Coffee Kiosk Business Plan

The Daily Perc

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Financial Plan

7.0 Financial Plan

The Daily Perc's financial picture is quite promising. Since TDP is operating a cash business, the initial cost is significantly less than many start-ups these days. The process is labor intensive and TDP recognizes that a higher level of talent is required. The financial investment in its employees will be one of the greatest differentiators between it and TDP's competition. For the purpose of this pro-forma plan, the facilities and equipment are financed. These items are capital expenditures and will be available for financing. There will be a minimum of inventory on hand so as to keep the product fresh and to take advantage of price drops, when and if they should occur.

The Daily Perc anticipates the initial combination of investments and long-term financing of $425,000 to carry it without the need for any additional equity or debt investment, beyond the purchase of equipment or facilities. This will mean growing a bit more slowly than might be otherwise possible, but it will be a solid, financially sound growth based on customer request and product demand.

7.1 Important Assumptions

The financial plan depends on important assumptions, most of which are shown in the following table. The key underlying assumptions are:

• The Daily Perc assumes a slow-growth economy, without major recession.
• The Daily Perc assumes of course that there are no unforeseen changes in public health perceptions of its general products.
• The Daily Perc assumes access to equity capital and financing sufficient to maintain its financial plan as shown in the tables.

General Assumptions

General Assumptions
	FY 2002	FY 2003	FY 2004
Plan Month	1	2	3
Current Interest Rate	10.00%	10.00%	10.00%
Long-term Interest Rate	9.00%	9.00%	9.00%
Tax Rate	0.00%	0.00%	0.00%
Other	0	0	0

7.2 Key Financial Indicators

The following chart shows changes in key financial indicators: sales, gross margin, operating expenses, collection days, and inventory turnover. The growth in sales exceeds 250% each year. TDP expects to keep gross margin above the 38% projected for the first year, but it doesn't anticipate anything higher than 46%, since our payroll expenses will increase substantially as it grows into new areas and faces new competition.

The projections for inventory turnover show that TDP will maintain a relatively stable amount of inventory in its headquarters warehouse so that it has no less than two weeks of inventory on hand, but no more than three weeks, in order to keep products fresh. The only time it would consider holding larger stores of inventory is if there was some catastrophic event that could cause a dramatic rise in the price of its coffees or teas.

Benchmarks



7.3 Break-even Analysis

To arrive at the average monthly fixed costs, The Daily Perc calculated the fixed costs for the Drive-thru to be $26,750. Using the average price per unit, less the average cost per unit, divided into the fixed costs of operation, TDP concludes that we will need at least 22,181 units per month to reach break-even at $41,034 per month.

Break-even Analysis



Break-even Analysis

Break-even Analysis
Monthly Units Break-even	15,817
Monthly Revenue Break-even	$29,580
Assumptions:
Average Per-Unit Revenue	$1.87
Average Per-Unit Variable Cost	$0.64
Estimated Monthly Fixed Cost	$19,457

7.4 Projected Profit and Loss

The Daily Perc is expecting some dramatic growth in the next three years, reaching $558,043 in sales and a 39.56% Gross Profit Margin by the end of the first year. Expenses during the first year will be roughly $233,483, leaving a Net After-tax loss of $20,541, or 3.68%. This loss will provide TDP with a tax loss carry-forward for the second year of $30,936.

Aside from production costs of 60%, which include actual production of product and commissions for sales efforts, the single largest expenditures in the first year are in the general and administrative (G&A) area, totaling 23% of sales. G&A includes expenses for rents, equipment leases, utilities, and the payroll burden for all employees.

Sales increase by nearly 400% in the second year, due to the addition of two more Drive-thrus and two more Mobile Cafes, reaching a total of $2,348,900, with a Gross Profit Margin of 39.58%. Although operating expenses double in the second year, The Daily Perc will be able to realize a Net After-tax profit of $190,467 or 6.79% of sales. In that same year, TDP will make charitable contributions of $70,000.

The third year is when The Daily Perc has the opportunity to break into markets outside the metropolitan area. TDP will see nine additional Drive-thru facilities open in the third year, which will drive sales to $6,022,950 and, even with a 200% increase in production costs, help reach a Gross Profit Margin of 45.05%. Several expenses take substantial jumps this year--advertising increasing from $36,000 to $72,000 and donations increasing from $72,000 to $180,000--and TDP will be adding several key management team members. These increases, as well as those for increased equipment leases and rents, raise our operating expenses to $1,673,431, leaving a Net After-tax profit of $860,428, or 11.96% of sales. The single largest expense sector in the third year, outside of production, is still G&A costs, but it is down from 23% in the first year and 18.5% in the second year to just 15.02%.

Profit Monthly



Profit and Loss

Pro Forma Profit and Loss
	FY 2002	FY 2003	FY 2004
Sales	$558,043	$2,348,900	$6,022,950
Direct Costs of Goods	$190,977	$732,350	$1,783,010
Production Payroll	$144,874	$646,050	$1,425,250
Sales Commissions	$1,416	$35,234	$90,344
	------------	------------	------------
Cost of Goods Sold	$337,267	$1,413,634	$3,298,604
Gross Margin	$220,776	$935,267	$2,724,346
Gross Margin %	39.56%	39.82%	45.23%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll	$0	$22,000	$185,000
Advertising/Promotion	$18,000	$36,000	$72,000
Website	$1,000	$15,000	$22,000
Travel	$4,000	$7,500	$15,000
Donations	$3,332	$70,467	$180,689
	------------	------------	------------
Total Sales and Marketing Expenses	$26,332	$150,967	$474,689
Sales and Marketing %	4.72%	6.43%	7.88%
General and Administrative Expenses
General and Administrative Payroll	$31,500	$106,000	$156,000
Sales and Marketing and Other Expenses	$0	$0	$0
Depreciation	$21,785	$92,910	$196,095
Leased Offices and Equipment	$0	$6,000	$18,000
Utilities	$9,640	$19,800	$41,100
Insurance	$12,570	$32,620	$63,910
Rent	$16,800	$50,400	$126,000
Payroll Taxes	$36,356	$126,908	$303,638
Other General and Administrative Expenses	$0	$0	$0
	------------	------------	------------
Total General and Administrative Expenses	$128,651	$434,638	$904,743
General and Administrative %	23.05%	18.50%	15.02%
Other Expenses:
Other Payroll	$66,000	$72,000	$258,000
Consultants	$0	$0	$0
Legal/Accounting/Consultants	$12,500	$24,000	$36,000
	------------	------------	------------
Total Other Expenses	$78,500	$96,000	$294,000
Other %	14.07%	4.09%	4.88%
	------------	------------	------------
Total Operating Expenses	$233,483	$681,605	$1,673,431
Profit Before Interest and Taxes	($12,707)	$253,662	$1,050,915
Interest Expense	$16,165	$37,954	$82,232
Taxes Incurred	$0	$0	$0
Net Profit	($28,872)	$215,708	$968,682
Net Profit/Sales	-5.17%	9.18%	16.08%

7.5 Projected Cash Flow

Cash flow will have to be carefully monitored, as in any business, but The Daily Perc is also the beneficiary of operating a cash business. After the initial investment and start-up costs are covered, the business will become relatively self-sustaining. With the exception of seasonal dips, which TDP has attempted to account for, through changes in the menu items.

Assuming an initial investment and financing of $415,000, which would include $30,000 of operating capital, The Daily Perc anticipates no cash flow shortfalls for the first year or beyond. March and May are the greatest cash drains, since TDP will be experiencing the cost of second drive thru and mobile unit start-up. Again, TDP sees heavier than normal drains of cash in December and January, as there will be certain accounts payable coming due.

Cash



Cash Flow

Pro Forma Cash Flow
	FY 2002	FY 2003	FY 2004
Cash Received
Cash from Operations
Cash Sales	$558,043	$2,348,900	$6,022,950
Subtotal Cash from Operations	$558,043	$2,348,900	$6,022,950
Additional Cash Received
Sales Tax, VAT, HST/GST Received	$0	$0	$0
New Current Borrowing	$0	$0	$0
New Other Liabilities (interest-free)	$0	$0	$0
New Long-term Liabilities	$181,463	$253,970	$729,992
Sales of Other Current Assets	$0	$0	$0
Sales of Long-term Assets	$0	$0	$0
New Investment Received	$0	$0	$0
Subtotal Cash Received	$739,506	$2,602,870	$6,752,942
Expenditures	FY 2002	FY 2003	FY 2004
Expenditures from Operations
Cash spending	$242,374	$846,050	$2,024,250
Bill Payments	$273,191	$1,144,381	$2,760,422
Subtotal Spent on Operations	$515,565	$1,990,431	$4,784,672
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out	$0	$0	$0
Principal Repayment of Current Borrowing	$1,500	$0	$0
Other Liabilities Principal Repayment	$0	$0	$0
Long-term Liabilities Principal Repayment	$26,469	$0	$0
Purchase Other Current Assets	$0	$0	$0
Purchase Long-term Assets	$191,850	$429,700	$1,356,993
Dividends	$0	$0	$0
Subtotal Cash Spent	$735,384	$2,420,131	$6,141,665
Net Cash Flow	$4,122	$182,739	$611,277
Cash Balance	$29,622	$212,361	$823,638

7.6 Projected Balance Sheet

The Daily Perc's projected balance sheet shows an increase in net worth to just over $1 million in 2004, at which point it expects to be making 11.96% after-tax profit on sales of $6.02 million. With the present financial projections, TDP expects to build a company with strong profit potential, and a solid balance sheet that will be asset heavy and flush with cash at the end of the third year. The Daily Perc has no intention of paying out dividends before the end of the third year, using the excess cash for continued growth.

Balance Sheet

Pro Forma Balance Sheet
	FY 2002	FY 2003	FY 2004
Assets
Current Assets
Cash	$29,622	$212,361	$823,638
Inventory	$35,159	$134,826	$328,252
Other Current Assets	$0	$0	$0
Total Current Assets	$64,781	$347,187	$1,151,890
Long-term Assets
Long-term Assets	$323,250	$752,950	$2,109,943
Accumulated Depreciation	$21,785	$114,695	$310,790
Total Long-term Assets	$301,465	$638,255	$1,799,153
Total Assets	$366,246	$985,442	$2,951,043
Liabilities and Capital	FY 2002	FY 2003	FY 2004
Current Liabilities
Accounts Payable	$49,724	$199,242	$466,169
Current Borrowing	$7,500	$7,500	$7,500
Other Current Liabilities	$0	$0	$0
Subtotal Current Liabilities	$57,224	$206,742	$473,669
Long-term Liabilities	$286,394	$540,364	$1,270,356
Total Liabilities	$343,618	$747,106	$1,744,025
Paid-in Capital	$225,270	$225,270	$225,270
Retained Earnings	($173,770)	($202,642)	$13,066
Earnings	($28,872)	$215,708	$968,682
Total Capital	$22,628	$238,336	$1,207,018
Total Liabilities and Capital	$366,246	$985,442	$2,951,043
Net Worth	$22,628	$238,336	$1,207,018

7.7 Business Ratios

Standard business ratios are included in the following table. The ratios show a plan for balanced, healthy growth. The Daily Perc's position within the industry is typical for a heavy growth startup company. Industry profile ratios based on the Standard Industrial Classification (SIC) code 5812, Eating Places, are shown for comparison.
Comparing the ratios in the third year with the industry, this pro-forma plan appears to be within an acceptable difference margin.

TDP's return on net worth and net worth number differ from the Industry Profile due to the lack of overhead when compared to a typical walk-in cafe. The Drive Thru and Mobile business model is lean thus allowing for increase return ratio and providing a lower Net Worth.

Ratios

Ratio Analysis
	FY 2002	FY 2003	FY 2004	Industry Profile
Sales Growth	0.00%	320.92%	156.42%	7.60%
Percent of Total Assets
Inventory	9.60%	13.68%	11.12%	3.60%
Other Current Assets	0.00%	0.00%	0.00%	35.60%
Total Current Assets	17.69%	35.23%	39.03%	43.70%
Long-term Assets	82.31%	64.77%	60.97%	56.30%
Total Assets	100.00%	100.00%	100.00%	100.00%
Current Liabilities	15.62%	20.98%	16.05%	32.70%
Long-term Liabilities	78.20%	54.83%	43.05%	28.50%
Total Liabilities	93.82%	75.81%	59.10%	61.20%
Net Worth	6.18%	24.19%	40.90%	38.80%
Percent of Sales
Sales	100.00%	100.00%	100.00%	100.00%
Gross Margin	39.56%	39.82%	45.23%	60.50%
Selling, General & Administrative Expenses	44.74%	30.63%	29.15%	39.80%
Advertising Expenses	3.23%	1.53%	1.20%	3.20%
Profit Before Interest and Taxes	-2.28%	10.80%	17.45%	0.70%
Main Ratios
Current	1.13	1.68	2.43	0.98
Quick	0.52	1.03	1.74	0.65
Total Debt to Total Assets	93.82%	75.81%	59.10%	61.20%
Pre-tax Return on Net Worth	-127.60%	90.51%	80.25%	1.70%
Pre-tax Return on Assets	-7.88%	21.89%	32.83%	4.30%
Additional Ratios	FY 2002	FY 2003	FY 2004
Net Profit Margin	-5.17%	9.18%	16.08%	n.a
Return on Equity	-127.60%	90.51%	80.25%	n.a
Activity Ratios
Inventory Turnover	7.02	8.62	7.70	n.a
Accounts Payable Turnover	6.49	6.49	6.49	n.a
Payment Days	27	35	40	n.a
Total Asset Turnover	1.52	2.38	2.04	n.a
Debt Ratios
Debt to Net Worth	15.19	3.13	1.44	n.a
Current Liab. to Liab.	0.17	0.28	0.27	n.a
Liquidity Ratios
Net Working Capital	$7,557	$140,445	$678,221	n.a
Interest Coverage	-0.79	6.68	12.78	n.a
Additional Ratios
Assets to Sales	0.66	0.42	0.49	n.a
Current Debt/Total Assets	16%	21%	16%	n.a
Acid Test	0.52	1.03	1.74	n.a
Sales/Net Worth	24.66	9.86	4.99	n.a
Dividend Payout	0.00	0.00	0.00	n.a

7.8 Exit Strategy

There are three scenarios for the investors and management to recover their investment--two with significant returns on each dollar invested.

Scenario One:
The Daily Perc becomes extremely successful and has requests from other communities for Daily Perc operations to be opened there. This opens the door for franchising opportunity. When one looks at the wealth that has been created by the likes of McDonald's, Wendy's, Kentucky Fried Chicken, Burger King, and Taco Bell, the value of franchising a great idea cannot be dismissed. However, developing a franchise can be extremely costly, take years to develop, and be destroyed by one or two franchisees who fail to deliver the consistency or value on which the founding company had built its reputation.

Scenario Two:
The Daily Perc chooses to become the Drive-thru version of Starbucks, obtaining several million dollars through an initial public or private offering that would allow the company to open twenty to thirty facilities per year in the region of the country between the mountain ranges, in both major and small metropolitan communities. This is the preferred Exit Strategy of the Management Team. The danger in this is that competitors would rise up and establish a foothold on a community before--or in the midst of--the arrival of The Daily Perc, causing a potential for a drain on revenues and a dramatic increase in advertising expenditures to maintain market share. Knowing these risks--and planning for them--gives TDP the edge needed to make this scenario work.

Scenario Three:
By the third year, the growth and community support for The Daily Perc will have made the news in more than just the metropolitan area. It can be assumed that competitors, such as Starbucks or Quikava, will have seen the press and realized the value proposition in The Daily Perc's business plan. This will make TDP an attractive target for buyout. The company could be purchased by a much larger competitive concern by the end of the third year.

Taking a conservative approach to valuation and estimating that The Daily Perc would be valued at $7.5 million, and assuming that all 250 units of ownership in TDP are distributed to investors, a cash purchase of TDP would net each unit $30,000. With each unit selling at $4,250, that constitutes a Return on Investment of 705% over the three years. However, any buyout will most likely involve a cash/stock combination. A cash/stock buyout would be favorable, since the buying company would pay a higher price and the transaction would not have such severe tax consequences to the sellers.

Conclusion:
Of the three scenarios, the management team prefers Scenario #2. The same numbers would relate to a public or private offering as are used in Scenario #3, but to make an offering available, there would be a dilution of shares that would provide additional shares for sale to the new investors.

Assuming the capital acquisition described in this plan is completed, there will be 250 units of the company in the hands of investors, constituting 100% of the authorized and issued units. For purposes on future fundraising, it will be necessary to authorize a stock split of, perhaps 5,000 to one, turning the current 250 units into 1,250,000 units.

Using the balance sheet for the third year, which estimates a Net Worth of just over $1.45 million, cash balances of $1.29 million and earnings of $1.06 million, based on 13 Drive-thrus and four Mobile Cafes, it is not unrealistic to put a market value of $15 million to $25 million on the company. At present, such companies are trading in multiples of 20 to 30 times earnings, and it is simple mathematics to multiply the success of TDP by the number of commuter heavy metropolitan areas in the United States.

With a corporate valuation of $7,500,000, each of the new units would have a market value of $6/unit. By authorizing an additional 750,000 units, there would be a total of 2,000,000 units with a market value of $3.75 per share. By offering the 750,000 shares at the price of $3.75 per unit, TDP would raise an additional $2,812,500 in expansion capital, which would be sufficient to open locations in an additional three to five cities.