle the market competition with their business rivals. The organisation has to provide unique products and services which will enable them to ensure product and service differentiation in the market. This is the only way in which Red Hot Chilli Peppers will be able to sustain the market competition with their business rivals by attract more customers from the market for their product and service offerings (Buettner, 2008).
The restaurant would provide exceptional service to the customer to satisfy them and retain them in the business. The design of the restaurant would such that that the people get the test of not only the India cuisine but also the test of the Indian culture. The price of the service would be affordable through creative menu development (Revell and Blackburn, 2007). The traditional Indian cuisine with seasonal variety would be provided to the customer to choose from. The change of menu would provide according to the seasons.
The restaurant would be in the casual restaurant formation. But it would have food and quality of service like the fine dining restaurant with affordable price. The service quality of the restaurant would have the continuous improvement approach (Teece, 2010). So from the beginning the staffs would be advised to listen to the customer for the improvement process. A special system would apply for the cleanliness and checking of the food quality. Monthly bases there would evaluation of the service quality, customer expectation and the improvement opportunity.
The service of the restaurant would be differentiated based on the theme of the restaurant and quality of service. There would be some Indian street and fast food in the menu. This will give the customer variety of option and test. The service and the production staffs of the restaurant would be some specialised person who has the knowledge and test of the Indian culture (Revell and Blackburn, 2007). That is why it would be important for the business to retain all those staffs for the business so proper training, performance recognition and rewards would be given with maintenance of appropriate communication.
Exterior design
The outward look of the restaurant is important to attract the customer. It would give the impression of the service provided inside (Jain and Haley, 2009). So the exterior of the restaurant would be designed appropriately.
Quality of service
The quality of service to the customer is very important from the marketing perspective. This would develop the word of mouth publicity for the business. That is why a detailed minimum service guideline would be developed in the organisation (Cravens and Piercy, 2006). The staffs are advised to listen to customer and provide exceptional service. The staffs would be sufficient empowered for this reason.
Promotion
An integrated marketing promotional approach would be used for the business. The business would attract the other culture people to give them the cultural flavour and test of cuisine of the India. The business would also attract the Indian people who want to have the test of the Indian cuisine abroad. Because of the heavy inbound tourist in the country the restaurant would attract the traveller from the India (Jain and Haley, 2009). Now these different approaches would need different promotional tools.
The advertisement would be dedicated to attract the customer and make them aware about the expected service. A good amount of budget would be provided for the regular presence of the advertisement. The ads would be provided in the news paper, restaurant related website, travel websites, and billboards. There would be some special discounts given to increase the sale and influence the people to test the food and the service. A loyal customer base development would be the target of the business and that is why the some special offered would be developed. The opening of the restaurant would be grand and have lot of PR activity to inform the customer about the presence of the restaurant. The social media would be used to created the buzz. A regular interaction in the social media with the promotion of new menus would be done. An up to date designed mobile friendly web site would also be developed. The internet and social media marketing would be used to generate traffic into the website. 16% of the total cost of sales would used for the marketing and promotional purpose (Cravens and Piercy, 2006). The expectation is that the marketing and promotional activity would contribute around 30% of total sales figure annually who would be new customer.
Sales budget
|
Sales |
For the year 2017 |
|
Net food sales |
£147172 |
|
Net beverage sales |
£63073 |
|
Net sales |
£210,245 |
|
Cost of sales |
|
|
Food sales cost |
£106648 |
|
Beverage sales cost |
£ 45706 |
|
Total cost of sales |
£152,354 |
Sales forecast for ‘Red Hot Chilli Peppers’ of the year 2017 figures in £
The sales budget has two components that is food and beverage. Food product sales are expected at around 70% of total sales and rest is the beverage. The cost of sales also reflects the same pattern. The bar diagram is for the sales forecast for the 12 month period of the business. Initially the sales figure is expected to be low. Gradually as the marketing and promotion creates the market demand the sales figures rises (McCarthy et al., 2006). At the month 11 and 12 the sales figure touches the £25000 mark. The minimum target sales of £17520 are reached in the 6th month of the operation. The minimum target is derived from the break-even point analysis and dividing that per month.
Red Hot Chilli Peppers is a family run business where the family member is occupying the main managerial position while the rest of the positions like accounts and marketing have been delegated to outsiders. The fact that it is a small family owned business there are only few managerial positions and the total employee strength has been fixed at 17.
General Manager – The new outlet will be run by the third generation male descendent of the owner who has completed his graduation in hospitality management from one of the reputed colleges in London. He has also completed his MBA in International Business from Stanford University. The manager is a dynamic individual who has excellent leadership skills and this is the main reason which the responsibility of managing the new business outlet of Red Hot Chilli Peppers has been assigned to him as the owner feels that he is the ideal candidate for the job. The manger would be responsible for ensuring the smooth business operations of the restaurant in the market and he would ensure optimum business productivity at Red Hot Chilli Peppers.
Accounts Manager – The accounts manager is an individual who has industry experience of more than 5 years. The accounts manager has previously worked in accounting firms like PWC and Grant Thornton. The accounts manager holds a first class masters degree in Financial Accounting from University of Manchester. The accounts manager will be responsible for maintaining a balance sheet of the daily operations expenses and revenues generated by the restaurant. The accounts manager would maintain a record of the daily cash inflows and cash outflows from the business which would be help the manger to evaluate the performance of the restaurant in the market (Drury, 2013).
Marketing Manager – The person responsible for managing the marketing and promotional activities has an experience of more than 4 years on a similar field. The person holds a MBA in Marketing from University of Nottingham. The marketing manager will be assigned the responsibility of undertaking an effective promotional campaign which will enable the restaurant to popularise their products and services in an effective manner. This will enable Red Hot Chilli Peppers to spread customer awareness and this will enable them to increase their daily customer footfalls (Althuizen, 2012).
The management team at Red Hot Chilli Peppers comprises of a team of competent individuals who have the necessary expertise and skills to guide the restaurant towards the path of sustainable growth in the near future. The owners of the restaurant have identified a team of individuals who are best suited for the restaurant and the owner sincerely hopes that with a team of dedicated and hardworking individuals working under the management they will be able to effectively contribute towards the growth and success of the restaurant. Being successful in a competitive business environment inherently requires teamwork and better understanding among all the employees working at the restaurant (Carmeli, 2008). The main issue and challenge which can be faced by the organisation is the lack of communication and understanding between the employees. The management needs to regularly interact and communicate with their employees in order to provide a healthy working environment for their employees. This will go a long way in fostering better teamwork and understanding between the management and the employees which will enable the organisation to ensure optimum productivity within their business (Barrick et al., 2007). The staffs (waiters) who are providing food to the guests must be imparted with quality training regarding how to interact and behave with their customers. The waiters must be taught the importance of being courteous and friendly at the time of interaction with the clients. This will enhance the buying experience for the customers and as a result Red Hot Chilli Peppers will be able to foster customer satisfaction in the market. Red Hot Chilli Peppers will be able to retain their customers for the long haul and they will be able to sustain the business competition in the market by creating a steady customer base for their product and service offerings (De Hoogh & Den Hartog, 2008).
The restaurant will have a total employee strength of 17 individuals which comprises of 4 cooks, 4 waiters, 2 helpers, 1 accounts manager, 2 accountants, 1 general manager and 1 marketing manager and 2 security guard.
Daily Staffing Expenses:
|
Position |
Quantity |
Rate (hourly rates) |
Average Hours |
Total |
|
Waiters |
4 |
£5 |
8 |
£160 |
|
Cooks |
4 |
£7 |
8 |
£224 |
|
Accountants |
2 |
£8 |
8 |
£128 |
|
Helpers |
2 |
£5 |
8 |
£80 |
|
Accounts Manager |
1 |
£12 |
8 |
£96 |
|
Marketing Manager |
1 |
£12 |
8 |
£96 |
|
General Manager |
1 |
£15 |
8 |
£120 |
|
Security Guards |
2 |
£6 |
8 |
£96 |
The financial plan of the new business plan would be based on certain economic and business related assumptions. The forecast of the financial plan would deviate from the forecast as the variables changes. The assumptions are as follows.
Red Hot Chilli Peppers
Profit & Loss Account
For the year end 30th March 2018
|
Sales Revenue |
£210,245 |
|
Cost of sales |
£152,354 |
|
Gross profit |
£57,891 |
|
Administrative expenses |
£15,248 |
|
Operating profit |
£42,643 |
|
Financial expenses |
£15,485 |
|
Earning before tax |
£27,158 |
|
Tax @20% |
£5,431 |
|
Net profit |
£21,727 |
The restaurant business of Red Hot Chilli Peppers started with an initial investment of £250,000. The profit and loss account of the company is showing the expected results of one year of operation in the business. The sales revenue of the company is expected to reach at £210,245. Considering the market scenario and the above assumptions, the business is expecting the growth of 10% on year on year basis for the next two years that is 2018 and 2019. The growth would be the result of the optimum utilisation of the resource available and reaching the economy of scale gradually (Penmanand Penman, 2007). Currently the restaurant is having 4000 sq ft as total space available for the business. The sales generation per sq ft would start from a minimum base level in the 2017 and is expected to reach the optimum level by the end 2018. The sales per sq ft in the 2017 are £52.56/ sq ft. The design of the restaurant is done in efficient way so that the space utilisation becomes highest in the operation. As the marketing and promotional activity picks up and the business become well know to the prospective customer, the sales figure would rise then gradually (Griffin, 2009). The rise in sales figure would improve the sales per sq ft figure. The cost of sales for the year 2017 is expected £152,345. There the gross profit of the company is expected to stand at £57,891. The operating profit of the company is expected to be at £42,643. The operating profit of the company would be 20.28% of the total sales figure. In the following years the operational efficiency is expected to grow and there the operating profit of the company would be targeted at 28% by the end of 2019 operation. The targeted operating efficiency is arrived at by considering 10% increase in the sales revenue for 2nd and 3rd year operation with minimum increase in administrative expenses and moderate increase in cost of sales. The net earnings for the year 2017 are estimated at £21,727. The estimation shows that the business would be able to register profit in the first years. The target would be reached thorough the efficient design, proper marketing promotion done for the business and maintaining the operating efficient of the business. In the following year the profit figure would be even better as the economy of scale is reached. Along with that the there would be reduction in the promotion cost from the second year (Penmanand Penman, 2007). The expense for the marketing activity for the first year is high as there would be lot of advertisement expenses, discounts for the sale growth, special offer and program for the customer loyalty development.
Red Hot Chilli Peppers
Balance sheet
For the year end 30th March 2018
|
Net non-current asset |
£335,090 |
|
Inventory |
£5,843 |
|
Debtor |
£20,000 |
|
Cash |
£18,311 |
|
Net current asset |
£44,154 |
|
Total asset |
£397,244 |
|
Net current liability |
£45,243 |
|
Net non-current liability |
£345,176 |
|
Total liability |
£390,419 |
|
Net liability |
£11,175 |
|
Capital and reserve |
£12,691 |
|
Shareholders fund |
£11,175 |
In the balance sheet of the company is showing the financial position of the company after the yearlong operation of 2017. The current liability figure of the company is higher than the current asset. The current liability is £45,243 and the current asset is £44,154. So in the first year the business would not be able to meet all of its current liability of the business. The reason would be the difficulty level of meeting the debt obligation in the initial year because of the starting phase of the operation (Sinha, 2012). The situation would be balanced through better negotiation within the creditors to extend the payment time and also through taking some short term debt from the banks.
The total asset figure of the business would be at £397,244 and the total liability position of the business would be at £390,419. So here the total asset position of the business is lower than the total liability position of the business. This means that the business would also unable to pay its entire obligation in the long run (Griffin, 2009). But the total short fall here is £11,175. This position would improve as the business progresses. So to maintain the total liability figure as low as possible the business would look for the increased efficiency. The debtor position and the average collection day would be strictly maintained. The inventory level of the business is kept at low position. The inventory in the restaurant business would not be stored long as to reduce the wastage in the business (Sinha, 2012). This approach is also useful as there would be minimum investment in the inventory management and equipment at the initial phase.
Red Hot Chilli Peppers
Cash flow
For the year end 30th March 2018
|
Net inflow of cash from operation |
£26,923 |
|
Net outflow of cash from activity of investments |
£287,816 |
|
Net inflow of cash from financing |
£284,951 |
|
Total increase in cash and cash equivalent |
£22,058 |
|
Cash and cash equivalent for January 3rd 2017 |
_ |
|
Cash and cash equivalent for January 3rd 2018 |
£22,058 |
The net inflow from the business operation is £26,923. The total investment activity would case the cash outflow of £287,816. There the cash inflow from the financing activity would be at £284,951. At the end of the year 2017 the business would have £22,058 amount of positive cash flow. The cash inflow of the business would be strictly maintained so that the requirements for the working capital do not face many problems in the business. The business would not rely too much on the credit from the supplier side (Maravas and Pantouvakis, 2012). There would be discounts from the supplier side. For availing the discount the business would have to pay the supplier at the delivery time. In the initial year operation the business would not be able to have those discounts as it has to keep cash in hand for certain emergencies in the business. As the operation get regularise the business would look for those kind of discount from the supplier to save money for the business. This approach would increase the current liability position of the business at the beginning year. The inventory is deliberately kept low in the business operation to keep the cash flow in the business high. The menu of the restaurant would focus on the seasonal flavour more and that is why it would be possible for the operation to purchase product in the season time with minimum cost and minimum requirement to store that for long term. The budget would be strictly followed in the business. In the restaurant business there is continuous requirement to purchase suppliers. That is why the liquidity position of the business needs to be good (Maravas and Pantouvakis, 2012). In the assumption part it is mentioned that the inflation condition of the country is in rising trend. The increase in the price of the supplies in the market, the business at that time would not be able to pass that quickly to the customer easily. This would impact the demand factor. The business has to absorb the rising cost factor for some time before passing it to the customer. In that context also the cash flow position is very important and because of this risk factor the cash flow would be strictly maintain.
Financial ratios
|
Current |
0.975 |
|
Acid test |
0.846 |
|
Gross profit margin |
27.53% |
|
Net Profit Margin |
10.33% |
|
Fixed asset turnover |
0.627 |
|
Total asset turnover |
0.529 |
|
Inventory turnover ration |
26.07 |
The financial ratios of ‘Red Hot Chilli Peppers’ would provide certain ideas about the financial health of the business. The current ratio of the business is below 1. This means that the pressure of current liability is high in the business. In the short run because of the high operational cost the liability position of the business is high (Fridson and Alvarez, 2011). The inventory portion of the current asset is much more difficult to convert in cash quickly. There is also a change of wastage of the inventory stocks. So the acid test ratio gives the actual liquidity position of the business. The acid test ratio is 0.846 where as the current ratio is 0.975. This is relative low drop of 0.129. The inventory position in the business is kept low. The benefit is that the current ratio is not too bad from the current ratio and both of them are close to 1 (Higgins, 2012). That means the business would be able to arrange the capital need to meet the short fall.
The gross profit margin and the net profit margin of the business would stand at 27.53% and 10.33% respectively. The margins in the restaurant business are low. Still the business would develop creative menu with seasonal section of items to attract the customer. This approach would reduce the cost and increase the affordability of the service. As a result the business is expected to register health profit (Higgins, 2012). The net profit margin of the business would improve as the financial expenses come down from the initial year’s high point.
In the restaurant business the investment in the fixed asset is high. So it is important to monitor the efficiency of the fixed asset use for the revenue generation. Here the fixed asset turnover ratio is 0.627 whereas the total asset turnover is at 0.529. Both the turnover ratio is good for the business in comparison to the industry average. The Inventory turnover ratio is 26.07. The average inventory of the business is low that is why the ration is very good and it means that the business is able to sell the average inventory around 26 time with in the year (Sanjeev, 2007). So the resource utilisation in the operation is very high. This approach would help the business to save cost as well as improve the cash flow and profitability.
The cost of sales of the business is at 72% of the total sales figure. So the contribution for every £100 is £28.
The business is starting with £250,000. Out of this £150,000 is for the procurement of the property and £25,000 for the purchase of the other equipment. The rest of the amount is for the variable expenses in the operation. So the total expense for the fixed cost is £175,000.
So the breakeven point in the business will reach at [(175000/28} ×100] = £625,000.
That means the business would break even when it achieves £625,000 as sales revenue. The current sales revenue is £210,245; 10% increase in revenue for 2018= £231269; 10% increase for 2019= £254396.
Considering these revenue figures the business would be able to break even around 2 year and 10 months (Kotas, 2014).
For the first year the break even target for each month would be [210245/12] = £17520.
So per day basis the sales target of the business through the break-even analysis is [17520/30] = £584.
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