The Watertower Cafe

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Cafe Bistro Coffeehouse Business Plan

Financial Plan

We want to finance growth mainly through cash flow. We recognize that this means we will have to grow more slowly than we might like.

The most important indicator in our case is inventory turnover. We have to make sure that food inventory turnover stays at approximately four turns per month, or we risk loss through spoilage.

We do not want to let our average collection days get above 45 under any circumstances. This could cause a serious problem with cash flow, because our working capital situation is tight. Most credit sales will be via credit and debit cards. We do have plans to initiate direct billing for law firms and other businesses conducting regular visits.

We must target a net profit of 14% at the least, and hold marketing costs to no more than one to three percent of gross sales.

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:

  • We assume a slow-growth economy, without major recession.

  • We assume of course that there are no unforeseen changes in technology to make equipment immediately obsolete.

  • We assume access to equity capital and financing sufficient to maintain our financial plan as shown in the tables.
General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 12.25% 12.25% 12.25%
Long-term Interest Rate 6.75% 6.75% 6.75%
Tax Rate 25.42% 25.00% 25.42%
Other 0 0 0

7.2 Projected Cash Flow

We expect to manage cash flow over the next three years with minimal new investment required over the first two years. It is our expectation that revenue beyond projected sales will be invested in retiring long-term debt early.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $2,186,601 $2,351,541 $2,573,024
Subtotal Cash from Operations $2,186,601 $2,351,541 $2,573,024
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $0 $0 $29,559
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
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 $2,186,601 $2,351,541 $2,602,583
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $322,008 $322,008 $322,008
Bill Payments $1,633,772 $1,677,517 $1,773,221
Subtotal Spent on Operations $1,955,780 $1,999,525 $2,095,229
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $23,160 $26,435 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $27,430 $29,329 $31,339
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $2,006,370 $2,055,289 $2,126,568
Net Cash Flow $180,231 $296,252 $476,015
Cash Balance $280,231 $576,483 $1,052,498

7.3 Key Financial Indicators

The most important indicators in our case are are daily seating "counts" and weekly sales numbers. We must also make sure that we are turning our inventory rapidly so as to avoid food spoilage.

We must target net profit/sales figures toward the 14% level with gross margins never dipping below 38%. Marketing costs should never exceed three percent of sales.

7.4 Break-even Analysis

The Break-even Analysis shows that The Watertower has a good balance of fixed costs and sufficient sales strength to remain healthy. Our break-even point is $106,101 on sales averaging $12.54 per patron. This break-even position is achieved on a monthly fixed cost of $57,873 and and per unit/patron variable cost of $5.70.

Break-even Analysis
Monthly Revenue Break-even $122,179
Assumptions:
Average Percent Variable Cost 62%
Estimated Monthly Fixed Cost $46,841

7.5 Projected Profit and Loss

We expect income to approach $2.1 million for calendar year 2002. It should increase to $2.57 million by the end of the years covered in this plan.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $2,186,601 $2,351,541 $2,573,024
Direct Cost of Sales $1,348,308 $1,277,010 $1,340,860
Other $0 $0 $0
Total Cost of Sales $1,348,308 $1,277,010 $1,340,860
Gross Margin $838,293 $1,074,531 $1,232,164
Gross Margin % 38.34% 45.69% 47.89%
Expenses
Payroll $322,008 $322,008 $322,008
Sales and Marketing and Other Expenses $80,800 $80,800 $80,800
Depreciation $6,900 $6,900 $6,900
Leased Equip/Van/Dispensing Systems $12,600 $12,600 $12,600
Utilities $24,000 $24,000 $24,000
Insurance $20,940 $22,000 $23,000
Other Taxes $24,000 $24,000 $24,000
Payroll Taxes $70,842 $70,842 $70,842
Other $0 $0 $0
Total Operating Expenses $562,090 $563,150 $564,150
Profit Before Interest and Taxes $276,203 $511,381 $668,014
EBITDA $283,103 $518,281 $674,914
Interest Expense $48,095 $43,298 $41,442
Taxes Incurred $55,675 $117,021 $159,254
Net Profit $172,433 $351,062 $467,318
Net Profit/Sales 7.89% 14.93% 18.16%

7.6 Projected Balance Sheet

As shown in the Balance Sheet, we expect a healthy growth in net worth from approximately $172,000 at the end of 2002 to almost $1 million by the end of the plan period.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $280,231 $576,483 $1,052,498
Inventory $129,671 $122,814 $128,955
Other Current Assets $0 $0 $0
Total Current Assets $409,902 $699,297 $1,181,453
Long-term Assets
Long-term Assets $595,040 $595,040 $595,040
Accumulated Depreciation $6,900 $13,800 $20,700
Total Long-term Assets $588,140 $581,240 $574,340
Total Assets $998,042 $1,280,537 $1,755,793
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $149,628 $136,826 $146,543
Current Borrowing $6,690 ($19,745) $9,814
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $156,318 $117,081 $156,357
Long-term Liabilities $667,969 $638,640 $607,301
Total Liabilities $824,287 $755,721 $763,658
Paid-in Capital $98,000 $98,000 $98,000
Retained Earnings ($96,679) $75,754 $426,817
Earnings $172,433 $351,062 $467,318
Total Capital $173,754 $524,817 $992,135
Total Liabilities and Capital $998,042 $1,280,537 $1,755,793
Net Worth $173,754 $524,817 $992,135

7.7 Business Ratios

Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 5812, Eating Places, are shown for comparison. The ratios show a plan for balanced, healthy growth.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 7.54% 9.42% 7.60%
Percent of Total Assets
Inventory 12.99% 9.59% 7.34% 3.60%
Other Current Assets 0.00% 0.00% 0.00% 35.60%
Total Current Assets 41.07% 54.61% 67.29% 43.70%
Long-term Assets 58.93% 45.39% 32.71% 56.30%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 15.66% 9.14% 8.91% 32.70%
Long-term Liabilities 66.93% 49.87% 34.59% 28.50%
Total Liabilities 82.59% 59.02% 43.49% 61.20%
Net Worth 17.41% 40.98% 56.51% 38.80%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 38.34% 45.69% 47.89% 60.50%
Selling, General & Administrative Expenses 30.51% 30.77% 29.62% 39.80%
Advertising Expenses 0.73% 0.68% 0.62% 3.20%
Profit Before Interest and Taxes 12.63% 21.75% 25.96% 0.70%
Main Ratios
Current 2.62 5.97 7.56 0.98
Quick 1.79 4.92 6.73 0.65
Total Debt to Total Assets 82.59% 59.02% 43.49% 61.20%
Pre-tax Return on Net Worth 131.28% 89.19% 63.15% 1.70%
Pre-tax Return on Assets 22.86% 36.55% 35.69% 4.30%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 7.89% 14.93% 18.16% n.a
Return on Equity 99.24% 66.89% 47.10% n.a
Activity Ratios
Inventory Turnover 10.91 10.12 10.65 n.a
Accounts Payable Turnover 11.72 12.17 12.17 n.a
Payment Days 28 31 29 n.a
Total Asset Turnover 2.19 1.84 1.47 n.a
Debt Ratios
Debt to Net Worth 4.74 1.44 0.77 n.a
Current Liab. to Liab. 0.19 0.15 0.20 n.a
Liquidity Ratios
Net Working Capital $253,583 $582,217 $1,025,096 n.a
Interest Coverage 5.74 11.81 16.12 n.a
Additional Ratios
Assets to Sales 0.46 0.54 0.68 n.a
Current Debt/Total Assets 16% 9% 9% n.a
Acid Test 1.79 4.92 6.73 n.a
Sales/Net Worth 12.58 4.48 2.59 n.a
Dividend Payout 0.00 0.00 0.00 n.a