Organizational and Corporate Finance at L.A. Lounge - Research Proposal Example

? Organizational and Corporate Finance Organizational and Corporate Finance There are many different businesses that operate within the world. The basic aim of almost every business (except Not-for-profit organizations) is to make profit for their respective owners. Before starting any business, the owner who inject the capital i.e. the ones who the business, tend to evaluate all different options before taking initiating on with a business. Investors evaluate and predict the outcomes and the results of any given business before they invest in any project and hence when they find any project worthwhile, they invest in it. A Sports Bar is a very feasible business venture that can be considered worthwhile within the Los Angeles area as it is considered to be an area where sports is the pre-dominant entertainment and recreational activity, hence I would be really interested in starting up a sports bar named “The L.A Lounge” Like every other business, a bar is also considered to be a business venture in which the primary motive is to gain profit. A bar offers many different products such as food, snacks, games and other alcoholic and non-alcoholic beverages. A sports bar on the hand is considered to be an extension to the bar phenomena. A sports bar offers all the same products with an added facility to watch sporting events on large screens. The “L.A Lounge” would definitely produce great financial results if it is handled and managed appropriately. The first irk would be the financial issue i.e. the capital needed to start up such a business. There are many different options that can be availed to gain finance in order to run a Sports bar. One option would be through partnership where different investors, who might be close affiliates, would be contacted and asked to invest in such a business and if they agree upon investing, a proper partnership deed can be formed where the profit sharing issue would be properly addressed with respect to all the different partners investing within the business. Each and every partner’s duty would be mentioned properly in order to avoid potential future conflicts. Besides the partnership option, the other option would be to put up a formal business plan and present it to a bank that can help in financing the sports bar business. If the market is properly analyzed and all the risks are properly addressed and answered upon, the bank may end up granting a loan to start the business. This loan would carry a certain interest rate which would normally higher than the normal loan rates because of the new business setup. If the banks disallow such loan, there are other venture capital firms that offer loans to customer with good business plan and approach. The interest on loans offered by such venture capital firms is higher than the bank’s interest rate. This is because the venture capital firms are willing to bear the risk that banks do not and hence they charge extra interest because of their exposure to a new business plan which might not produce results as fruitful as presented within the business plan. There are different bodies within the U.S.A such as the Small Business Administration (SBA) and the Kauffman Foundation that can help in acquiring start-up business loans (CVBT, 2011). Once the long-term loan is acquired, the main focus would be to run the business smoothly. For the “L.A Lounge”, a proper inflow of material (products offered for sale e.g. food, alcoholic and non-alcoholic drinks) would be really essential. This inflow would only be possible if proper balance is kept between the amount that is to be divided as profit and the amount that would need to be re-invested in the business. Apparently, if the business is operating well enough to return its prior loan-commitments i.e. the monthly payments of interest, it would be able to draw more loan from the financial investors and this would be used to finance the day-to day running of the business. A conservative working capital management would be adopted to answer this scenario whereby the long term loan would be used to fund the fixed and the non-fluctuating current assets, whilst the fluctuating current assets would be financed by the short term loan borrowings (Preve et al, 2010). The primary thing that would be needed to strengthen the business plan would be the projected income statement for next 5 years. This projected income statement would show the anticipated results of L.A Lounge for the next 5 years and the results would be altered in accordance with the different factors that may affect the cost and revenue pattern of the sports bar. Assumed: Sales would increase by 15% from year 1 onwards and 25% from year 3 and onwards Cost of Sales as a % of Revenue, Yr 1 = 48%, Yr 2 = 45%, Yr 3 = 40%, Onwards = 35%. Loan payments would be fixed Staff salaries would increase with respect to the inflation rate Year 1 Onwards. Other Expenses would increase with respect to inflation rate. Advertisement would increase by 2% after Year 2. The inflation rate is considered to increase at the current rate for all the 5 years. The current inflation rate in the U.S.A is 3.77% - August 2011 (Rate Inflation, 2011). Besides the respective growth rates, all items would increase with respect to the inflation rate (Except the loan payment). Other expenses include utility bills. Projected Income Statement (L.A Lounge) Year 1 ($) Year 2 ($) Year 3 ($) Year 4 ($) Year 5 ($) Revenue 500,000 597,000 774,383 1,004,472 1,302,926 Cost of Sales (240,000) (268,650) 309,753 351,565 456,024 Gross Profit 300,000 358,000 464,630 652,907 846,902 Fixed Expenses Loan Payments 250,000 250,000 250,000 250,000 250,000 Variable Expenses Advertisement 100,000 105,845 112,032 118,581 125,513 Staff Salaries 22,500 23,348 24,228 25,141 26,089 Professional fees 10,000 Other Expenses 17,500 18,160 18,845 19,555 20,292 Net Profit (140,000) (69,003) 59,525 239,630 425,008 A business plan would have to include many different factors that should convince the loan provider with enough guarantees that his/her negative thoughts or his/her hesitance to provide a loan may be reduced or negated. The business plan for L.A Lounge would include the projected income statement along with other explanations and reasoning that would be given to obtain the long-term loan. The business plan would be as follows: Business Plan “L.A Lounge” would be offering different products within the bar. The products would vary from a new and original steak recipe that would be totally different in taste as compared to other competitors currently offering the same products; the other products would almost be the same i.e. alcoholic and non-alcoholic beverages with the additional facility to watch live sporting events on 3D LED Televisions. The severe competition would come from other similar sports bar within the area such as the Busby’s West, El Toro Cantina, Bar None and the Barney’s Beanery. Though these are the competitors offering similar services within the region but it can be argued that the locality in which the L.A Lounge is to be opened would be geographically dispersed from these competitors and besides that the market for such sports bar is large enough to produce good incentives for L.A Lounge given the pre-established names of the competitors. According to the U.S census bureau, $18,289 million had only been made by bars and taverns in the year 2011 and around $26,413 million had been made by Snacks and non-alcoholic beverage bars in the same year. Hence, the U.S census report clearly suggests that food would be sold in a higher proportion as compared to the drinks and the food would also produce higher margins as compared to the drinks (U.S Census Bureau, 2011). The average annual revenue for a more popular sports bar, “Hooters”, was around $885 million from its 385 restaurants, hence it can be said that an individual restaurant earns around $2.3 million for the privately owned sports. As per different research and reports, it seems evident that an average revenue earned by similar sports bars with a prestigious name amounts to $2.5 million per restaurant/bar (Channick, 2011). The only worrying sign that would just harm the business plan is a severe indication of a loss in the first two years of the business. It can be argued that the initial losses would depart because of the learning curve as it this has been clearly indicated within the projected income statement that the sales figure would increase because of the advertisement and the awareness of the new sports bar amongst the public at large and the costs would reduce because of the learning effect. According to some researches, the best possible cost percentage should be around 30% of sales and this would gradually be achieved. Staff should be hired on part time basis as bars like L.A Lounge would require hospitable staff for the promotion as well and it would be better to train the staff once rather than to train them on a recurring basis. Another idea is to adopt “Hooter’s” policy of hiring glamorous girls as waitresses within the bars. References Central Valley Business Times. (2011). California community colleges get $2.54 Million SBA grant, CVBT. Retrieved from: http://www.centralvalleybusinesstimes.com/stories/001/?ID=19451 Channick, R. (2011). Tilted Kilt franchises growing in Chicago, Chicage Tribune. Retrieved from: http://articles.chicagotribune.com/2011-05-05/business/ct-biz-0506-tilted-kilt-20110505_1_tilted-kilt-technomic-restaurant-averages Preve, L. A., & Sarria-Allende, V. (2010). Working capital management. New York: Oxford University Press. Rate Inflation. (2011). USA – Current Inflation Rate. Retrieved from: http://www.rateinflation.com/inflation-rate/usa-inflation-rate.php U.S Census Bureau. (2011). Table 1283. Commercial and Non Commercial Groups – Food and Drink Establishments and Sales: 1990 to 2011. Retrieved from: http://www.census.gov/compendia/statab/2012/tables/12s1283.pdf Read More