Financing Plan to Raise Capital - Research Paper Example

?Running Head: Financial Plan to Raise New Capital Financial Plan to Raise New Capital Financial Plan to Raise New Capital Introduction Marina Restaurant has been in the food industry for several years. The restaurant was opened in Oklahoma in 1997 by Tom Mark and Peter Mark. There was one restaurant initially, but currently the capacity is 100 in over 30 countries internationally. It is praised for quality of items in the menu and also for their good customer service. The Marina Restaurant is one of the leaders in casual dining and hotel industry. The Marina Restaurant was blessed with an interest from very influential people and customers even from the beginning. It usually hosts live bands apart from food and this has helped it solidify its image as the premier casual rock and roll diner. With all the success, the company has grown globally. The vast amounts of locations reflect the effective and efficient management which has led a small investment in a single cafe into an internationally recognized business expanding in just over 18 years. Marina Restaurant revenues are mainly from cafes, selling memorabilia and hotels. To ensure customers keep coming back they ensure they provide excellent value in the form of good food and entertainment. With such growth, the management has decided to open more outlets for the restaurant. However, it needs capital to start up the investment. Start-up Funding The Marina Restaurant seeks funding of $900,000 for the new venture and it will get it from three investment groups or under equity offering which entails raising capital through the issue of stock. This approach is preferred at this stage since there are no repayment schedule or debt service repayments. The shareholders will only get their returns when the company makes profits. The shareholders also have a right to vote during annual general meetings and can elect the board of directors (Owen 2003). The ordinary shareholders are the owners of the business and can receive dividends from profits. However, it is a costly process as there are floatation costs incurred and it can lead to dilution of shares held by existing shareholders. It is also risky if there are no dividends payable at year end thus shareholders end up bearing the operational risk. The investment documents will be prepared by legal firms representing each party and will not be limited to Form D Security Exchange Commission (SEC) filing, Subscriptions agreement and the Private Placement Memorandum (PPM). The subscriptions agreement reflects the terms and conditions of the investment. In other words, it is the sales contract for buying securities. Form D SEC filing notifies the commission that the company is using Regulation D program and also gives the basic information of the company. It is vital to note that this form is not an approval document but a mere notification that the company has an offering in the place. It is a violation of the security laws under the federal government to raise capital without this document. The PPM discloses all the company’s information to investors. The information maybe whether the company is raising debt or equity, the risk the investors may face and the terms of the investment( share price, maturity dates or note amounts). Financial projections Financial projections will be on the income statement, statement of financial position, statement of cash flows as well as on the financial ratios. Projections will be on years ranging from 1 to 5, and they are based on historical information already available from the company (Owen 2003). Apart from the forecast, the break-even analysis will be carried out. Break even analysis Break even analysis shows the relationship between selling prices, sales volume, variable costs, fixed costs and profits at various levels of activity. It is also referred to as cost-volume profit analysis. It used in determining the break-even point where the total revenue equals the total costs. This means that at BEP, the profits are zero. Fixed costs include rent, maintenance costs, pre-opening amortization and insurance costs. Variable costs will include excess rent, service labor, management labor, kitchen labor, property taxes, payroll taxes, advertising and professional or legal fees. Break-even Analysis   Monthly Revenue Break-even $64,679     Assumption:   Average variable cost (%) 31%     Estimated Monthly Fixed Costs $44,890 The graph below demonstrates break-even analysis. From the graph above, there will be losses when expansion starts, and then there will reach a point where profits are zero. As the restaurant sales more, it will eventually begin to earn profits. Break even analysis has its limitations (Drury 2004). To begin with, it assumes that fixed cost, variable costs and sales revenue behaves are linear. However, this is not the case since some overhead costs may be stepped in nature. As a result, the straight sales revenue line and total cost line tent to curve beyond a certain level of production. Another limitation of break even analysis is that it assumes that all the stock produced is sold. Therefore, changes in stock levels are not taken into account in the breakeven chart. Finally, breakeven analysis is only suitable in providing information to relatively small companies that produce one type of products. Thus, it is not suitable for companies producing different product. Income statement forecast It is assumed that sales will increase at 81 percent in the first year and then at a constant rate of 8 percent in the other years. The results of the income statement indicate our investors will get good returns as shown in appendix 1. Table 1: Income statement Cash flow Forecast The assumptions made when constructing the cash flow statement depend on good traffic counts in the restaurant, daily operational management, payment days, inventory turnover and accounts receivables management. The initial projections are sales to investment ratio that is in excess of 2-to-1, return on equity of over 20% and return on investment that is in excess of 30%. Table 2: Cash flow statement Balance sheet Forecast Appendix 3 shows our solid balance sheet. From the look, our financial position is good, and there is no doubt that we can meet both the short-term and long-term financial obligations. Table 3: Balance sheet 3 Ratio analysis Financial ratios are used to analyze the trend over time and assess the performance of the business (Shim & Siegel 2007). Appendix 4 shows our main ratios, and there are no intentions to improve collection days, gross profit margin, sales controls and labor controls. We plan to maintain cash flow at a range of 19 to 20 percent annually while increasing sales. This will lead to high returns to our investors and other stakeholders. Table 5: Ratio analysis Contingency plan a) Liquidity risk In the events that the business is experiencing liquidity problems, the management will examine and revise the account receivables procedures to ensure that payment periods are just, and payments from debtors are received on time. b) Unacceptable sales levels Marina Restaurant will combat the problem through intense advertising and doubling promotions. This is if sales do not increase as expected. c) Unacceptable returns on equity If the shareholders returns are below the acceptable level, Marina Restaurant will examine the marketing and production costs with the sales prices. If there are too thin margin, sales prices will have to be increased. References Drury C., (2004). Management and Cost Accounting. Cengage Learning. Shim Jand Siegel J., (2007). Handbook of Financial Analysis, Forecasting and Modeling, 3rd Edition. CCH Owen, S. A., (2003). Accounting for Business Studies. Oxford: Elsevier Butterworth-Heinemann. Read More