Financial Management of Cool Moose Creamery - Essay Example

?Contents Introduction 3 Important Elements to Consider 3 Market Size and potential of the market 3 Product and its uniqueness 4 Demand of the products or services 4 Competition 5 Expected Return on Investment 5 Risk involved 5 Availability of resources 6 Reversible Investment 6 Gut Feeling 6 Taking the final decision of investment 7 Assessing the possibility of Purchasing a new single-head soft-serve ice cream machine 7 Qualitative Issues that need to be consider: 9 Competition 9 Demand of ice cream in the market 9 Legal issues 10 Opportunities Prevailing 10 Conclusion 10 Exhibit 11 Project Profit and Loss Statement 11 Calculating Hourly Rate of employee 11 Cost of soft-serve mix per serving 11 Cost of Napkin 11 References 11 Introduction This report analyses the feasibility of starting a new venture of Cool Moose Creamery. Cool Moose Creamery has been successful in offering scooped ice cream, frozen yogurt, milkshakes and floats. The company is evaluating to expand its offerings and therefore it is planning to create new franchises and for this, the management would identify elements that are to be considered and that would have an impact on the profitability of the firm. The report analyses whether starting a new franchise of Cool Moose Creamery would be feasible or not and what opportunities and threats might be considered while starting this venture. The report has been divided into two parts; the first part of the reports highlights and discusses different elements that could influence the decision whether to start a new venture or not and the other part of the report analyses the feasibility of starting a new venture by using different project appraisal techniques. The first part of would include more of qualitative data however the quantitative data and all the calculations have been included in the second part. Important Elements to Consider Starting a new venture is the phase when the management of the business has to consider important elements and factors that could influence the operations and success of the new firm. By identifying these important elements, the managers are able to identify factors that could influence the business and then take steps to minimize the impact of these steps. Such elements are also important for the management as they provide areas that the management should look at and be careful of while starting a new venture (Dunung, 2010). Some of the most important elements that the management has to consider while starting a new venture are as follows: Market Size and potential of the market One of the important elements that have been considered before starting a new venture is the market size and the potential of the market. Market size is basically defined as the total number of potential customers that the firm for whom the firm would be offering products or services. Market potential basically refers to the potential or possibility of the consumers buying the products or services of the firm. If the market has high potential but the size is very limited and starting a business requires high investment, then it is not feasible to go ahead with such a venture. However, if the market size is small and has potential in it but requires low investment then venture can be started as despite of low market size firm would be able to capitalise the market. Therefore it is important for the management to consider and analyse the market size and the potential of the market along with the benefits that would be delivered by the venture and by comparing these elements, the final decision should be made. Product and its uniqueness The other important element that the management should consider before starting a new venture is the product and how unique the product is to meet the needs of the market. Product is the first and most important P of the marketing mix and if the first P is not good enough to attract customers, then the business would not be successful in the long run. The quality of the product is an important element that would make the product successful however it is also important that the product is offered at an affordable price to the consumers. It is also critical that the product is accepted by the consumers as if the product is not according to the taste of the people, then it will not be accepted. This is the reason why many firms modify their product when they expand their products and services to different markets so that their products are able to meet the needs of the domestic consumers (Kotler, 2009). Demand of the products or services The demand of the products or services that a new venture is going to offer is an important element that the management needs to consider while taking their decision to start a new venture. By analysing the demand of the products and services, the management is able to identify the potential of the market and therefore the demand of the products or services is important. If the demand of the product or service is low, then it would not be a good idea for the management to start the venture therefore it is important to consider the demand of the product or service in the industry as an important element. Competition The level of competition is another important element that could change the investment decision of the management. Higher competition in the industry might not allow the firm to achieve higher market share, however the quality and threats from competitors are also to be considered while making the decision. Also higher competition becomes a barrier for firms to enter the market. Expected Return on Investment The expected return on investment of the project is an important element that influences the decision of investors whether to make investment in a venture or not. By estimating the return on investment of the project, the investors are able to choose between different investments or projects and then take decisions that yield the highest returns. Different firms also calculate the net present value of the investment and then consider the project that yields the highest value at present. Risk involved Risk involved in the business is another important element that has to be considered while making the decision whether to start a new business or not. Risk does not include the financial risk involved in the business, but it also includes the operational risk and risk of technology and other risks. Therefore it is important for the management or the investors to consider different risks that are at stage of start up as well as once the operation of the venture has been started. Availability of resources While making the decision of starting a new venture, it is important that the firm is able to find different resources easily that it would require at the time of starting the venture as well as at the time of its operations. If the firm is located in such a location that sufficient resources are not available, then it would be difficult for the firm to operate smoothly. Therefore it is significant to consider the location and the availability of the resources while making the decision to start the venture. In addition to this, it is also important that the management considers the cost of the resources as well as the cost of resources might vary from one place to another and this can influence the profitability of the firm. Reversible Investment Reversible investment basically refers to the amount of investment that can be recovered or retrieved if the business is not successful and it has been closed. The higher the reversible investment, the easier is the decision of the management to go ahead with the investment decision. However if higher proportion of the investment is irreversible then it hesitates the investors or the managers a little to make the decision (Tummons, & Spinelli, 2009). Though, if the business idea is lucrative, and the market is positive then there is no harm to invest in a business that has higher irreversible investment. Gut Feeling Another important element that could influence the decision of the investors to invest in the project is the gut feeling. At times, decisions are made on the basis of gut feeling rather than on the calculations as managers would feel that the idea is good enough to be profitable and therefore the decision is taking on the basis of judgement. Taking the final decision of investment There are several factors or elements that are to be considered while making the final decision, however it is up to the management of the firm that which elements they consider and which one they consider the most important ones. Some managers might include more elements while making investment decisions and some might even exclude some of the elements that have been discussed. Making the investment decision is not actually science, and therefore it is up to the managers to make the decision according to the situation. So it is important for the management to identify and understand different elements that could influence the decision to start a new venture as this would allow them to know which factors that impact the profitability of the firm in the long run. Assessing the possibility of Purchasing a new single-head soft-serve ice cream machine The second part of the report would assess the possibility of whether the management should purchase a single head soft serve ice cream machine or not. In order to take the decision whether single head soft serve ice cream machine should be purchased or not, project appraisal techniques such as payback period and return on investment would be used. Profit margin of the project would also be calculated. However in order to calculate the payback period of the project, return on investment and profit margin of the project, profit and loss statement of the project needs to be calculated so that the profitability of the project is revealed. To prepare the projected profit and loss statement of the project, all the relevant costs and expenses have been identified and calculated. The project profit and loss statement can be found in the exhibit section of the report. Payback Period Payback period of the project shows the time in which the investment amount would be received to the investors (Arnold, 2008). To calculate the payback period, following formula has been used: By using the above formula, the payback period of the project is calculated: Payback Period Total Investment 50000 Payback Period in years 7.14 Payback period is found to be 7.14 years. It means that the project amount would be received in 7.14 years. Return on Investment (ROI) Return on Investment (ROI) is another important project appraisal technique that has been used by investors to analyse whether project is feasible or not (McLaney, 2009). ROI reflects the return that the investors would receive on the total project cost. Higher the return on investment, there are more chances that investors would like to invest in such a project (Jaffe, 2007). Return on investment is calculated using the following formula: By using the above formula of return on investment, ROI of the project is calculated: Total Investment 50,000 Net Profit 597.5 Return On Investment 1.20% ROI of the project is found to be 1.20% Profit Margin Profit margin reflects the ratio of earnings from the total sales or revenue of the firm (Ross, Westerfield, and Jordan, 2009). The profit margin is calculated using the following formula: The profit margin of the project is calculated below: Total Revenue $7,000 Net Profit $598 Profit Margin 8.54% Profit margin of the project is found to be 8.54% Qualitative Issues that need to be consider: There are several qualitative issues that need to be considered by the management before making investment in single serve ice cream machine. Some of important qualitative issues that the management has to consider are as follows: Competition When starting this business, it is important that the management considers the number of competitors offering similar kind of products in the market. Demand of ice cream in the market Another important qualitative issue that the management needs to consider is the demand of the ice cream. If the demand of ice cream is high, then the project should be invested. Also it is important to consider the future demand of the product as this would help in identifying the long run demand or long run sales of ice cream. Legal issues Another qualitative issue that needs to be addressed is the legal issues of offering eatable products. The soft-serve ice cream machine creates several health and safety issues and therefore it is important to consider the legal aspect of such issues and then take steps accordingly. Opportunities Prevailing Before the project has been invested, it is important for the investors to evaluate more projects as well. As by identifying more projects, the investors would be able to analyse whether this project would yield the highest returns or other projects would yield higher returns. If there are more opportunities available for the investors to invest that would yield higher returns, then there is no point in making investment in single serve ice cream machine. Conclusion Making investment decision for any project is critical as this is the make or break situation of the project. It is important to critically analyse the situation, external as well as internal factors that could influence the firm and its operations before the project has been started. Not only these factors should be identified but their impact should be calculated so that their impact can be calculated on the operations of the firm. Therefore the management also needs to carefully analyse the external factors and then make their final decision whether to invest in the project or not. Exhibit Project Profit and Loss Statement Revenue $7,000 Cost soft-serve mix 700 Cost of Cone/ Cup 196 Cost of Napkin $28.00 Employee Cost 3978.5 Depreciation expense 1500 Total Cost 6402.5 Profit $598 Calculating Hourly Rate of employee Hourly Rate $10.25 Employment Insurance (EI) and Canada Pension Plan (CPP) Contributions $0.65 Total Hourly Rate $10.90 Cost for One hour each day for 365 days $3,978.50 Cost of soft-serve mix per serving Soft-Serve Mix $30 One bag would have 120 servings Soft-serve mix/serving $0.25 Cost of Napkin Napkin - 500 $5 Cost of one napkin $0.01 References Dunung, S. (2010), Starting your Business, Business Expert Press, New York. Kotler, P., (2009), Marketing Management, Pearson: Prentice-Hall. Tummons, J., & Spinelli, S., (2009), New Venture Creation, Entrepreneurship for the 21st Century, Mcgraw-Hill Higher Education, New York. McLaney, E., (2009), Business Finance: Theory and Practice, Pearson Education: New Jersey. Jaffe, J., (2007), Corporate Finance, Pashupati Printers Pvt Ltd: Delhi. Arnold, R., (2008), Economics, South-Western Cengage Learning: Mason, OH. Ross, S., Westerfield, R., and Jordan, B., (2009), Fundamentals Of Corporate Finance Standard Edition, McGraw-Hill: New York. Read More