You have decided to open up a restaurant in London serving fast food takeaway. You would like to open up 1 restaurant initially and then in a few years open more restaurants in in London.
You need to prepare a report to potential investors how you plan to fund and price your products.
We have decided to open a restaurant in the great city of London. The restaurant will be in nature of fast food takeaway. We have decided to open one such restaurant during first year of operations and we shall expand our business once this restaurant is settled operationally.
According to Brooks (2009), every business and service industry has following sources to finance its business operations:
Equity share capital is the primary source of finance for every business. It is permanent source of finance. Moreover, payment of dividend is no compulsory on equity shares. The company can pay dividend only if it has profits and directors declare dividend. However, as the equity shareholders bear the risk, it is more risky. Moreover, as the dividend is not tax deductible, it also increases cost of equity capital. Equity capital can be raised from existing investors if they are ready to make further investment in the company. It can also be raised from friends and relatives if they are ready to make participation in the ownership of the company. Angel investors are also keen to invest in start up companies with potential to grow big in size and provide huge returns. They can be very good source of finance for start up companies with solid fundamentals (Higgins, 2007).
The company can also finance its operations through debt. Debt capital is more flexible as compared to equity as the company can raise and repay debt as per its requirement. Moreover, cost of debt is lower as compared to equity as interest is tax deductible. The company can increase return of equity shareholders with the help of positive financial leverage. However, debt capital carries more risk as the company has to pay interest on debt even if it does not have profits. If the company is unable to serve interest and principle timely, debt holders can demand liquidation of the company. Therefore, debt capital increases financial risk of company. The company can raise debt from friends and relatives if its requirement is low to medium. However, if the finance requirement is high, the company will have to approach bank and bank will finance the company after completing credit check and document formalities. The company will have to mortgage its assets with bank for the purpose of obtaining debt. The company can also raise long term debt from venture capital funds. These funds provide long term finance with flexible interest rate and repayment schedule to start up companies. The rate of interest can be low during the initial stage to support profitability of the company and interest rate can increase at growth stages. Moreover, moratorium is also provided for repayment of principle (James, 2010).
Retained profit is also very important source of finance for the company. The company can retain the profit in the business instead of distributing it to the owners if it has cash requirement. The company can get this finance without any cost. The owners will also be happy as the company is employing their funds profitably (Yescombe, 2002).
Creditors are also very important source of financing working capital of the company. The company can negotiate with the suppliers for better credit terms and it can also request the suppliers to enhance credit period to support its working capital requirement. The biggest advantage of this source is that it comes without any additional cost if terms are properly negotiated (Yescombe, 2002).
The company can also discount its accounts receivables with the factoring company and get finance against its accounts receivables. This debt can be repaid from proceeds of accounts receivables (Yescombe, 2002).
Thus, it can be said that there are various sources of finance for the business and it can raise finance according to its requirement.
According to Neal & Pike (2009), income generation is very essential for every business to survive and prosper. We have designed a unique business model for our restaurant. Therefore, we would be able to generate income from various sources such as;
– Sales
– Commission
– Sponsorship
– Grants
The primary source of our revenue will be selling of fast food. We shall target young students and jobbers to sale our food. These customers are always looking for quality food at reasonable price and they are also heath conscious. We believe that we will be able to get good share of these customers as we have kept our prices very reasonable looking to the overall market rates. Moreover, we shall serve best quality food.
We will also sell readymade foods of large retailers. We have already signed long term contract with two such retailers. These retailers already have base of royal customers. We shall utilize the market strength of these retailers and sell their products through our restaurants. We will get commission of 10% on food sell on behalf of them.
We will also accept sponsorship from local companies to market their products. Our restaurant will be situated in the middle of the city. Moreover, we will have regular young and earning customers. Therefore, local companies will be interested in advertising with us.
We are also eligible for local government grants as we are a new enterprise with young entrepreneur. This grant will help us meet our operational expenses during the initial stages.
Variable Cost per unit of fast food will be as under:
|
Particulars |
Amount |
|
Materials |
£5.00 |
|
Consumables |
£1.00 |
|
Labour |
£2.00 |
|
Total Variable Cost |
£8.00 |
We will purchase best quality materials from the local city area. The material will cost £5.00 per fast food. The material cost is very high because of its quality. This quality is very important for the restaurant as it wants to develop long term royal customers.
Consumables will cost £1.00 per unit. This consists of various small items required for the purpose of preparing the food item.
We will employ skilled workers on contract basis. These workers will be paid £2.00 per fast food item prepared by them. These workers already have very long experience of preparing quality food in other restaurants. Therefore, they will ensure quality food with good test.
Fixed Costs per month will be as under:
|
Particulars |
Amount |
|
Rent |
£1,000 |
|
Salaries |
£2,000 |
|
Marketing Expenses |
£500 |
|
Administrative Expenses |
£600 |
|
Maintenance Expenses |
£400 |
|
Total Fixed Expenses |
£4,500 |
We will run our restaurant in a rented premises instead of own premises. This will save us from huge investment at the initial stage. We have executed a long term contract with the landlord to use this premises for the purpose of our restaurant with an option to purchase the premises after 5 years. The monthly rent will be £1,000 per month during first year of operations.
We will also hire full time staff for the purpose of smooth running of the restaurant. This includes a restaurant manager to oversee operations of the whole restaurant and helpers to assist the manager. Monthly salary of £2,000 will be paid to these employees.
The promoters believe in the magic of marketing. Therefore, they will spend £500 per month for the purpose of marketing the restaurant. The marketing will be targeted at our target customers so that it is effective and value for money is received. This exercise will help create awareness about the restaurant and build brand of the restaurant in the long run. The restaurant will be able to charge premium price for its brand. Therefore, marketing expense is very essential part of total expenses.
We will also employ one administrative staff for the purpose of day to day administration of the restaurant. Moreover, it will have to incur various administrative expenses such as electricity, stationary, telephone, utility etc. These expenses will add up to £600 per month.
We will also have to incur heavy expenses on maintenance. The regular maintenance of furniture and other items is very essential in restaurant business. Therefore, we will spend £400 per month for this purpose.
We will price our fast food products at £12 per unit. This price has been arrived after evaluating detailed market research carried out by an independent market research firm; price charged by other restaurants for similar products and cost structure of the restaurant. We firmly believe that we would be able to sell our products at this price. There will be no need to offer discount to customers as the selling price is already competitive.
The selling price of fast food is £12 per unit whereas variable cost per unit is £8. Therefore, contribution margin is calculated as under:
|
Particulars |
Amount |
|
Selling Price |
£12 |
|
Variable Cost |
£8 |
|
Contribution |
£4 |
|
Contribution Margin Ratio |
33.33% |
Thus, it can be seen from the above table that contribution margin ratio of the restaurant is 33.33%.
The fixed expenses of the restaurants are £4,500 per month. Therefore, breakeven point is calculated as under:
|
Particulars |
Amount |
|
Fixed Expenses |
£4,500 |
|
Contribution Per Unit |
£4 |
|
Breakeven units |
1,125 |
|
Breakeven Revenue |
£13,500 |
Thus, it can be seen from the above calculations that breakeven sales are 1,125 units and breakeven sales revenue is £13,500. The restaurant must generate this revenue to avoid loss.
The management plans to generate after tax profit of £7,000 per month from the fast food business. As the tax rate is 30%, before tax profit required is £10,000 month. The target revenue for this profit is calculated as under:
|
Particulars |
Amount |
|
Fixed Expenses |
£4,500 |
|
Target before Tax Profit |
£10,000 |
|
Total Target Contribution |
£14,500 |
|
Contribution Per Unit |
£4 |
|
Target Units |
3,625 |
|
Target Sales Revenue |
£43,500 |
Thus, the restaurant must generate sales revenue of at least £43,500 to generate after tax profit of £7,000 per month.
The restaurant will also get commission of £2,000 for selling products of other retailers and sponsorship revenues are expected to be £500 per month. It has been assumed on conservative side that the restaurant will not get any government grant. Further, simplicity of calculations, it has been assumed that no expenses will be required for the purpose of earning commission and sponsorship.
Projected Profit & Loss Statement of the restaurant for first month of operations is as under:
|
Particulars |
Amount |
|
|
Sales Revenue |
£43,500 |
|
|
Cost of Goods Sold: |
||
|
Material |
£18,125 |
|
|
Consumables |
£3,625 |
|
|
Labours |
£7,250 |
£29,000 |
|
Gross Profit |
£14,500 |
|
|
Other Income: |
||
|
Commission |
£2,000 |
|
|
Sponsorship Revenue |
£500 |
£2,500 |
|
Fixed Expenses: |
||
|
Rent |
£1,000 |
|
|
Salaries |
£2,000 |
|
|
Marketing Expenses |
£500 |
|
|
Administrative Expenses |
£600 |
|
|
Maintenance Expenses |
£400 |
£4,500 |
|
Profit before Tax |
£12,500 |
|
|
Tax @ 30% |
£3,750 |
|
|
Profit after Tax |
£8,750 |
Thus, it can be seen from the above projections that the restaurant will generate gross profit of £14,500 and net profit of £8,750 per month.
Stock controlling is very essential for safeguarding assets of the company as stock is one of the major inputs for the purpose of making the food. Moreover, as our stock consists of food items, it is even more essential. We will establish following controls for the stock:
Cash is also very important component of current assets of the company and it is prone to theft and fraud in the absence of adequate internal control systems. We will establish following systems to control cash:
Thus, it can be seen from the above discussion that stock and cash can be controlled with effective internal control systems.
It is clear from the above discussion that our restaurant has very good potential to grow big in size. We have already acquired the premises on long term lease and we have also hired skilled labours. We have also secured selling contracts from the leading retailers. There is large market for our products at our price. This will ensure that we earn profit from the first month of starting the business.
Avis J., 2008, Management Accounting Decision Management, 2008-2009 Edition, Oxford: CIMA Publishing.
Brooks R., 2009, Financial Management: Core Concepts, 1st edition, Pearson Education
Delena S., 2013, Fraud Analysis: Strategic and Methods for Detection and Prevention, London: Wiley
Drury C., Management & Cost Accounting, Business Press Thomson Learning
Higgins R., 2007, SE edition. Analysis for Financial Management,McGraw-Hill Education
James S., 2010, Essentials of Working Capital Management, Wiley
Neale B. & Pike R., 2009, 6th edition, Corporate Finance and Investment Decisions and Strategies, Prentice Hall
Rose H., 2008, Internal Control Policies and Procedures, London: Wiley
Tracy J., 2013, Accounting For Dummies, For Dummies
Yescombe E.,2002, Principals of Project Finance, Massachuettes: Academic Press
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