BUSINESS PLAN: FINANCIAL PROJECTIONS

Objectives of the Project

This project is designed to provide students with the opportunity to gather and analyze the data needed to prepare the financial section of a business plan, and to synthesize the data into the form of a written report accompanied by projected income statements, cash flow statements, and balance sheets for the first two years of a four-year business plan.

The Purpose of Your Business Plan

Business plans are developed for various purposes, such as providing potential investors or lenders with a credible projection of revenue, profit, and capital requirements. The failure rate for small businesses is extremely high, often because the entrepreneur underestimated the amount of capital that would be required. The question to be answered by this business plan project: “How much capital (cash) will I need to invest, and when (in what months) will it be needed?”  The answer will appear on the Cash Flow Statement in the form of any negative ending cash balance that results after all data other than owner investment has been entered.

The Business

You have spent the last 15 years in a high-paying but stressful job in a technology company, and have now decided to start a business of your own. Being an excellent cook, your plan is to open a specialty restaurant in an upscale suburban shopping mall. (You may select any nationality cuisine or other specialty you wish.)  Your restaurant will serve lunch and dinner during the hours 11:00 a.m. to 9:00 p.m., seven days a week. Revenue is expected to average $10 per lunch patron, and $20 per dinner patron. Though you plan to do some advertising, you are counting on word-of-mouth recommendation by very satisfied customers as the primary source of your clientele. Your restaurant will accept cash or major credit card only, no checks or charge accounts.

You have found available restaurant space in a suitable location that you can lease for a term of 5 years at a monthly rental of $2,000 plus 3% of gross revenue. There is space for 10 tables seating four persons each, and an additional 10 tables seating two persons. You estimate that kitchen equipment, tables, chairs, and table settings will cost $60,000 to be financed by $12,000 in down payment and a $48,000 bank loan at 10% interest, the principal to be repaid in 48 monthly installments. Redecorating and remodeling is expected to cost $40,000, with another $10,000 for sales registers, computer system, and office equipment – all to be paid for in cash. An additional $10,000 in leasehold improvements and $5,000 in office equipment is anticipated for the second year of operation. For the purpose of calculating depreciation expense, you estimate that all equipment and furniture will have a useful life of 5 years which equates to a 20% annual straight-line depreciation rate.

Your savings are primarily in tax deferred retirement accounts, and cannot be used to start a new business. However, you have sufficient equity in your home to obtain a line-of-credit loan of up to $125,000 at 8% interest, and will draw against the line as additional cash investment is needed by the business. (Being a personal loan, it will not appear on the books of the business.) Eventually, the business will apply for an unsecured line of credit loan of its own, but at least two years of successful operations are required in order to qualify.

You will be managing the operation and also doing most of the gourmet cooking during the first several months. Though you will not be on the payroll as a salaried employee, you do plan to draw $4,000 a month for personal living expenses. (It is suggested that one-half this amount be treated as “Officers Salaries” to be entered on the Income Statement, and the other half as “Payroll Expense” to be entered as a “cook” on the Payroll schedule.)

The company will elect to file federal and state income taxes as an “S Corporation” to achieve limited liability protection and pass-through income tax treatment. As such, the corporation will pay no income tax. Instead, stockholders report their share of any profit or loss on their individual income tax returns. Assume the cost to set up the corporation will be $1,000 in attorney’s fees and $800 in California state franchise tax. The corporation will continue to pay a minimum franchise tax of $800 each year thereafter.

Payrolls will be prepared semi-monthly by Paychex, a payroll service, at an estimated monthly fee of $200, which covers quarterly and year-end federal and state tax returns, W-2’s and 1099’s. Other check disbursements and daily deposits will be recorded weekly in Peachtree computer accounting software by your niece who recently received an “A-“ in her high school accounting course. She will be paid $100 per month.  Near the end of the 12^th month of each year, a CPA will make any necessary adjustments to the computer figures, and compile year-end financial statements and prepare federal and state tax returns for an estimated yearly fee of $2,000.

REQUIRED

Write a report entitled BUSINESS PLAN FINANCIAL SECTION for (NAME OF YOUR COMPANY).

The report should be written in Word, 12 pt Times Roman font, single spaced, and have a title page. Except for the title page, page numbers should be centered in the footer of each page. The report should contain the sections shown below. Each major section should contain a second-level heading. Under APA style format, first-level headings are centered, in bold, on a new page.  Second-level headings should be left-justified, bold, with initial caps (first letter of each word in upper case) as in the headings below. Third-level headings are similar to second-level, except underscored instead of bold. If any text, charts or other information is copied directly from the instructions or any other source and presented as your own work, it is considered plagiarism and subject to severe penalties.

Title page
The title page should contain the title BUSINESS PLAN FINANCIAL SECTION for [name of your restaurant] prepared by [your name] and the [date]. Students in online classes should avoid pictures or other graphic images that result in large files.

Purpose of this business plan

      A paragraph that explains the purpose of this business plan. (See “The Purpose” on the first page, but state in your own words.)

About (name of your company)

One or two paragraphs describing your proposed business, including the type of clientele it expects to attract. (A much more comprehensive description would normally be contained in other non-financial sections of a business plan.) Avoid hype, you are not selling anything to anybody.
Summary 
This paragraph should state the total amount of invested cash required during the first year, followed by two exhibits. The first exhibit should be a bar chart showing projected Sales and Net Income for each of the two years. The second exhibit should be a bar chart showing the amount of equity cash investment you will need to make in each of the first twelve months.
Basis for Financial Projections
This is the main section of the project report. It should be written after the financial exhibits have been prepared and tested for reasonableness by comparing key financial ratios for the second year with industry norms based on the National Restaurant Association Operating Percentages (See National Restaurant Association operating percentages on page 6.)  Note that the first year’s ratios for a startup business would not be representative, and that the financial ratios on websites such as Moneycentral.msn.com are based on large chain restaurant companies and may not be representative of a small independent restaurant.

      This section should contain for each of the bulleted line items below a third-level heading followed by one or more paragraphs in which you provide a detailed explanation of how you arrived at your projected amounts. (See also “Using the Excel Template” on page 6.)  If the Excel program is calculating the amount, do NOT say that, but rather provide a brief explanation of the calculation. If a published reference is used, refer to the author or publication and year at the end of a sentence or paragraph. For example: (General Electric, 2009). Also, be sure to list the citation in APA style in the References section of your report (see examples on page 10).

• Sales Projections
• Cost of Food and Beverage Sales (Cost of Goods Sold)
• Food and beverage inventory (based on industry average inventory turnover ratio)
• Payroll Expense, including Officers Salaries and Employee Benefits
• Rent Expense (Occupancy Cost) per lease agreement
• Advertising Expense
• Depreciation Expense
• Insurance (liability, casualty, workers compensation), Utilities, and Other Operating Expenses

Breakeven Analysis
When startup companies are still operating at a loss, owner/managers are particularly interested in knowing the amount of sales revenue needed to break even. Even after the business begins to show monthly profits, it is important for managers to know the breakeven point and its related “margin of safety” in the event of an abrupt sales decline. In this section, provide a paragraph that explains the concept of breakeven analysis and shows the formula and the calculation for each of the two years in total (not individual months) of (1) breakeven sales in dollars, and (2) margin of safety. For the purpose of these calculations, assume that the Cost of Food and Beverage Sales (Cost of Goods Sold) is variable, and all other expenses are fixed.

References

List in proper APA (American Psychological Association) style the citation to any publication or website used to obtain your research data. (See APA Reference Style Sheet at the end of these project instructions.) At least two references are required.

Appendix for Financial Exhibits
An Appendix section should contain a title page followed by the financial statement exhibits in Exhibit number order, i.e., Exhibit A-1, B-1, B-2, etc.

For online classes, it is acceptable to send your entire Excel file, but be sure to use the following file name: Bplan Appendix [your last name]

Grading

The project will be graded as follows:

85% on content

10% on writing quality

5%  on format

Note: A commendable grade of 95% is the maximum that can be earned if all the requirements are met but not exceeded. Higher grades are earned only if the work product exceeds expectations, for example by more comprehensive research in support of projections.
 

Project Phases and Due Dates (unless changed by the instructor)

Phase I 

Onground classes: due the second Monday or Tuesday of class
Online classes: due as part of Week 1 Homework

1. Find and print the restaurant industry average inventory turnover ratio from http://moneycentral.msn.com. Turn in a single page Word file entitled References that contains the citation in appropriate APA citation style to your source for the restaurant industry average inventory turnover ratio. See APA Reference Style – Examples at the end of these instructions for samples of appropriate APA reference style. Also turn in the web page printout (not required for online classes.)  Moneycentral.msn.com is a website that contains financial ratios for the specified public company alongside the average for the industry to which that company belongs. On the menu of topics on the left, click on Investing > Stock Research > then under the heading Research, Financial Results. In the “Name or Symbol” box at the top, type in the name or stock symbol of a restaurant company such as “Cheesecake Factory”.  For financial statements, select Statements. For financial statement ratios, select Key Ratios. Among the groups of ratios listed under the company name, select Management Efficiency for Inventory Turnover and other efficiency ratios.
2. Complete and turn in the Excel spreadsheet called for on page 6 showing your calculations of the estimated number of lunch meals and dinner meals per day and per month. Save the file with the file name [Your last name] Meals Projections, and turn in as part of the homework assignment.

Phase II
Onground classes: due the third Monday or Tuesday of class
Online classes: due as part of Week 2 Homework

Read slowly and carefully these instructions again, and also read the worksheet in the Excel Bplan template file called “Readme”. Then prepare preliminary financial exhibits (Excel worksheets). After completing the Excel worksheets, read the instructions a third time to make sure you have addressed all of the facts and met all of the requirements. Be sure to use the “Checkpoints” to make sure your projected amounts are reasonable. Then submit your preliminary financial exhibits to the instructor for comment and feedback. Students are encouraged but not required to submit a draft of the narrative report for comment at the same time.

Phase III – Completed Project Report

Onground classes: due the fourth Monday or Tuesday of class
Online classes: due as part of Week 3 Homework

If the report is submitted after the specified due date, 5 percentage points will be deducted for each day late or portion thereof. Reports will not be accepted after the scheduled date for the final exam.

National Restaurant Association

The following table of operating expense percentages (based on total sales) was obtained from a prior year’s National Restaurant Association’s website  http://www.restaurant.org.

 USING THE EXCEL TEMPLATE

Download the Excel file called Bplan Financials. Copy the file under a new name that contains your last name, and use the copy to complete your projected financial statements. Carefully review the instructions in the worksheet called “Readme”. This Excel template contains sample data for a widget wholesaler. Be sure you delete and/or replace all of the sample data with your own data. Also be sure to back up your file after each work session.

The following suggestions are intended to supplement the instructions in the “Readme” worksheet with particular regard to a business plan for a startup restaurant.

• Assumptions
  The average inventory turnover ratio for a particular industry can be found at http://moneycentral.msn.com. (See com, above, for instructions on the use of this website.)
• Meals projections

  Assume you have two “products” to sell, luncheon meals and dinner meals. The anticipated average bill (before sales tax) is indicated in the fact situation, above. It is suggested that you use as a practical capacity two seatings at each table during the lunch hours, and three seatings during the evening dinner hours.

  Use the blank worksheet in the Excel template called “Meals” to show your calculation of the number of lunch meals and dinner meals for the first month of operations. When estimating the number of meals that will be served in each of the first twelve months, start with a low percentage of practical capacity (say about 25%) for the first month of operation, and gradually build to a moderate percentage of capacity (say about 50%) by the 12^th Reflect the increasing number of lunch and dinner meals for each of the twelve months of the first year in the worksheet called “Sales”. Do not show dollar amounts on the Meals worksheet; the dollar amounts will appear automatically when the number of meals is entered in the “Sales” worksheet.

  The second year’s sales might be projected to be 10% to 15% greater than sales in December of the first year, multiplied by 12.

  Checkpoint: Sales figures should be growing each month to about $65,000 to $75,000 in December which equates to about $600,000 to $700,000 for the first year, and $900,000 to $1,100,000 in the second year

• Cost of Goods Sold (Cost of Food and Beverage Sales)
  Use the same cost of goods sold percentage for both products. One source for the industry average for full-service restaurants is the National Restaurant Association (see table on page 6). Also shown are percentage norms for Salary and Wages and some other major categories of expense.
• Inventory of Food and Beverage (for balance sheet)
  One of the assumptions called for on the “Assumptions” worksheet is the inventory turnover ratio which is the basis for calculating the amount of inventory needed tgo be kept on hand. The formula for inventory turnover ratio is as follows:

  Ratio = Cost of Goods Sold              Example: $450,000   =  5
  Inventory                                        $100,000

  Therefore, to solve for the Inventory amount when the ratio and the Cost of Goods Sold is known:

  Inventory =  Cost of Goods Sold      =     $450,000         =  $100,000
  Ratio                                4.5

  Note, however, that you estimate the need for a minimum inventory of $5,000 at all times.

• Payroll Expense (cooks, hostess, servers, busboys, etc.)

  Use the Payroll worksheet for payroll other than Officers Salaries. When estimating the number of employees in each category, consider the number of hours per week that your restaurant will be open for business, not including daily set up and clean-up time. For approximate hourly wage rates of each category, research the hourly rates in your area.

  To estimate the number of servers needed, use as a rule-of-thumb the equivalent of one full-time server for every 30 meals or fraction thereof served each day.

  Use the Income Statement account “Officers salaries” for the salary of owner/managers. In the case of a manager who performs both management and non-managerial functions (e.g. maitre d’ or chef), it is suggested that the salary be split between “Officers Salaries” and “Other Payroll” by including the latter on the Payroll worksheet.

  Checkpoint:  check the reasonableness of your total payroll figures by comparing the National Restaurant Association’s percentage for Salaries and Wages with the sum of your second year’s Officers Salaries plus Other Payroll expense percentages. (The first year of a startup business is not representative.)

• Advertising Expense
  It is suggested that you use a fixed monthly amount for newspaper advertising that approximates 3% of the projected sales revenue for the 12^th month (December) of the first year. For the second year, project a 15% increase over the 12^th month of the first year, multiplied by 12.
• Depreciation Expense and Accumulated Depreciation on the balance sheet
  Depreciation is calculated by the Excel template using the straight-line rate shown on the Assumptions worksheet.

• Rent Expense (Occupancy Cost)
  Refer to information provided in the fact situation on the first page of these project instructions.

• Interest Expense
  Interest expense is calculated by the Excel program. It automatically applies 1/12^th of the annual rate indicated in the Assumptions worksheet to the loan balance at a given month-end. (Loan amortization schedules are not used.) However, there is no automatic calculation of payments on principal, so in the case of installment loans, it is necessary to divide the original loan balance by the number of months in the term of the loan, and enter the monthly payments as a negative figure on the Cash Flow Statement.
• Remaining operating expenses
  For Insurance, Supplies, Repair and Maintenance, Utilities and other expenses:
  To earn maximum point credit for this project, speak with the owner of a local restaurant that is about the size of the restaurant you are planning. Explain that you are a National University student and have been assigned this project for your MBA accounting class, and show him/her your assignment. For the second year, project a 15% increase over the 12^th month of the first year, multiplied by 12.

  [Do NOT add or delete any rows on this or any other exhibit.]

  Checkpoint: If after completing your income statement your 2nd year profit (income before taxes) is more than 10% of Sales, replace the amount for Other Expenses in both years so as to reduce the 2^nd year profit to between 5 and 10%.

• Cash used for Investing Activities (Cash Flow statement)
  Use the Cash Flows statement to enter the purchase of capital assets for cash: replace the three existing titles in the yellow cells with “Kitchen equipment”, “Leasehold improvements”, and “Office equipment”, and enter the cost of each as a negative amount since these investments result in negative cash flows.
• Capital from Financing Activities

1. Long-term and/or short-term borrowing  (Cash Flow statement)
   Enter cash proceeds from borrowing, such as a bank loan, as positive figures (positive cash flow), and loan repayments as negative figures (negative cash flows).
2. Capital paid in by owners  (Cash Flow statement)
   These are the very last figures to be entered, because you cannot know how much investor cash will be needed until all other positive and negative cash flows have been projected. Enter the amount of cash needed to provide a minimum cash balance each month of about $10,000, but not more than $35,000 at the end of any period, including the second year. Use any excess cash to pay off loans early. If there is still an excess, withdraw some of the capital that was paid in by the investors, and/or increase your salary (Officers Salaries).which will increase your W-2 income and thereby increase your Social Security tax and account balance.