Financial Management of a Small Burger Restaurant - Coursework Example

? Financial Management of a Small Burger Restaurant Financial Management of a Small Burger Restaurant Introduction: Financial projections are an important aspect and an essential in operations of any business. The company can forecast and estimate its performance by projecting financial statements which involves planning of activities into monetary terms. This involves a forecast of sales revenue from different sources in a business and the estimate of costs that the business will incur. These forecasts and estimates are increase by certain percentages usually to take into account for inflation. The projections are based on various assumptions and are never accurate. They provide a rough idea of how the business can be in future and can even identify areas of concerns that can appear in future. Each head in the projected financial statement is based on certain assumptions; some can easily be predicted while some are difficult to predict as they are outside business’s control for e.g. changes in taxes, an unpredictable event etc. (Lasher. 2000; Covello. 1998) In a small business like burger restaurant operative in a college campus, since there are no proper planning departments and tools, the projection technique of financial management can be useful. A typical small burger restaurant’s sources of revenue can be sale of food and beverages. The main heads of costs could be the material costs, packaging and transportation of food etc. In any other business, the restaurants have operating expenses like rents, utilities, labor wages, cleaning expenses etc. Such businesses are not operative in a very dynamic environment nor are very large businesses which have many complexities and changes to take account of. The estimated projected income statement for such a business for 3 years can be presented as below: Pro-forma 3 years Projected Income Statement YEAR-1 YEAR-2 YEAR-3 SALES REVENUE (NET) ($) ($) ($) Food revenue 505,890 570,276 548,674 Beverage Revenue 151,110 153,884 233,682 Food Cost (143,719) (158,863) (168,542) Beverage Cost (47,906) (44,807) (42,136) TOTAL INCOME 465,375 520,490 571,678 OPERATING EXPENSES Advertising 1,200 2,400 3,000 Depreciation 36,000 28,800 23,040 Utilities and Phones 31,080 33,300 37,200 Wages 344,925 356,423 367,920 Officer's Salary 42,000 43,680 45,420 Rent 7,500 7,500 7,500 TOTAL OPERATING EXPENSES 462,705 472,103 484,080 OPERATING PROFIT 2,670 48,388 87,598 NET PROFIT 2,670 48,388 87,598 The analysis of the projected income statement for three years is detailed below: Revenue: The business deals and serves meals which include foods and beverages. The restaurant serves food items like burgers, apple pies, nachos and cheese and salads etc, while it mainly serves beverages and soft drinks with the meal. This makes two main products as the revenue generating which are food revenue and beverages revenue. Food & Beverages Revenue: The food revenue constitutes around 65% to 75% of the total revenue. We analyzed that on an average a customer spends around $6 on an order. Since we have no information about the units of sales and what items of food are preferred and sold we shall assume that out of the revenue received from each customer on an average, a portion of average selling price of food items can be taken as revenue from the food. Similarly for the beverages no information regarding the number of units sold is given, therefore we shall take the revenue as a portion of average selling price of beverages. The beverages ranges from a price range of $1.29 to $ 1.49; this means that out of the total $6 spend on an order by a customer $1.29 to $1.49 will be spent on beverages, which makes around 25% to 35% of the average order that is $6. Rest 65% to 75% of the remaining revenue will be generated from food items. Based on this assumption in year 1, if there are 300 customers everyday and the business operated 365 days a year and an average customer spending is $6, the food revenue on an estimate can be around 77% which makes $505,890 and the remaining 23% can be estimated as the beverages revenue of $151,110. Similarly in year 2 and 3 the revenue can be estimated in the same way, however changes will occur in the selling prices due to inflation or any other reasons and on an average a customer will spend on an order in year 2 and 3 has been assumed to increase by around 5% in both years. Similarly in both years 2 and 3 a variation is taken between the allowed ranges of estimation in the revenues for food and beverages revenue. Cost: The restaurant business on a college premises doesn’t involve very high and complex cost heads like interest and markup payments, legal fees, taxes and consultancy fees etc. Such a small business will mainly incur costs on direct items like raw material; packaging and processing etc. other overheads can include utilities, office expenses, deprecation, rent etc. Food and Beverage Costs: As revenues are calculated, similarly the average cost of meal is $1.75 each meal served which means the direct cost incurred on each meal is $1.75. As we analyzed in the revenue, similarly the cost incurred on each beverage that the restaurant offers ranges from $0.14 to $0.27, which makes the cost on the beverages of around 15% to 25% of the cost of each order and the remaining cost incurred can be allocated to food costs which will range from 75% to 85% of the total costs incurred on an order. If the calculations are performed on the assumptions taken for the revenue, in year 1 the cost incurred on beverages for 300 customers everyday for 365 days and the cost of $1.75 taken between the estimated ranges of 25%, the cost would be $47,906. The remaining 75% would be the cost of food of $143,719. Similarly in year 2 and 3 the costs can be estimated in the same way, however changes will occur in the costs due to inflation or any other reasons and on an average an order would cost in year 2 and 3 has been assumed to increase by around 2.8% in both years. Similarly in both years 2 and 3 a variation is taken between the allowed ranges of estimation in the costs for food and beverages revenue. Advertising: Advertising is an essential for any business as it opens doors for new business. In year 1 advertising expenses has been taken as $1200. An increase in the advertising expenses can be seen in both years 2 and 3 which can be further linked to increase in revenues for years 2 and 3, which means increased advertising brought more business. Depreciation: The depreciation is to be calculated on the reducing balance method. The fixed assets are valued at $180,000, accordingly the deprecation for year 1 would be $36,000 ($180,000 x 20%), for year 2 $28,800 (180,000-36,000 x 20%) and for year 3 $23,040 (144,000-28,800 x 20%). Utilities and Phones: Utilities and phones are estimated to be $31,080, $33,300 and $37,200 for 3 years respectively. Wages and Officer’s Salaries: The wages of labour form an integral part of cost. The business operates 365 days a week for 15 hours from 8AM to 11PM. There are 7 employees on the campus at any hour of the day and the hourly rate of labour is $9/ hour. On this basis the cost of wages and salaries for year 1 can be calculated as $344,925. In year 2 and 3 the hourly rate has been increased by 3.3% to take into account for inflation, rest of the details have assumed to be constant. Therefore in year 2 and 3 the cost has been calculated as $356,423 and $367,920 respectively. The officer’s salary has been estimated in the range of pro-forma income statement. In year 1 it has been estimated as $3,500/month and an increase of 4% is taken to incorporate inflation making the total officer’s salary $42000, $43,680 and $45,420 in years 1, 2 and 3 respectively. Rent: The rent is estimated to remain constant for next 3 years at $25/ square foot. The restaurant operates at an area of 300 square foot. The rent for 3 years can be estimated as $7,500 per year. Conclusion: After the analysis and the estimation of the income statement the restaurant is in minimal profit in year 1 which increases in year 2 and 3 due to estimated increase in revenues and reduction is costs. References Covello, J. A., & Hazelgren, B. J. (1998). Your first business plan: A simple question and answer format designed to help you write your own plan. Naperville, Ill: Sourcebooks. Lasher, W. (2000). Practical financial management. Cincinnati, Ohio: South Western College Pub. Read More