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06Mar

Financial Feasibility Assignment

Financial Feasibility Assignment closely analyses a project to set up a restaurant of a size of Bistrot Pierre would require a thorough financial feasibility of the project. An attempt to do the same has been done which has been explained through this report.

PROJECT DETAILS:

As already mentioned in the previous two sections of the project exercise, this project deals with setting up a supply chain system for restaurants. These restaurants will be large but aesthetically beautiful. The restaurant will serve both food and wine.

FINANCIAL REQUIREMENTS:

The project will have to have a considerable amount of initial investments in the business. This investment has to be funded through the traditional sources of financing, i.e. equity and debt. The requirements for this project are described below:

  1. Equity: The initial investment in the project is to the tune of £ 800,000. The promoter of the business has to bring in an initial corpus of £ 300,000 as his contribution to the business. This is roughly around 35% of the total investment. The promoter has to bring in this amount because of the nature of the business. As this business is perceived to be a risky business, the promoter bringing in this amount will give confidence to the investors.
  2. Term Loan: The promoter has to rope in some of the financial institutions to get funding for the project. The financing has to be to the tune of £ 500,000, which is a huge sum but looking at the lucrative financials of the business, the investor might show confidence. Also, we are ready to give an 8 % rate of interest, which is higher than the prevailing market prices. This will definitely attract the investors.

INITIAL EXPENDITURE:

In Hotel Industry, the initial expenditure is limited to a small number of things. It basically includes the preliminary expenses, licenses and other legal fees, furniture and fixtures, building and equipment.

  1. Preliminary Expenses: The preliminary expenses include expenses incurred during the pre-operative stage, wherein money is spent on the project planning, formulation, searching for the sources of finances, advisory services, market research etc. The preliminary expenses are expected to be to the tune of £ 100000.
  2. Licenses and other legal fees: Since restaurants are into food and wine industry, a lot of approvals have to be availed from the government and local authorities. Separate license has to be taken for food and wine. This will be handsome amount and it will run into thousands of pounds. The expected amount is £50000 which is around 6% of the initial investment.
  3. Furniture and Fixtures: The planned capital expenditure for furniture and fixtures is expected to be to the tune of £ 5,000,000. This is the biggest pocket of expenses in the restaurant business. The main essence of this business is its ambience and food.
  4. Equipments: The equipments for the restaurant business will include cooking equipments, cooking utensils, cutlery sets and various other small equipments. The planned capital outlay for these is £ 150,000.

OPERATING BUDGET PROJECTIONS:

The following are the items of the operating budget and they have been explained in brief:

  1. SALES: Since the restaurant will be into both food and wine, the sales have been classified separately. The estimation says that the annual sales for food will be £ 1,700,000, which turns out to be £ 4657 on a daily basis. The estimates for wine are £ 600,000 annually and so the daily figures turn out to be £1643. The estimates are very modest keeping in mind the demand and robust growth in the industry.
  2. COST OF SALES: The cost of sales for food products is assumed to be around 30%. It is intentionally kept high keeping in mind the dynamics of the vegetable and cereals market. These ingredients are perishable and so they can’t be stored for a long period. Therefore we can’t guard against the fluctuations in the prices of these commodities.

The cost of sales for wine is taken to be 25% which is an industry wide practice. The cost of sales for both the products is slightly on the higher side.

  1. DEPRECIATION: As per the depreciation rates provided by the Taxation Authorities of United Kingdom,
    • Depreciation is deducted using the reducing balance method.
    • The depreciation rate for machinery and equipment is 25%. Industrial buildings are depreciated on a straight line method, 4% per year.
    • Companies involved in enterprise zones can claim 100% depreciation for commercial buildings.

Since ours’ is a business where the major chunk of investment is into furniture and equipments, the amount charged as depreciation is quite substantial. As per the calculations, the amount of depreciation turns out to be £ 165000.

  1. INTEREST EXPENSE: The market wide interest rates on term loans have been assumed to be 8%. This makes the interest burden to be £40,000. This interest rate is substantially higher than the prevailing market rates but it helps to compensate the risky nature of the restaurant business and attracts investors for the business.
  2. CORPORATE TAX: As per the corporate tax rates provided by the Taxation Authorities in United Kingdom, our business falls into the tax bracket of 27%. The Profit Before Taxes (PBT) for the business is £ 359100. This means that the amount of tax turns out to be £ 96957.
  3. LOAN PRINCIPLE REPAYMENT: The financial forecasting shows a good picture for the first year considering the financial goals . It shows that the business is actually in a position to generate positive cash flows. This positive cash flow can be used to make the loan repayment. The loan repayments can be done in 10 equal annual installments. The first repayment installment will turn out to be £50000.
  4. CASH FLOWS AFTER TAXES: The business is being able to generate positive cash flows even at the end of its first year. The amount of cash flows is £374643 which is a substantially huge amount. This amount can be re-invested into the business and can help in financing the operational activities of the subsequent year. The positive cash flow generation in the first year is accredited only to the excess demand and the robust growth in the restaurant industry.

ASSUMPTIONS:

  1. Corporate Tax Rate in United Kingdom

As per the Government Taxation Rules in United Kingdom,

Corporate Tax rates for 2008–2011
2008–2010 2011
Small profits rate 21% 20%
Small profits upper limit £300,000 £300,000
Marginal relief limits £300,001 – £1,500,000 £300,001 – £1,500,000
Main rate 28% 27%
Source: http://www.hmrc.gov.uk/ct/index.htm
  1. Depreciation Rates

The government rules relating to depreciation are as follows:

  • Depreciation is deducted using the reducing balance method.
  • The depreciation rate for machinary and equipment is 25%. Industrial buildings are depreciated on a straight line method , 4% per year.
  • Companies involved in enterprise zones can claim 100% depreciation for commercial buildings.
  1. It is assumed that the business is started with a initial investment of 800000 wherein 300000 came from equity capital and the rest is project financing from some financial institution.
  2. The rate of interest for loan is taken to be 8 % p.a.
  3. The loan will be repaid in 10 equal annual installments

Allocation of Expenses for Financial Feasibility Assignment Study

The basis of allocation of expenses has been summarized below in a tabular form:

BASIS
 
1 SALARIES Monthly Annual % of Sales
  On roll Employees ( 15 staff * 1500) 30000 360000 15.65%
  Waiters (20 waiters * 1000 ) 20000 240000 10.43%
  TOTAL SALARIES 600000 26.09%
   
2 DIRECT OPERATING EXPENSES Monthly Annual % of Sales
Expenses on Auto 300 3600 0.16%
Catering and Banquet Supplies 200 2400 0.10%
Cleaning Supplies 600 7200 0.31%
Contract Cleaning 750 9000 0.39%
Extermination 600 7200 0.31%
Flowers and Decoration 500 6000 0.26%
Kitchen and Utensils 600 7200 0.31%
Laundry and Linen 750 9000 0.39%
Licenses and Permits 400 4800 0.21%
Menus and Wine Lists 300 3600 0.16%
Miscellaneous 500 6000 0.26%
Paper Supplies 2000 24000 1.04%
Security Systems 250 3000 0.13%
Tablewares and Smallwares 600 7200 0.31%
Uniforms 200 2400 0.10%
TOTAL DIRECT OPERATING EXPENSES   102600 4.46%
3 MUSIC AND ENTERTAINMENT Monthly Annual % of Sales
Musicians 0 0 0.00%
Music and Sound System 200 2400 0.10%
Others 0 0 0.00%
TOTAL MUSIC & ENTERTAINMENT   2400 0.10%
4 MARKETING Monthly Annual % of Sales
Selling and Promotions 2000 24000 1.04%
Advertising 1000 12000 0.52%
Printed Materials 0 0 0.00%
Consumer Research 200 2400 0.10%
TOTAL MARKETING   38400 1.67%
5 UTILITIES Monthly Annual % of Sales
Electricity 2500 30000 1.30%
Cooking Gas 800 9600 0.42%
Water 700 8400 0.37%
Trash Removal 250 3000 0.13%
TOTAL UTILITIES   51000 2.22%
6 GENERAL ADMINISTRAITVE EXPENSES Monthly Annual % of Sales
General Administrative Expenses 8000 96000 4.17%
7 REPAIRS & MAINTENANCE Monthly Annual % of Sales
Repairs and Maintenance 1500 18000 0.78%
8 Rent and Rates Monthly Annual % of Sales
Rent of Building 15000 180000 7.83%

SENSITIVITY ANALYIS

The following is the sensitivity analysis for PAT w.r.t. Total Sales and Total Cost of Sales.

SENSITIVITY ANALYSIS FOR PROFIT AFTER TAX (PAT) w.r.t. Total Sales and Total Cost of Sales
262143 2000000 2100000 2200000 2300000 2400000 2500000 2600000 2700000
500000 152643 225643 298643 371643 444643 517643 590643 663643
550000 116143 189143 262143 335143 408143 481143 554143 627143
600000 79643 152643 225643 298643 371643 444643 517643 590643
650000 43143 116143 189143 262143 335143 408143 481143 554143
700000 6643 79643 152643 225643 298643 371643 444643 517643
750000 -29857 43143 116143 189143 262143 335143 408143 481143
800000 -66357 6643 79643 152643 225643 298643 371643 444643

The green color in the table signifies that the company is earning profit and the red color shows that the company is generating losses from the business.

DESIGNING OF SPREADSHEET

The spreadsheet has been designed in such a manner that it facilitates the feasibility analysis. The features of the spreadsheet are:

  • The “DATA” tab has all the financial data about the business.
  • Any changes done in the “DATA” tab will reflect changes in all the remaining tabs. This feature will enable quick and easy sensitivity analysis.
  • Also, the market analysis can be done on a micro-level by changing any component of the expenses or incomes.