The Feasibility of a New Venture - Cool Moose Creamery - Essay Example

? COOL MOOSE CREAMERY, A FEASIBILITY STUDY CONTENTS Part Analysis….............................................................................3 Part 2: Purchasing…........................................................................7 Part 3: Finances…............................................................................9 Part 4: Bibliography….....................................................................13 PART 1 A wide range of factors must be considered as both obstacles and opportunities in the establishment of this or any new franchise. The initial success of the Cool Moose Creamery in Ontario should be studied for comparison purposes prior to the financial commitment of a franchise investment. Of considerable interest is the notion of whether the initial location of the first business contributed to its success? Moreover, what were the location factors that contributed to the success of the first business? A common refrain in real estate is location, location and location again. This maxim, of course, is not only limited to home prices. Consideration must be given to visibility and accessibility. Obviously, a highly visible location along an extremely busy thoroughfare where the eyes of all passer-bys will be drawn to your sign, thus, making business almost ideal. In a highly competitive business environment, start-ups may find these prime locations already long occupied by established players. There are still options for the establishment of a new business or franchise: buying out an unsuccessful business in an otherwise useful location or appropriating a property as close as one can get to prime real estate, yet on the fringes. In this case a choice made here could prove to be influential with respect to every other subsequent factor. If a prime location for your franchise of Cool Moose Creamery can be determined, and is theoretically available then, as with most other material decisions, the cost/benefit analysis must come into play. It may be possible to purchase or lease a property in a highly visible location, but this cost must be weighed against future earnings. There must be a sense of the likely revenue within a particular time frame, as well as one should realize how high the benefits of visibility might be depending on a prime location. Even if the money does not come directly out of pocket, such as it is in the case with the $20,000 bank loan that must be sought, too much capital invested in the initial start up could lead to more debt, or more complex financing arrangements that could make the business more trouble than profit. These factors are never easy to predict, but the small business owner must do the best he can while examining – whenever possible examples of similar businesses, and the local operations in similar situations as guides for cost and profitability. Other factors that will influence the success of any franchise may be forces less visible and tangible than location or the initial equipment that must be purchased. Local zoning ordinances must also be taken into account, with respect to both above board and clandestine forces. Even if the zoning regulations and requirements are obeyed with precision, investigation is warranted concerning under-the-table problems or restrictions. Have other business owners complained about a particular individual in city government with control over regulatory decisions that might impede small businesses? Could there be zoning ordinances that have unusual sub-clauses or interpretations that are not obvious at cursory examination but which prove surprisingly problematic after an investment has begun? Question such as these can only be addressed through word-of-mouth, largely from anecdotal accounts, and of course – prior personal experience. This leads the small business owner into the complex question of a financial 'cushion'. One must consider whether it is possible, or feasible to determine minimum initial start up money, and then wait until it is possible to acquire extra funding held in reserve against unforeseen obstacles beyond simple issues of pricing and purchasing. Should the business be put on hold until more startup money than absolutely necessary is available? Or should the requested bank loan amount be enlarged beyond the most optimistic assessment of initial costs? Again, this would create a greater burden of debt and more complex financing arrangements, yet such considerations must be proposed, even if the decision is made not to act on suspicions of possible crisis. Returning to the question of location, obviously competition in any form of business endeavor is a given, but the small business owner should take care to assess whether this city or location will involve a more severe risk than normal. In addition to competition from the same sorts of businesses, such as another Dairy Queen – one must consider whether there are different, nearby businesses or establishments that might compromise an otherwise ideal location? A nearby airport is known to depress home prices from the constant background din, which is generally impossible to block. Other examples might be an adult entertainment business within visual distance of a church or synagogue. In other case it, perhaps, might be a luxury hotel that overlooks an oil refinery or some other zone of heavy industry or possible toxic chemical odors. Locations that otherwise receive high traffic can be made undesirable depending upon the type of businesses adjacent to your own. With respect to an ice cream shop, considerations would be very similar to that of any restaurant; a location with high visibility that does not include other operations that might produce toxic or noxious odors, for instance. Although another consideration with respect to ice cream could be a business that might provide weight loss products. These two establishments could potentially feed off of, or interfere with each other in complex ways, and that should be carefully evaluated before a decision is reached. Choosing a location where similarly themed restaurants already exist becomes a double-edged blessing. On the one hand, a location with many restaurants or custard shops indicates that the geography of the area does not interfere with the success of ice cream themed products. On the other hand, even if the startup investment is not prohibitive in such a location, a new business along similar lines may simply be lost in the crowd. Thus alternative locations should be scouted out with high visibility and traffic, and absence of interfering forces that would prevent people from enjoying ice cream, which has not been exploited by similar businesses. Such a choice spot may not exist in a given city, but some consideration should be given towards the possibility. All restaurants are also under stringent health and safety requirements in the industrialized world. Dispensers and receptacles of ice cream and similar perishable food items must be kept at controlled temperatures, and cleaned regularly. Cutting costs in this instance is a dangerous gamble. Various health departments and food safety inspectors have good reasons for draconian regulation in this regard. Not only could a build-up of bacterial or fungal contaminants alter the flavor of the product, sickness could easily result from poor hygiene, in which case more potential revenue is lost as the health department is compelled to step in to compel a change in operations or depending upon the severity of the violation, shut down service altogether. Even if these problems can be resolved sufficiently, there is still the question of advertising. Even if a favorable location can be secured at a reasonable rate, customers may not show up simply because your business operation has simply become part of an ever present background din. They may simply not be thinking about whether they would enjoy your creamery. Advertising can provide the hook that is needed to draw customer notice. A catchy jingle can linger in the imagination of people who otherwise must attend to busy schedules and may not be thinking about ice cream. The memory of your catchphrase can pop up in their awareness when other, more pressing matters have faded in importance. Furthermore, if the absolute optimal location cannot be secured, you may be able to make up the difference in advertising by emphasizing your exact location – even if it is away from the main thoroughfare of specialty ice cream shops. PART 2 Small business comprises over 50% of all employees in the United States, (Focus.com 2012) and thus many shops of similar nature can prove enduring and lucrative. First, important decisions must be made in terms of start up costs; of which there are several alternatives. With respect to the ice cream in this particular case, the equipment must be factored into the cost/benefit analysis, and not just in the short term. Using technology similar to soft serve ice cream, other practical and financial considerations must be addressed. The number of dispensers on the soft-serve machine is perhaps the most pressing question with respect to equipment purchases. A machine with two dispensers will by necessity be less expensive, but it will allow for fewer allotments of ice cream over any given time frame. On the one hand, every business would like to be at peak capacity in all circumstances, at all times. But this is improbable as one must also consider lulls in customer traffic, seasons in which patronage will be reduced. For this sort of business it is likely to do peak business in summer and far less in the winter. A machine with three dispensers could allow for faster service during the summer months, but it might prove superfluous during the slower paced, colder times of the year. It is more important to save money on an item with a limited use during some parts of the year, or is it more vital to maximize the potential for profit during the busiest season? The best way to resolve the question is with respect to time frame. In the short term, there is less potential for sales with respect to start up cost. Long-term investments always have the potential to pay for themselves with a viable business model. Over time, a machine with more dispensers should end up paying for itself with expedited service during peak hours of operation. Thus, the potential for profit should prove greater with a three dispenser machine. Some reasons to employ the smaller device would be a situation of extreme limitations in startup capital. If the decision has been made to go forward with the franchise, but the estimated ideal funding in the form of loans and personal investment has not been fully realized, then small margins in the beginning become more important. Without ideal funding, an alternative might be to purchase the smaller dispenser in the beginning, there and if the business model should prove viable, upgrade later to a larger dispenser. This is probably the best option if small margins of initial money could make a critical difference. Another option in terms of funding that could be explored during the establishment of a franchise is of course, funding from the parent corporation. Well-established franchises are dynamic corporate entities that – when stable can maintain a cash reserves for emergency situations. These emergencies can also constitute an endangered branch of the franchise unable to reach financial solvency based on its present challenges. A well-established corporation might then make the decision to put that franchise into receivership rather than simply lose a branch of their business that may turn a profit later. The long-term viability of such a strategy is certainly questionable, but the original owner of the first business should be approached with this idea, whenever a new franchise becomes operational. If a single corporate entity can be formed that will cover the startup costs, this can benefit the business as a whole. A bank will expect a return on whatever loans it might provide that will simply flow into the bank's accounts. Friends not directly involved in the business will at some point expect consideration as well, and whatever return they may receive on their investment will go to them alone. But if the Cool Moose Creamery were to be incorporated, then the money will circulate within this business unit, helping the founder and other franchises. By strengthening the whole rather than an outsider, the business itself can grow and will therefore be better equipped to assist an individual shop should the need arise later. Serious negotiations with the initial founder of the business should be conducted by anyone seeking a franchise to this effect. PART 3 Investment Return At the rate of $2.50 per serving of soft serve ice cream, it would require 6,000 servings to equal the cost of a new, single-dispenser machine. 15,000/2.50 = 6,000. Projections must be made as to the minimum time before this investments pays for itself, with respect to start-up costs, salary and rent. But the above figure does not take into account cost of product itself. Total cost of supplies needed for return of investment on single-dispenser machine: $30/bag - 120 servings per bag = 25 cents cost per serving. 25 cents per serving + 7 cents for cone or cup + 1 cent for a napkin/serving Total cost to the shop of 33 cents for each serving of ice-cream at $2.50/serving, revenue equals $2.17 each time ice cream is sold. At the adjusted rate, it would require at least 6,913 unit sales to recoup the investment of the single head machine. 15,000/2.17 = 6912.44 This is not counting rent, or salary. Refrigeration for the ice cream mix, using a single head machine would total at $750 for a 4-month operating period, including utility costs and purchase price. $2,250 annually. Thus, a new single-head machine plus refrigeration for the product would cost $17,250 over the course of a year, requiring 7,950 unit sales minimum in order to recover the cost in a year's time, at the revenue of $2.17, as adjusted for each unit sold after containers and napkins are paid for. A four-month operating period would allow on average for 2,800 servings sold projected. Three such periods would be necessary to pay for these costs. 17,250/2,800 = 2.8390. This assumes sales are equal for each operating period. (Which may not be the case given seasonal preferences) 2,800 servings X $2.17 unit price yields = $6,076 per projected operating period. If that figure remains constant over the course of 3, 4-month operating periods annually, revenue can be projected as $18,228. Cost and upkeep of the machine and freezer as established above would allow for $978 remaining for rent, and salary. 18,228 - 17,250 = 978. Employee costs alone would outstrip this margin: Employee full time salary including tax contributions equals a rate of $10.90/hour. Paying employees based on revenue would allow for 90 hours of labor, to say nothing of rent. 978/10.90 = 89.72 hours. These prices cannot be profitable based on sales alone. Additional funding is a necessity, probably in the form of a bank loan. Otherwise, if rates and terms for a loan are deemed undesirable, a used machine is a superior option. At the average price of $2,000 dollars, even if repairs to the device equaled the entire purchase price, it would still be less than a third the cost of a new machine. Prices would still be favorable even if a used machine had to be entirely replaced during each 4-month operating period. A bank loan or a used machine is the only truly viable options in the absence of unlimited start-up capital. The presence of capital as an initial resource is of course, critical. The above calculations demonstrate the steep challenges for a new business seeking to purchase its own location, equipment, and compensate employees. Arguably, the in this initial seed money must inform any long-term strategy, with respect to purchasing decisions. It has been stated that the owner's friends are willing to go in together with respect to the initial startup costs, and the purchasing decisions must hinge upon the availability of these funds. At the rate of $10.90 an hour in terms of wages for single employee, in order to maintain operations at year-round, it might almost seem prudent to obtain a bank loan simply to pay this expense. It is apparent that profitability within the first year will be a negligible possibility at best. However, if the market remains reliable and the bank is agreeable then the potential exists to become increasingly profitable in subsequent years. If the initial obstacle of purchasing the machine can be addressed, the next question becomes the details of the bank loan and the long term challenges this presents. What rate of return will the bank demand? What other fees or points might be required? The more there are initial funds, which can be procured from friends and acquaintances, the better. Here though however, the owners 'friends' must be expecting some form of return on their investment, or at least a means of profit sharing. REFERENCES Focus.com, 2012. Small Business and Hard Facts. Focus Editors. http://www.focus.com/fyi/small-businesses-and-hard-facts/ [Accessed: 6/14/2012]. Read More