Financial Feasibility Assignment

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
2008–20102011
Small profits rate21%20%
Small profits upper limit£300,000£300,000
Marginal relief limits£300,001 – £1,500,000£300,001 - £1,500,000
Main rate28%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
 
1SALARIESMonthlyAnnual% of Sales
 On roll Employees ( 15 staff * 1500)3000036000015.65%
 Waiters (20 waiters * 1000 )2000024000010.43%
 TOTAL SALARIES60000026.09%
  
2DIRECT OPERATING EXPENSESMonthlyAnnual% of Sales
Expenses on Auto30036000.16%
Catering and Banquet Supplies20024000.10%
Cleaning Supplies60072000.31%
Contract Cleaning75090000.39%
Extermination60072000.31%
Flowers and Decoration50060000.26%
Kitchen and Utensils60072000.31%
Laundry and Linen75090000.39%
Licenses and Permits40048000.21%
Menus and Wine Lists30036000.16%
Miscellaneous50060000.26%
Paper Supplies2000240001.04%
Security Systems25030000.13%
Tablewares and Smallwares60072000.31%
Uniforms20024000.10%
TOTAL DIRECT OPERATING EXPENSES 1026004.46%
3MUSIC AND ENTERTAINMENTMonthlyAnnual% of Sales
Musicians000.00%
Music and Sound System20024000.10%
Others000.00%
TOTAL MUSIC & ENTERTAINMENT 24000.10%
4MARKETINGMonthlyAnnual% of Sales
Selling and Promotions2000240001.04%
Advertising1000120000.52%
Printed Materials000.00%
Consumer Research20024000.10%
TOTAL MARKETING 384001.67%
5UTILITIESMonthlyAnnual% of Sales
Electricity2500300001.30%
Cooking Gas80096000.42%
Water70084000.37%
Trash Removal25030000.13%
TOTAL UTILITIES 510002.22%
6GENERAL ADMINISTRAITVE EXPENSESMonthlyAnnual% of Sales
General Administrative Expenses8000960004.17%
7REPAIRS & MAINTENANCEMonthlyAnnual% of Sales
Repairs and Maintenance1500180000.78%
8Rent and RatesMonthlyAnnual% of Sales
Rent of Building150001800007.83%

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
26214320000002100000220000023000002400000250000026000002700000
500000152643225643298643371643444643517643590643663643
550000116143189143262143335143408143481143554143627143
60000079643152643225643298643371643444643517643590643
65000043143116143189143262143335143408143481143554143
700000664379643152643225643298643371643444643517643
750000-2985743143116143189143262143335143408143481143
800000-66357664379643152643225643298643371643444643

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.