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Accounting, Finance, SPSS
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The Financial Plan Of Business: Break-Even Analysis (Essay Sample)
Instructions:
You only need to write the part 6-10 1300words, the part summary you don't need to write.
You finish the work according to the model and relating the part finished by the member.
Content:
Financial Plan
The financial plan of this business will be outlined in the following sections:
* Start-Up cost
* Sources of funds
* Break-Even Analysis
* Profit and Loss
* Cash flow
It is important to note that the average price for every meal is $10. The revenue target in the first year will be $36,000. The annual increase in revenue and cost of goods sold will be 20% for the first four years, reducing to 10% after that. All expenses will be subjected to an inflation rate of 5% every year. No employees will be employed in the first and second year of running this business. The owners will carry out all the work. In the third year, the company will employ two employees to help run the business.
Start-Up Costs
The total start-up costs are the costs needed to cover all the expenses before the business starts running (Fuentes, Arroyo, Bojica and Perez, 2010). Healthy and Bye Homesick will has set aside $34,200 as the start-up cost required to start the business. The start-up cost is broken down in the table below.
Start-Up expense
Amount
Permits and lease deposits
$1,200
Contingency
$10,000
Building improvements
$15,000
Working Capital
$8,000
Total
$34,200
All the start-up assets will not be bought as they are already bought.
Sources of funds
Sources of funds in a new business has a significance influence in its success. A new business should not start with a huge debt, but should only take a loan once it has established a certain type of pattern in the revenue earned (Agrawal, Catalini and Goldfarb, 2014). The sources of funds for Healthy and Bye Homesick will be only from the partners, friends and relatives. The major reason to use these sources of funds is that capital required is not a large sum and it can easily be raised by the involved parties. One advantage of using this type of sourcing funds is that the young business is not in debt and is not under any pressure of meeting any liabilities. However, a disadvantage is that using this method can limit Healthy and Bye Homesick potential of starting big.
Break even analysis
Break-even analysis is done to find out how low the volume of sales can go for the business to become unprofitable. The total fixed costs for this business will be $34,200, which represent the annual expenses. The variable cost per meal sold is $3.51. Since $10 is the average price per meal, the breakeven revenue is $52,700 or 5,270 meals.
Net Units
Net Revenue ($)
Fixed Cost (S)
Variable Cost ($)
Total Cost ($)
Total Profit ($)
0
0
34,200
0
34,200
-34,200
2635
26,350
34,200
9,249
43,449
-17,099
5270
52,700
34,200
18,500
52,700
0
7905
79,050
34,200
27,747
61,947
17,103
10,540
105,400
34,200
36,996
71,196
34,204
Projected Profit and loss
The profit and loss analysis will demonstrate annual increases in revenues over four years as projected.
Profit and loss
Year 1 ($)
Year 2 ($)
Year 3 ($)
Year 4 ($)
Income
Sales
26,350
31,620
37,944
45,533
Cost of goods sold
9,500
11,400
12,540
13,167
Gross profit
16,850
20,220
25,404
32,366
Expenses
Insurance
2,600
2,730
2,867
3,010
Permits and licenses
1,200
1,260
1,323
1,389
Miscellaneous
4,900
5,145
5,402
5,672
Wages
0
0
5,000
5,250
Total Expenses
8,700
9,135
14,592
15,321
Net Profit
8,150
11,085
10,812
17,045
Cash Flow
The cashflow statement describes how the business will spend its resources (cash outflows) and from where the cash will come from (cash inflows).
Cash Flow
Year 1 ($)
Year 2 ($)
Year 3 ($)
Year 4 ($)
Cash Received
Owners Investment
34,200
Cash Sales
26,350
31,620
37,944
45,533
Subtotal Cash Received
60,550
31,620
37,944
45,533
Expenditure
Start-Up Cost
34,200
Expenses
8,700
9,135
14,592
15,321
Subtotal expenditure
42,900
9,135
14,592
15,321
Net Cash Flow
17,650
22,485
23,352
30,212
Cash Balance
17,650
40,135
63,487
93,699
Critical Risks
The restaurant industry is progressively becoming competitive due to the recent debut of new competitors in the industry. Whitten (2017) acknowledge the negative trend by stating that market saturation is causing declining sales. Increase in the number of competitors inclines the restaurants to increase their competitive intensity with some opting to use price discounts to attract customers from other rivals. Whitten (2017) describes this situation by mentioning how the industry traffic trends show a decline in the number of customers visiting quick-service restaurants. The main rivals will be the school cafeteria and the fast food outlets in the CBD. However, Healthy and Bye Homesick has planned about this and hence will provide more healthier foods which are homecooked. Unless the competitors introduce Asian Cuisines, Healthy and Bye Homesick will have no main competitors.
The business will be faced by a number of other risks once it starts operating. The major risks it will face include fire and demanding workload.
Fire
The business will be located in the owners flat in the CBD. The risk of fire is always present when preparing the meals and hence the business must come up with measures of reducing a fire risk. This is very crucial since if this risk is not covered well enough, it may completely finish the operations of the business. The first measure that will be taken is an insurance cover against fire. The insurance cover will ensure business continuity in case of a fire incident. However, other measures must be taken to ensure that the risk of a fire will be a minimum. Healthy and Bye Homesick will purchase two fire extinguishers which will be placed strategically in the premises to counter any small fires incidences. Also, the cook will be only allowed to wear appropriate kitchen clothing. Loose clothing has been known to cause fires while cooking and hence an apron will reduce occurrence of any such incident. Healthy and Bye Homesick will also employ the golden rule of not leaving any cooking unattended. The cook will always be in the kitchen when preparing the meals. The cook can only leave the kitchen if there is no cooking taking place. All surfaces in the kitchen will be kept dry and clean to prevent any accidents that may lead to a fire. Healthy and Bye Homesick will also schedule an inspection of all electrical appliance regularly to prevent any faulty appliance causing fire.
Demanding workload
Another major risk facing the operation of Healthy and Bye Homesick is a demanding workload. As all operations will, be done by the owners, the risk of fatigue is very potent. Fatigue may lead to substandard services which may affect the business in its first stages. To reduce this risk, the cook will do the cooking from 8:00 AM to 5:00 PM and have three breaks, one hour each. The person responsible for the administration will however work within the same time period but have one break of one and a half hours. The breaks will be useful for the owners to stay energized and offer optimal services. However, this risk is expected to reduce significantly once Healthy and Bye Homesick starts employing new employees.
Harvest strategy
The owners of Healthy and Bye Homesick have set a clear harvest strategy for the company during a set time period. A harvest strategy is where the owners of a business plan about transition of leadership of a company, its continuity over the years and finally if they will sell the business or not (liquidation). Also, it can be implied as the owner’s decision on the fate of the company after it has reached the maturity level (Maritz and Donovan, 2015). The owners will manage the business entirely in the first four years. Healthy and Bye Homesick aims to expand in these first four years and move to new premises in the CBD from the owner’s flat in the fifth year. Once the business moves into the new premises, the partners will delegate their role of managing the business to a manager who will oversee the operation of the business. The only major additional expense of this move will be rent and wages of more employees employed. Other incidental expenses will be advertising costs and setting up a new delivery mode which the company can run. When this move is done, the owners will have recovered the initial outlay they laid to start the business. The business will be self-sufficient and able to make profits every year as expected and hence assure potential investor that it will continue churning out profits for a long time to come. The owners of Healthy and Bye Homesick will use the selling harvest strategy in the sixth year with potential customers being the larger hotels in Melbourne. Projections show that in six years, the business will be worth over $500,000 and will guarantee $75,000 net profit every year. The sale will not however be restricted to larger hotels onl...
The financial plan of this business will be outlined in the following sections:
* Start-Up cost
* Sources of funds
* Break-Even Analysis
* Profit and Loss
* Cash flow
It is important to note that the average price for every meal is $10. The revenue target in the first year will be $36,000. The annual increase in revenue and cost of goods sold will be 20% for the first four years, reducing to 10% after that. All expenses will be subjected to an inflation rate of 5% every year. No employees will be employed in the first and second year of running this business. The owners will carry out all the work. In the third year, the company will employ two employees to help run the business.
Start-Up Costs
The total start-up costs are the costs needed to cover all the expenses before the business starts running (Fuentes, Arroyo, Bojica and Perez, 2010). Healthy and Bye Homesick will has set aside $34,200 as the start-up cost required to start the business. The start-up cost is broken down in the table below.
Start-Up expense
Amount
Permits and lease deposits
$1,200
Contingency
$10,000
Building improvements
$15,000
Working Capital
$8,000
Total
$34,200
All the start-up assets will not be bought as they are already bought.
Sources of funds
Sources of funds in a new business has a significance influence in its success. A new business should not start with a huge debt, but should only take a loan once it has established a certain type of pattern in the revenue earned (Agrawal, Catalini and Goldfarb, 2014). The sources of funds for Healthy and Bye Homesick will be only from the partners, friends and relatives. The major reason to use these sources of funds is that capital required is not a large sum and it can easily be raised by the involved parties. One advantage of using this type of sourcing funds is that the young business is not in debt and is not under any pressure of meeting any liabilities. However, a disadvantage is that using this method can limit Healthy and Bye Homesick potential of starting big.
Break even analysis
Break-even analysis is done to find out how low the volume of sales can go for the business to become unprofitable. The total fixed costs for this business will be $34,200, which represent the annual expenses. The variable cost per meal sold is $3.51. Since $10 is the average price per meal, the breakeven revenue is $52,700 or 5,270 meals.
Net Units
Net Revenue ($)
Fixed Cost (S)
Variable Cost ($)
Total Cost ($)
Total Profit ($)
0
0
34,200
0
34,200
-34,200
2635
26,350
34,200
9,249
43,449
-17,099
5270
52,700
34,200
18,500
52,700
0
7905
79,050
34,200
27,747
61,947
17,103
10,540
105,400
34,200
36,996
71,196
34,204
Projected Profit and loss
The profit and loss analysis will demonstrate annual increases in revenues over four years as projected.
Profit and loss
Year 1 ($)
Year 2 ($)
Year 3 ($)
Year 4 ($)
Income
Sales
26,350
31,620
37,944
45,533
Cost of goods sold
9,500
11,400
12,540
13,167
Gross profit
16,850
20,220
25,404
32,366
Expenses
Insurance
2,600
2,730
2,867
3,010
Permits and licenses
1,200
1,260
1,323
1,389
Miscellaneous
4,900
5,145
5,402
5,672
Wages
0
0
5,000
5,250
Total Expenses
8,700
9,135
14,592
15,321
Net Profit
8,150
11,085
10,812
17,045
Cash Flow
The cashflow statement describes how the business will spend its resources (cash outflows) and from where the cash will come from (cash inflows).
Cash Flow
Year 1 ($)
Year 2 ($)
Year 3 ($)
Year 4 ($)
Cash Received
Owners Investment
34,200
Cash Sales
26,350
31,620
37,944
45,533
Subtotal Cash Received
60,550
31,620
37,944
45,533
Expenditure
Start-Up Cost
34,200
Expenses
8,700
9,135
14,592
15,321
Subtotal expenditure
42,900
9,135
14,592
15,321
Net Cash Flow
17,650
22,485
23,352
30,212
Cash Balance
17,650
40,135
63,487
93,699
Critical Risks
The restaurant industry is progressively becoming competitive due to the recent debut of new competitors in the industry. Whitten (2017) acknowledge the negative trend by stating that market saturation is causing declining sales. Increase in the number of competitors inclines the restaurants to increase their competitive intensity with some opting to use price discounts to attract customers from other rivals. Whitten (2017) describes this situation by mentioning how the industry traffic trends show a decline in the number of customers visiting quick-service restaurants. The main rivals will be the school cafeteria and the fast food outlets in the CBD. However, Healthy and Bye Homesick has planned about this and hence will provide more healthier foods which are homecooked. Unless the competitors introduce Asian Cuisines, Healthy and Bye Homesick will have no main competitors.
The business will be faced by a number of other risks once it starts operating. The major risks it will face include fire and demanding workload.
Fire
The business will be located in the owners flat in the CBD. The risk of fire is always present when preparing the meals and hence the business must come up with measures of reducing a fire risk. This is very crucial since if this risk is not covered well enough, it may completely finish the operations of the business. The first measure that will be taken is an insurance cover against fire. The insurance cover will ensure business continuity in case of a fire incident. However, other measures must be taken to ensure that the risk of a fire will be a minimum. Healthy and Bye Homesick will purchase two fire extinguishers which will be placed strategically in the premises to counter any small fires incidences. Also, the cook will be only allowed to wear appropriate kitchen clothing. Loose clothing has been known to cause fires while cooking and hence an apron will reduce occurrence of any such incident. Healthy and Bye Homesick will also employ the golden rule of not leaving any cooking unattended. The cook will always be in the kitchen when preparing the meals. The cook can only leave the kitchen if there is no cooking taking place. All surfaces in the kitchen will be kept dry and clean to prevent any accidents that may lead to a fire. Healthy and Bye Homesick will also schedule an inspection of all electrical appliance regularly to prevent any faulty appliance causing fire.
Demanding workload
Another major risk facing the operation of Healthy and Bye Homesick is a demanding workload. As all operations will, be done by the owners, the risk of fatigue is very potent. Fatigue may lead to substandard services which may affect the business in its first stages. To reduce this risk, the cook will do the cooking from 8:00 AM to 5:00 PM and have three breaks, one hour each. The person responsible for the administration will however work within the same time period but have one break of one and a half hours. The breaks will be useful for the owners to stay energized and offer optimal services. However, this risk is expected to reduce significantly once Healthy and Bye Homesick starts employing new employees.
Harvest strategy
The owners of Healthy and Bye Homesick have set a clear harvest strategy for the company during a set time period. A harvest strategy is where the owners of a business plan about transition of leadership of a company, its continuity over the years and finally if they will sell the business or not (liquidation). Also, it can be implied as the owner’s decision on the fate of the company after it has reached the maturity level (Maritz and Donovan, 2015). The owners will manage the business entirely in the first four years. Healthy and Bye Homesick aims to expand in these first four years and move to new premises in the CBD from the owner’s flat in the fifth year. Once the business moves into the new premises, the partners will delegate their role of managing the business to a manager who will oversee the operation of the business. The only major additional expense of this move will be rent and wages of more employees employed. Other incidental expenses will be advertising costs and setting up a new delivery mode which the company can run. When this move is done, the owners will have recovered the initial outlay they laid to start the business. The business will be self-sufficient and able to make profits every year as expected and hence assure potential investor that it will continue churning out profits for a long time to come. The owners of Healthy and Bye Homesick will use the selling harvest strategy in the sixth year with potential customers being the larger hotels in Melbourne. Projections show that in six years, the business will be worth over $500,000 and will guarantee $75,000 net profit every year. The sale will not however be restricted to larger hotels onl...
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