Expanding the Sweet Coffee Shop - Example

Expanding the Sweet Coffee Shop

Lauren Jordan

BUS 402 Small Business Management

Strayer University

Professor William Hatchett

June 14, 2016

Expanding the Sweet Coffee Shop

Financial Plan for the Sweet Coffee Shop

Sweet Coffee Shop projects that the financial condition is positive and optimistic for the coming years. Projected financial statements would usually be prepared for the short-term basis, ranging from one (1) to three (3) years. The important financial components would include ascertaining the level of sales, costs of goods sold, operating profits, expenses, and net profits for items under the income statement. As for the balance sheet components, major elements such as assets, liabilities, and net worth would be projected. The summary financial components for the projected income statement and projected balance sheet are shown in the following financial highlights:

Financial Highlights for the Next Three (3) Years

Financial Components

First Year

Second Year

Third Year

Income Statement

Sales

1800000

1980000

2160000

Costs of Goods Sold

360000

396000

432000

Operating Profits

1440000

1584000

1728000

Expenses

1200000

1320000

1440000

Net Profits

240000

264000

288000

Balance Sheet

Assets

2500000

2700000

3504000

Liabilities

50000

60000

1000000

Net Worth

2000000

2240000

2504000

• Assumptions to Financial Statement Accounts
• Initial sales of about $5,000 per day is projected in the first year; to increase by 10% in the second year and 20% on the third year. The projected sales of $5,000 is a conservative; yet viable figure as the shop has just launched serving its products to the target market. Likewise, the projected increases in sales for the second and third years are also considered conservative growth rates which could be revised depending on the customers’ response on the first year of operations.
• Cost of Goods Sold is 20% of sales. These would include costs of the coffee beans, as well as other ingredients that go into coffee brewing and in the food products (sandwiches, pastries, pancakes, doughnuts) which would be offered to the clients. It was specifically noted that suppliers for the coffee beans, as well as other ingredients would come from the nearest local farmers to ensure freshness as well as affordability.
• Expenses are projected to be $100,000 per month on the first year, $110,000 on the second year, and $120,000 on the third year. The expenses would include rent, salaries of the personnel, utilities, and maintenance, among others. The expenses component would also include interest expenses for short-term loans and eventually for the $1,000,000 loan that is to be contracted on the third year to be used to open the second shop.
• On the third year, Sweet Coffee Shop applied for a $1000000 loan to finance the opening of a second store. A discussion on the monthly amortization, as well as the monthly interest rate for the loan would be presented in the section below. The loan is proposed to be paid within 3 years.
• The assets component would include the cash, equipment, furniture and fixtures,

as well as other resources of Sweet Coffee Shop that would form a permanent part of the structure.

• Initially, the liabilities of $50,000 and $60,000 for the first and second years of operations could be short-term credits or loans to suppliers or financial institution required for sustained operations of the shop.

From the projected financial statements, it could be deduced that Sweet Coffee Shop would be generating an average of $264,000 in net profits for the three-year period. The assumptions used a conservative growth rate in sales of only 10% in the second year and 20% in the third year. Substantial increases in rates of sales over the identified percentages would mean greater net profits for the coffee shop. As such, net worth would considerably increase and the proprietor could actually decide whether future stops to be opened would be financed through equity or through debt financing. The debt financing plan that is presented in the section below would attest that Sweet Coffee Shop would be able to pay the planned $1,000,000 loan using either chattel mortgage or savings account as collateral.

Guerrilla Marketing Strategy

A guerilla marketing strategy is defined as “an advertising strategy that focuses on low-cost unconventional marketing tactics that yield maximum results” . For Sweet Coffee Shop, a guerilla marketing strategy to be applied is the use of billboard advertising in strategic locations in the city, in conjunction with a promotional offer for a free cup of coffee. The message in the billboards announces the opening of Sweet Coffee Shop to focus on exemplary quality of the coffee and extremely affordable price; much like enabling customers to avail of specialty coffee at instant coffee prices. The shop would be able to achieve this goal and deliver a product at very affordable prices through the use of state-of-the-art technology, as well as sourcing the coffee beans from local farmers at very affordable prices. The billboards also announce the promotional offer that for every five cups of coffee availed, the customer gets one free cup of coffee for a slogan which says: Your Fifth Cup of Sweet Coffee is On Us.

The campaign only entails the customer to keep their receipts to avail of the fifth cup for free. Likewise, frequent customers would also be given a loyalty card where information of the customers’ purchases would be recorded in the company’s database. As such, loyal customers could eventually avail of freebies and price discounts of their coffee or other food products that the shop would provide: sandwiches, pastries, pancakes or doughnuts at very affordable prices.

The campaign is also proposed to be offered is small stalls to be located at supermarkets and university canteens during the first three months after launching to build brand awareness and to promote the shop. From word-of-mouth strategies, it is also expected that Sweet Coffee Shop would receive greater brand awareness and retention which would entice more customers to try the coffee products and other food items on a regular basis.

The Most Appropriate Location for a Second Store (an actual street address)

The most appropriate location for a second Sweet Coffee Shop store is in State Street which is a busy street due to the various discount stores that abound in the area. As such, together with the presence of other department stores and shopping centers, State Street is a strategic location due to its availability of numerous customers who could be looking for a cozy coffee shop to go into after a day of shopping or hunting for good bargains. State Street is also identified as one of the top shopping streets in Chicago . As such, as initially planned, during the launching period, specifically in the first three months, stalls are planned to be established in large shopping centers in the area. As such, from the brand awareness that has been established, it is presumed that Sweet Coffee Shop would have gained appropriate following of loyal customers to justify and rationalize the opening of a second store in the identified busy location.

Plan for Securing Sources of Debt Financing for the Second Store

Debt financing is defined as “a method of financing in which a company receives a loan and gives its promise to repay the loan” . For Sweet Coffee Shop, the proprietor could secure a loan by pledging either the shop’s equipment, chattel mortgage, or savings account to secure the loan. In Sweet Coffee Shop’s limited business experience, financial institutions could either request chattel mortgage and savings accounts to secure the $1,000,000 loan. The equipment for coffee brewing and the use of technology could serve as chattel mortgage for the loan. If deemed insufficient, balance sheet accounts would confirm that the shop generates enough cash in savings accounts to serve as additional collateral.

The proprietor could easily justify that the second store would assume similar financial projections as revealed in the financial plan; and therefore attest that positive net profits from the two stores would be sufficient to cover repayment for the loan.

Opening a second store is challenging, especially when a first store has just been launched. As such, although the projected financial statements revealed that Sweet Coffee Shop would be generating steady profits for the first three years, the net profits are still not enough to use as capitalization for the second store. In this regard, it is planned that a loan (debt financing) would be applied at the third year of operations to be earmarked for the opening of the second store.

The intended amount to be used for the loan is $1,000,000 which is planned to be repaid within 3 years. The current lending rate is 3.5% per annum. Therefore, at the principal of $1,000,000, the interest is $35,000 per year. The monthly amortization is projected at $27,777 per month for the next 36 months and an interest of $2,916 per month. These figures could easily be paid since based on the projected financial statements, the first store alone would be able to accommodate payment of the loan. As such, when the second store starts to operate, financial institutions would confirm that the net profits to be generated from the two stores would enable the proprietor to immediately repay the loan within the stipulated three (3) year period.