The Analysis of Garys Hart Business Plan - Assignment Example

GARY HART CASE STUDY Analysis of Gary Hart’s expenses costs Total cost of all ingredients per table: 17*24= £408 to be paid two weeks after the receipt. Kitchen staff salaries= £57,200 per year Waiting staff £13,728 Social security costs £20,800 Utilities £2,600 per quarter and payable by direct debit the first week of the following quarter. Rent £40,000 paid in four installments, beginning of every quarter Council tax £8,000 paid in four installments of 2,000 each payable beginning of each quarter Advertising cost £12,000 incurred the first week Analysis of revenues Revenue per day: 75%*60*24=£1,080 Payment in cash per day: 50%*1,080=£540 Revenue per month: 1,080*24=£25,920 Revenue per quarter: 25,920*3=£77,760 50% of daily sales are credit sales payable four weeks later Assumptions 1. Gary purchases ingredients once every month. 2. Waiting staff salaries and social security costs are payable every month. a. Gary’s Restaurant Trading cash budget For the year ended December 31, XXXX Quarter total 1 2 3 4 £ £ £ £ £ Cash b/f 48,484 126,364 213,248 Add receipts Cash sales 38,880 38,880 38,880 38,880 155,520 Collection from credit sales 77,760 77,760 77,760 77,760 311,040 Total cash available (A) 116,640 165,124 243,004 329,888 854,656 Less disbursement Kitchen staff 14,300 14,300 14,300 14,300 57,200 Waiting staff 3,432 3,432 3,432 3,432 13,728 Social security costs 5,200 5,200 5,200 5,200 20,800 Utilities 0 2,600 2,600 2,600 7,800 Rent 30,000 10,000 0 0 40,000 Council tax 2,000 2,000 2,000 2,000 8,000 Advertizing 12,000 0 1,000 1,000 14,000 Cost of ingredients 1,224 1,224 1,224 1,224 4,896 Total (B) 68,156 38,756 29,756 29,756 166,424 Cash balance (A-B) 48,484 126,364 213,248 300,132 688,228 b. Gary’s Restaurant Budgeted Trading Profit and Loss account For the year ended December 31, XXXX £ £ Sales: cash 155,520 Credit sales 311,040 Net sales 466,560 Less cost of sales Purchases (4,896) Gross profit 461,664 Less expenses Kitchen staff 57,200 Waiting staff 13,728 Social security costs 20,800 Utilities 7,800 Rent 40,000 Council tax 8,000 Advertizing 14,000 (161,528) Net profit 300,136 c. Gary’s Restaurant Budgeted Balance sheet As at December 31, XXXX £ £ Assets Current assets Debtors 9,720 Prepaid council tax 2,000 Fixed assets 50,000 61,720 Liabilities Creditors 0 Utilities due 650 Capital 61,070 61,720 Assumptions 1. The restaurant will pay all bills as they fall due, therefore there will be no creditors. 2. Utilities will be due since they are paid for the at the beginning of the following quarter; therefore those falling due December will be paid for beginning of January the following financial year. 3. I approximated the value of the restaurant’s fixed assets to be £50,000 by the end of the first year. d. Gary’s Restaurant Weekly cash budget For the first month of operation Week 1 2 3 4 £ £ £ £ Cash b/f (27,240) (24,000) (21,168) Add receipts Cash sales 3,240 3,240 3,240 3,240 Credit sales 3,240 Total cash available (A) 3,240 (24,000) (20,760) (14,688) Less disbursement Kitchen staff 4,766.67 Waiting staff 1,144 Social security costs 1,733.33 Rent 10,000 Council tax 2,000 Advertizing 12,000 Cost of ingredients 408 Total (B) 30,480 408 7,644 Cash balance (A-B) (27,240) (24,000) (21,168) (22,332) Assumptions 1. Ingredients are ordered for and delivered within the first week, whereas their payment is made in the third week. 2. Staff salaries and security costs are paid for in the fourth week, assumed to be the end of month. 3. Gary’s restaurant will begin its operations in January, hence being the first moth of the restaurant’s operations. Working cash is the amount of money required for day to day operations within a business. This is a business’ capital in liquid currency that is necessary for purchasing assets to be used by the business and meeting various obligations of the business. Working cash of a business can also refer to the ability of a business to meet its liabilities and expenses that fall due within a short time (Stickney 2010, p366). In this case, Gary will require a substantial amount that will enable him meet all day to day expenses of the restaurant for it to remain operational. In the first week of the restaurant’s operations, Garry expects to collect £3,240 from cash sales. Credit sales made within this month will be paid for in the fourth week of the month-end of the month. The restaurant will have to spend £30,840 in the first week of its operations. Throughout the first month, the restaurant is expected to have a cash balance of -£94,740. This means that the restaurant will be generating losses during the first month of operation. Factors attributing to the loss may be because the restaurant has a lot of costs to incur within that month for it to remain operation. Moreover, revenues generated are not enough to cover all expenses since the restaurant is new it will take time for customers to familiarize with the place. However, from information presented in the weekly cash budget, Gary should set aside approximately £94,740 as his working cash. This amount will be sufficient to cover day to day expenses of the restaurant for the first month of operation. It is also from this amount plus additions from cash sales that Gary will purchase some of the restaurant’s assets such as furniture and fittings. I arrived to this figure by adding all the negative cash balances at the end of every week for the first month of operation. e. Analysis of the business plan Introduction A business plan gives a road map that provides directions for a business entrepreneur to plan the future of his or her business. The analysis of Gary’s business plan is carried out under cost, volume and profit in relation to demographics and business location. Gray’s restaurant is located on the Margate sea front, one of the most famous beaches in the world. This location is suitable for a restaurant in that the beach is popular and receives many visitors- tourists all year round. Cost Gary’s restaurant will incur several expenses in start up exercise. However, these costs are necessary in carrying on with the operations of the restaurant. Before commencement of operations, Gary will have to incur expenses such as rental costs, council taxes and advertising costs. There are the costs that Gary will incur immediately the business enters its operations. However, other costs to be incurred by the restaurant include salaries to the staff and social security costs. These later costs will be paid for during the end of the first month of operation. Moreover, they are recurrent cost that the restaurant will have to incur and pay for at least once in a month. From the budgeted financial statements drawn, the business plan is cost effective. From information given, Gary must have used cost benefit method of pricing. This is where costs incurred are incorporated in the price of a product as well as the profit margin. The restaurant is cost effective since the profit to be generated exceeds costs to be incurred. Volume From information given, Gary expects the restaurant to be operating at 75% capacity. This is quite a high capacity for a business but can easily be attained given the fact that the restaurant is located at a suitable place. Margate beach is famous and receives a lot of visitors. It is expected that given the suitable facilities, Garry’s restaurant will attract a lot of customers; therefore being easy to serve three quarters of customers from the total restaurant’s capacity. Beach and a famous one like Margate is a suitable location for a restaurant. Gary’s restaurant is set up in a way that it can offer party services to customers. This will serve as an attraction factor for more customers as most tourists visiting the beach will have a venue for their parties. Moreover, the restaurant will be operating over the weekends, a time when most people are out of their jobs and can take time parting or visiting places. Profit Profits of any business organization depend on revenues generated and expenses incurred. Revenues of Gary’s restaurant will depend on the number of customers seeking goods and services of the restaurant. Profits are expected to grow over time as the restaurant grows. From the budgeted trading profit and loss account prepared, the restaurant is expected to generate £300,136 by the end of its first year of operations. Profitability of the restaurant will depend on the number of customers. f. Benefits of budgeting Introduction In starting up a business, the entrepreneur needs to come up with a business budget for his or her business to be successful. In every business, it is a basic requirement that before one can make any coin; he or she has to figure out how to spend it. A well drafted business budget helps an entrepreneur turn his or her dreams of a successful business into reality. Budgeting is the process by which an entrepreneur prepares a detailed statement of financial outcomes of his or her business that are expected for a given period in future. From this definition, it can be concluded that a budget is a document that contains financial forecasts of any business organization. For a budget to be accurate, it should be prepared on the basis of shortest periods possible. For instance, it can be prepared on a monthly or quarterly basis, and should be at a position to develop a set of goals that are reasonable and attainable. With the help of a budget, an entrepreneur can keep track of cash to be maintained within the business, expenses to be incurred, and the amount of revenues need to be generated to keep the business growing. By writing those estimations on paper, one can anticipate future needs of his or her business, expected spending and cash flows to be generated. Methodology In researching about benefits of budgeting for his restaurant, Gary should utilize web research. This is whereby Gary uses internet to find out what other businesses that began by budgeting are doing. It is also from the internet that he will be in a position to evaluate the financial position and status of those businesses that began operations without first drawing a budget. Moreover, he can post questionnaires in his business website for people to give their views on importance of budgeting before starting a business organization. However, Gary cannot escape using manual methods of collecting information, though utilized partially. Gary should come up with a team of people who will interview people on importance of budgeting before starting operating a business. This team will also be involved in distributing questionnaires to people, since not all people will be at a position to access Gary Restaurant’s website. This is the team that will summarize all data gathered and present their findings to Gary. To improve reliability of primary data, Gary also needs to use secondary data. Gary can access this data from marketing research firms and business consultants. However, Gary should ensure this method is cost effective in that cost of acquiring information should not exceed benefits to be derived form utilizing that information. Information acquired should be relevant in that Gary should be at a position to evaluate benefits attached to budgeting when starting any form of business. From information acquired, there are various benefits attached with budgeting or drawing a budget before starting a business organization. First, budgeting organizes business finances available. Drawing a budget helps highlight early warning signals for potential financial crisis likely to occur in carrying on with the business (Bernard 2002, p250). For instance, with a budget, Gary will have guidelines for paying bills and immediate alerts in case there occurs overspendings. Setting up a budget is also a way of opening up communication between Gary and his employees, especially those who will be working in the finance department. This ensures both the entrepreneur and employees are working towards a common goal that keeps them focused. It also involves all employees by teaching them to be responsible and holding on to accountability. This is because the owner already has the estimation of the outcome to expect and any adverse result calls for explanation and accountability form the person in charge. Drawing a budget before starting up a business offers one an opportunity for Gary to make informed decision on spending at any given time. Since Gary will be in a position to determine where his financial stand is, budgeting offers him with chances to take advantage of prospects that he may miss if he had not drawn any budget. With a budget, an entrepreneur will never have to guess since form the beginning, he will have definite knowledge whether he has start up finances or not. It is with the help of a budget that an entrepreneur focuses on financial goals of an organization (Steven, Roby & Gregory 2009, p329). A budget helps one come up with definite objectives that one should focus on. Budgets are usually drawn with the entrepreneur’s motivations in mind. For this case, Gary may be motivated by the fact that he wants to start and run a successful restaurant in the region. Preparing a budget saves time when one is dealing with some transactions. The time saved can be used in dealing with other transactions. For instance, it is easy to trace a specific transaction if one has a budget drawn. This is the case since one has already organized transactions in order and every item can be traced conveniently. Information can also be easily traced when needed. In one way or another, budgeting provides more money for the business (Bernard 2002, p250). These are the extra funds that the entrepreneur did not have before. These finances can be obtained through identifying and eliminating unnecessary expenses that are incurred on things like penalties as a result of late payments. Ensuring timely payment of bills will help elevate credit worthiness of a business and raise credit scores. The savings obtained can be used in paying business debts or can also be kept in the business’ bank account as savings. These savings earn the business some interest, hence expansion of the business incomes. Conclusion It is important for an entrepreneur to draw a budget before starting up a business. Gary should note that there are various benefits attached to drawing up a budget before starting up a business. These include having definite goal, open communication, control over business finances, responsibility among employees and determination of funds to be utilized to start up the business among others. Reference List Bernard, A.W. (2002). A Comparative Theory of Budgeting Process. New Jersey: Transaction Publishers. Steven, R. J.; Roby, B. &Gregory, J. (2009).Managerial Accounting: A Focus on Ethical Decision Making. Mason, OH: Cengage Learning. Stickney, C. P. (2010). Financial accounting: an introduction to concepts, methods, and uses. Mason, OH: South-Western/Cengage Learning. Read More