business management

Business Finance

st johns river state college

Question Description

The instructions demand that we have 4 pages main essay and 4 pages appendix work. - this means since we will be using tables in appendix and at some point calculations in the main essay - our word count should range at about 1500 words.

The use of external references should be limited - since it is a case study - we expect on 3-4 references.

The current work that we did lacks part of financial analysis - identify a financial analysis issue and examine well. PPT BUS1220 _570_ - GM Exam Review shows that we need financial analysis

I have sent a sample of a colleague student done on this very task. - use it to adjust your essay and make it better. The sample is labeled Sample GM pdf.

If you need your work to be much better follow the Different sample report it highlights on issues to capture.

Therefore this revision is not about adding words - but basically improving the focus on the paper and it is quality.

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[Section Number] [Name] [Student Number] Recommendation As a consultant to Ben Castanie and given the recent success of business, I would recommend Snakes and Lattes to pursue the option of status quo with some alterations to solve the capacity issue. The detailed recommendations are as follows: 1. Remain status quo for the upcoming year; 2. Strengthen marketing campaign towards consumers in their twenties by increasing social media exposure and have regular promotional events; 3. Implement reservation system on weekends to better project number of customers and enhance customer experience; 4. Consider opening up a second location in Toronto through extensive location research and close monitor of competitor behaviour in two years. Based on want analysis, Ben Castanie is able and willing to take on risks for the growth of his board game business. Remaining status quo allows him to further his passion in entrepreneurship and continue influencing North American market with the board game culture. Professionally, continuing what Ben has been doing well allows Snakes and Lattes to further penetrate the market and build stronger reputation to better serve as a steppingstone for expansion. According to need analysis, to become successful in the board game industry requires selecting an easily accessible location; creating unique atmosphere for customers; having knowledgeable staff to provide premium service; and providing diverse and updated selection of board games and food options. The service and product options currently provided by Snakes and Lattes is in line with industry requirements. Staying status quo allows Snakes and Lattes to [Section Number] [Name] [Student Number] continue operating as an industry leader and capture existing market. The group of consumers in their twenties presents huge profit opportunities in future and should be targeted. They are influential, bringing additional free advertising (words-of-mouth referrals) for the company. Their interest in alcoholic drinks brings in as high as 71% of gross margin, being the highest among all products sold. Ben should consider increasing marketing outreach through social media platforms and offer promotions. Discounts of 10% can be given to customers who are willing to post on social media regarding their experience at Snakes and Lattes, serving as an additional method of advertising. Looking at competitors, Snakes and Lattes offers more variety of games and has first mover advantage. The established brand recognition and unique culture is hard to imitate and will allow the company to outplay its competitors. Internal analysis presents no major issues regarding current operations at Snakes and Lattes. Its ability to gain profit within two years of operations is impressive and puts the company in an attractive position. The strong human resource contributes to the unique culture and ensures service quality. Pursing status quo allows the company to leverage its competitive advantage of being a first mover and having superior services and continue its successful operation. An issue present at the company is that customer demand exceeds capacity on weekends. Long line-ups turn away potential customers and negatively affect company’s reputation. To ease the line-ups, reservation policy can be implemented during weekends. This act will aid company is predicting weekend sales and further enhance level of service offered. In the future, if customer base further increases, it is recommended to open a second location in Toronto. Given Toronto’s large population, especially with university and college students, and established brand reputation, Toronto is considered a better location for expansion. [Section Number] [Name] [Student Number] Financial Feasibility If remain status quo, a net income of $34,818 is projected in 2013 (Exhibit 1). This is a conservative estimate given the assumption made for sales growth is as low as 5%. Being able to triple its net earnings in one year further proves that the status quo option is appealing. By accumulating retained earnings, Snakes and Lattes will be in a better position financially in upcoming years to consider expansion alternatives. Analysis of Other Options By assessing the option of opening a new location in London, there is potential benefits for Snakes and Lattes to increase brand exposure and regain first mover advantage in a new market. Quantitatively, a net loss of $10,621 is projected (Exhibit 2). Although it is reasonable for businesses to lose money in first couple years, the assumptions made for revenue is aggressive. The market potential and competitive landscape in London is not being evaluated. Making a big move at this stage may pose too much of a risk and pull Snakes and Lattes back into losses. In addition, managing two locations in different cities at the same time is also extremely challenging. Franchising option matches the professional goal of quick expansion. The upfront franchise fee decreases Ben’s investment and monthly loyalty fee will provide a sustainable source of income. A net benefit of $51,252 is projected with a payback period of 6.1 years (Exhibit 3). However, the option is not in line with Snakes and Lattes competitive advantage as the unique culture and atmosphere is hard to replicate. Success of such business is closely tied with human resource. While Ben lacks experience in franchising, he may fail to properly guide the franchisee and provide sufficient resource towards the success of business. [Section Number] [Name] [Student Number] The option of daytime coffee shop intends to create additional source of revenue for the company. 21 cups of coffee are required to be sold every hour for the option to breakeven (Exhibit 4). Based on competitor analysis, Canadians have established brand loyalty with chained coffee shops, resulting in high barrier of entry into the market. Comparing with competitors’ sales level of 50 to 100 cups an hour, it is hard to a newly opened, unprofessional store to achieve as high as 21 cups, needless to consider bringing in profit. Three valuations are performed to determine a selling price for Snakes and Lattes (Exhibit 5). $300,000 is a reasonable price taking into consideration the company’s brand recognition and other intangible value. The selling price determined is lower than number given by capitalization of earnings due to the buyer’s expectation of shorter payback. Potential buyer includes eager entrepreneurs or competitions. However, this option is incongruent with Ben’s goals and fails to capture the future success of business. Risk and Mitigation One of the risks associated with status quo is market share taken by emerging competition. To mitigate it, Snakes and Lattes is recommended to increase business exposure by partnering with clubs and student bodies at universities to better target this younger demographic. Promotions and seasonal food and drink options can be offered, alongside with existing tournaments and themed nights, to further attract customers. In conclusion, status quo appears to be the best option to pursue given the current external environment, competitive landscape, internal capability and financial feasibility. Snakes and Lattes will continue its success and maintain its position as a market leader. [Section Number] [Name] [Student Number] Exhibit 1: Projected Income Statement for Status Quo Snakes and Lattes Projected Income Statement For the year ending August 31, 2013 Revenue: Total Sales Total COGS Gross Profit increase 5% same % (30.89%) 884,999 273,376 611,623 Operating Expenses: Wages Amortization Interest and Bank Charges Rent Other Expenses Total Operating Expenses decrease 3% same $ same $ same $ same % (12.5%) 345,000 8,930 3,084 97,560 110,625 565,199 Net Income Before Tax Income Tax Net Income assume 25% 46,424 11,606 34,818 Exhibit 2: Payback for New London Location Incremental Benefits Cover Food Non Alcoholic Drinks Alcoholic Drinks Board Game Sales & Merchandise Total Incremental Benefits Less: COGS Gross Incremental Benefits 200ppl weekdays, 350ppl weekends 80% of Toronto 80% of Toronto same $ as Toronto same $ as Toronto 442,000 74,171 80,914 193,857 177,000 967,943 same % (30.89%) 298,997 668,945 [Section Number] [Name] [Student Number] Exhibit 2: Payback for New London Location (cont’d) Incremental Costs Rent Utilities Travel Insurance New Licenses Advertising Bank Fees Interest Salary Wages Maintenance & Repairs Office & General Professional Fees Telephone/Internet Dues & Fees Total Incremental Costs $20/sqft, 5,000 sqft 20% of rent given given given same $ as Toronto $200/month 4% on $100,000 bank loan given calculated from Exhibit 7 same % (1.26%) same % (1.34%) same % (1.77%) same % (0.48%) same % (0.57%) Net Benefit Investments Games Equipment Fixtures Training Total Investments Payback 100,000 20,000 5,000 5,000 5,000 24,880 2,400 4,000 40,000 419,640 12,196 12,970 17,133 4,646 5,517 678,382 (9,437) 1,000 games, $18 each given given given 18,000 80,000 40,000 5,000 143,000 N/A [Section Number] [Name] [Student Number] Exhibit 3: Payback for Franchising Incremental Benefits Royalty Marketing Fee Board Games and Supplies Equipment and Fixtures Leasing Total Incremental Benefits 5% of gross income 2% of gross income $500/month $1,000/month 30,947 12,379 6,000 12,000 61,326 Incremental Costs Advertising Materials Total Incremental Costs given 10,000 10,000 Net Benefit Investments Legal Work Training Games Equipment Fixtures Less: Franchisee Fee Total Investments 51,326 given given same as new location same as new location same as new location given 200,000 5,000 18,000 80,000 40,000 (30,000) 313,000 Payback 6.1 Exhibit 4: Breakeven for Daytime Coffee Shop Unit Contribution given (per unit) Fixed Costs: Marketing Employee (Barista) Total Fixed Costs given $13/h, 2 employees, 7am-11am, weekdays Breakeven 1.50 21,360 units/year = 411 units/week = 83 units/day = 21 units/hour 5,000 27,040 32,040 [Section Number] [Name] [Student Number] Exhibit 5: Valuation for Selling the Business Net Book Value Assets Less: Liabilities Net Book Value 153,793 (66,243) 87,550 Economic Appraisal Book Value Cash Inventory Property & Equipment, NET Total Assets Less: Liabilities Economic Appraisal Factor Value Market Value 6,329 100% 6,329 95,393 50% 47,697 52,070 80% 41,656 95,682 (66,243) 29,439 Capitalization of Earnings Projected Net Income Growth Multiple Risk Multiple Capitalization of Earnings 34,818 High growth potential – high demand, ability to expand, high profitability Medium-Low risk – low long-term debt, new niche market with relatively unknown future 12 10 382,997 1 As a consultant to Pete Mitchell, I recommend that the Ontario Racquet Club (ORC) pursues the option of Indoor–Outdoor Pool Addition to boost membership and attract new long-term, active, and profitable members. The following are the specific steps of the recommendation:  Present the Indoor-Outdoor Pool Addition strategy to the board of directors at the scheduled meeting for the following month for approval.  Once the project is approved by the board of directors, contact local banks and indoor construction companies for financing and renovation services, respectively. Send qualified staff in financing and operation departments to follow up, including getting the issuance of a building permit and other documents required.  Administration staff should notice all customers and employees one month earlier than the renovation work starts through email, mail or phone call, at least three times, to minimize the inconvenience caused by the construction to club members.  Discuss promotion strategies with marketing staff and implement advertisings at least two months before the new aquatic facility opens.  Additional training or hiring regarding the new pool and the expanded restaurant will be conducted by the human resource department 45 days before opening.  Continue to operate the business and monitor monthly, seasonal, semi-annual and annual membership growth rate and client retention rate for the next 3 years to assess the expansion. Qualitative Support: Attract New Customers Mitchell’s goal is to boost memberships and he is willing to take risks on it. ORC’s IndoorOutdoor Pool Addition plan, which includes one-of-kind retractable roof technology for all year 2 pool operation, will improve the product differentiation and strengthen ORC’s competitive advantages. The health, wellness, and sports club industry have been rapidly growing during the past years due to economic recovery, regional population growth and lifestyle changes. Although the industry continues to experience strong growth, companies require unique features to survive in severe competition. ORC currently outstands its direct competitors, which are private clubs, by offering the most types of service but charging comparable membership price. However, the play centre, on-site shop and spa services that are exclusively offered in ORC are not the first priority for a sports club. Therefore, ORC needs the indoor-outdoor pool that no club has currently owned to distinguish its sports facilities among the peers. Considering that the population in Mississauga, where ORC is located, is slightly younger, this large capacity, allyear functioned, technology-infused and typically younger children targeted aquatic facility will certainly become ORC’s unique feature that worth advertising, and captures potential customers who value both well-being and community atmosphere from the first sight. Qualitative Support: Retaining Current Memberships Another aspect of Mitchell’s goal is to prevent current clients from discontinuing their memberships. To achieve this goal, the expansion plan must consider at least the majority of the current members. The Indoor-Outdoor project, including aqua-fit classes, attracts primarily two types of customers: younger children (and their families) and retirees, which combines to be 61 percent of the total members. Older families, the largest of the three groups, seem to be less considered. But as long as the social atmosphere, which ORC has always highly respected, is not changed, this group of people is less likely to discontinue their membership. ORC also has 3 excellent tennis coaches and offers 16 other tennis courts at great locations. Therefore, the impact of losing one tennis court due to the renovation is limited. Quantitative Support: Increasing Profitability The project will result in an annual net benefit of $389,643, including a significate revenue increase in membership of $520,000 and in restaurant of $200,000. (Exhibit 1) The net benefit is 2.4 times the net income in 2013, which largely improve ORC’s financial performance and create benefit for shareholders. It requires 13.5 years for ORC to pay back the $5.25 million initial investment, which is time-taking but achievable for a company with a 40-years history. Besides, the high interest coverage indicates that the company is not using debt properly. The expansion investment will be financed from a bank loan so that ORC could use its own equity for other purposes. Why NOT the Alternatives? Staying status quo would fail to achieve the goal of boosting profitability membership and maintain the current ones because the increased revenue would be offset by the increased telephone expense. (Exhibit 2) Sport Court Expansion is not convincing enough to attract new customers because an all-purpose gym seems to be less professional than a dedicated sports court, and the purposes of use are still uncertain. Mitchell also intends to finance the investment wholly through internal cash, which would worsen the company’s unhealthy liquidity. Besides, it takes 14.1 years to pay back the investment, making it less attractive compared to the 13.5-year payback period renovation plan. (Exhibit 3) Non-Member Children’s Programs motivates current members but is unable to win new ones in a short time because the plan needs 338 people of the 4 total 12,000 advertisement views to join the club to breakeven the cost, which is nearly 8% of the current customers. (Exhibit 4) Selling the business can neither facilitate Mitchell’s goal to expand nor recognize the company’s goodwill. ORC’s value is estimated to be $1,666,800. (Exhibit 5) Risk & Risk Mitigation One of the major risks associated with this strategy is the severe deficit that results from error budgeting and overspending during the project. To mitigate this risk, Mitchell needs to discuss with department professionals ahead to take every possible occasion into consideration. Inprogress monitoring is also required to avoid unexpected results. Another risk is customers losing during the renovation because some people may be unsatisfied with their tennis court be rebuilt. To mitigate this risk, Mitchell needs to ensure all the members get the notice and suggestions of ORC’s alternative sports places before the construction. Mitchell could also ask the marketing department for promotion advice, such as spa coupons, to make all customers satisfied during the time. In conclusion, by implementing the Indoor–Outdoor Pool Addition strategy, Mitchell is able to retain current customers and attract a significant number of new profitable members. The renovation will benefit the company in the long term and help to achieve more success in the sports club industry. 5 Exhibit 1. Indoor–Outdoor Pool Addition Net Benefit and Payback Incremental benefits Membership Lessons/Clinics Restaurant $ 520,000 60,000 300 people * $200/person 200,000 $ $ (18,357) 761,643 $ 90,000 15,000 22,000 30,000 5,000 Interest $ 210,000 Total Incremental Costs $ 372,000 Net Benefit $ 389,643 One Time Investment Payback (year) $ 5,250,000 13.5 Court Fees Total Incremental Benefits Incremental costs Cost of Goods Sold Advertising Maintenance Utilities Insurance $611,905 * decrease rate 3% $200,000*45% $5.25 million * 4% interest $5,250,000 / $389,643 6 Exhibit 2. Projected Income Statement for Status Quo Revenue Memberships Lessons/Clinics Court Fees Restaurant Miscellaneous Total Revenue COGS Gross Profit $3,326,557 1,783,118 630,262 694,136 388,186 $6,822,259 100% $1,507,719 22.1% $5,314,540 77.9% Expenses Advertising Amortization & Depreciation Credit Card Processing Fees Insurance Interest Labour Maintenance Miscellaneous Office & Supplies Property Taxes Rent Services Telephone Utilities Total Expenses $95,512 422,980 156,912 34,111 20,467 2,271,812 204,668 163,734 225,135 347,935 347,935 457,091 17,521 $320,646 $5,086,460 = $3,226,557 + $100,000 = $611,905 * (1+ 3%) = $673,918 * (1+ 3%) = $376,880 * (1+ 3%) 1.4% 6.2% 2.3% 0.5% 0.3% 33.3% 3.0% 2.4% 3.3% 5.1% 5.1% 6.7% 0.3% = $14,521 + $3,000 4.7% 74.6% Net Income Before Tax $ 228,080 3.3% Income Tax $ 61,400 0.9% Net Income $ 166,680 2.4% 7 Exhibit 3. Sport Court Expansion Net Benefit and Payback Incremental Benefit Memberships Lessons/Clinics $ Court Fees Total Incremental Benefit $ $ (18,357) 111,643 $ 36,000 8,000 2,568 Total incremental cost Labour Maintenance Credit Card Processing Fees 70,000 60,000 Utilities $ 12,000 Total incremental cost $ 58,568 Total Incremental Benefit $ 70,568 Total incremental cost $ 141,136 Net Benefit $ 53,075 One Time Investment Payback (year) $ 300 people * $200/person $611,905 * decrease rate 3% $60,000 * 60% go to variable labour costs $111.643*2.3% 750,000 14.1 $750,000/$53,075 *assume that credit card processing fee is expected to remain at 2.3% Exhibit 4. Non-Member Children’s Programs Breakeven Selling Price/Person Variable Costs Unit Contribution $ $ $ Advertising cost Administrative cost Total fixed cost $ $ $ Break-Even (person) Conversion Rate 200 120 $200*60% 8 ...
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