Sammy's Family Entertainment Center
The rapidly growing family entertainment industry is enjoying great success across the nation. These “too good to be true” numbers are, in fact, realistic. Every effort has been made to use conservative numbers in all categories. This point bears repeating; conservative, well researched numbers have been used in all categories.
The lack of inventory and current liabilities will give some readers problems with the “usual” Business Ratios.
7.1 Important Assumptions
History has proven there are two types of businesses that thrive in depressed economic times. These two categories of businesses are alcohol and family entertainment. As far back as the depression of the early 30s, the family entertainment industry has performed well in prosperous times and in economic downturns.
Sammy’s does not assume they have no competition. But it is worthy to note there is a distinct lack of family entertainment in the area. While one might initially think this means such a business will not flourish here, our research has indicated otherwise. For example:
- The expanding network of new concept miniature golf courses is finding success in rural America. Locations near rural arterials are performing well across the nation.
- Locations in cities are doing well also. In our own region we see successful examples in St. Andrews and Mashie Woods.
Note the interest is high for current lending. This is in keeping with the conservative nature of this plan. It further demonstrates the basic health of this conceptual business.
|Year 1||Year 2||Year 3|
|Current Interest Rate||10.00%||8.00%||10.00%|
|Long-term Interest Rate||8.00%||8.00%||8.00%|
7.2 Break-even Analysis
We see an extremely low variable cost in the Break-even table. While some would consider this an error, we know it to be the beauty of the business. The variable costs are limited to a scorecard (1 cent), a stubby pencil that is used several times, and the replacement of balls (which are used hundreds of times).
The largest variable that determines the level of success in a miniature golf operation is the percent utilization of the golf course during the season. As the marketing plan points out, there are clearly defined peaks and valleys of activity during a typical week. Evenings and weekends tend to produce very high utilization, even full utilization for much of this time. On the other hand, weekday hours (between 10 am and 4 pm) tend to have lower utilization. On average over the full season, most facilities (with a direct population base of 40,000 to 60,000) experience a utilization of approximately 35%. Sammy’s is fortunate to have a population base of over 150,000 within a 15 mile radius (based on the 2000 US Census). In spite of that, we have used rather conservative estimates of utilization (about 20%) in deriving our projected revenues. But it is worthy to note that if our course utilization were only 10% (half of the 20% projection), we would still break even. This huge margin of error should satisfy even the most skeptical reader.
|Monthly Revenue Break-even||$16,279|
|Average Percent Variable Cost||9%|
|Estimated Monthly Fixed Cost||$14,842|
7.3 Projected Cash Flow
With a first reading, the projected cash flow numbers appear unrealistic. Allow us to reinforce information given in the notes to the sales forecast.
- The numbers have been verified by Mulligan-Bogey Leisure Builders. Mulligan-Bogey has built over 400 successful courses in the last ten years and they are well aware of the revenues of their courses.
- The revenue numbers were presented to two separate owners who have opened courses within the last three years. The owners felt the revenue estimates were conservative, but accurate for planning purposes.
- Even if, for some catastrophic reason, the actual revenues were substantially lower, the reader can see this business will still be profitable, with positive cash balance from the first month.
Although the Cash Spending row in our projections contains only payroll expenses, we may choose to pay some bills (from the Bill Payments row) in fewer than 30 days, once the business is up and running; these would then also be part of cash spending. Our current projections, however, were designed conservatively.
The cost of the golf course includes everything except the scorecards. So no balls or clubs are included in the startup costs.
Along with a $20,000 option, Sammy’s will offer $1 lease for the first year. Although this initially sounds unacceptable, it is worth noting the owner will receive $20,000 for the option, and the property has been vacant and for sale for two years, without an offer.
Underwriters are working on an insurance quote. We have used the best estimate of insurance professionals.
The arcade will operate on a 50-50 split with an arcade company. We have shown the revenue as a sale and the arcade companies share as an expense.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Subtotal Cash from Operations||$251,018||$254,433||$257,917|
|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||$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||$251,018||$254,433||$257,917|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||$207,538||$205,617||$214,599|
|Additional Cash Spent|
|Sales Tax, VAT, HST/GST Paid Out||$0||$0||$0|
|Principal Repayment of Current Borrowing||$0||$0||$0|
|Other Liabilities Principal Repayment||$0||$0||$0|
|Long-term Liabilities Principal Repayment||$11,837||$12,819||$13,883|
|Purchase Other Current Assets||$0||$0||$0|
|Purchase Long-term Assets||$0||$0||$0|
|Subtotal Cash Spent||$219,375||$218,436||$228,482|
|Net Cash Flow||$31,643||$35,997||$29,435|
7.4 Projected Profit and Loss
Estimates for financial projections are prepared with a conservative look at all aspects of the business. We have relied on three external sources for input and validation. We are in contact with two helpful course owners in similar demographic areas. One business has been operating for one year and the other for four years. Their input has been invaluable in comparing theoretical projections with reality. Another excellent source of data is Mulligan-Bogey Leisure Builders; they have built over 400 successful courses and are able to tell a prospective owner what to realistically expect.
It is important to note, based on their past experience, all three sources of information have agreed that our sales projections are either accurate or too low. They also agree the expense projections are either accurate, or too high. Thus we see a conservative forecast, giving both owner and investor a safety buffer.
Accounting and legal costs are projected at $1,250 at the outset for our Sub S Corporation, then another $500 for set-up by the accounting firm. The company will have its books reviewed each quarter; fees for accounting are listed below.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||$22,155||$22,325||$22,498|
|Other Costs of Sales||$0||$0||$0|
|Total Cost of Sales||$22,155||$22,325||$22,498|
|Gross Margin %||91.17%||91.23%||91.28%|
|Sales and Marketing and Other Expenses||$9,250||$6,150||$6,335|
|Acctg & Legal||$2,750||$2,833||$2,917|
|Total Operating Expenses||$178,104||$173,079||$176,800|
|Profit Before Interest and Taxes||$50,759||$59,029||$58,619|
7.5 Projected Balance Sheet
The asset side of the balance sheet shows an accurate picture.
The Balance Sheet shows the current liabilities at a zero balance. This is because all purchases and payroll are paid on a cash basis. >/P>
The beauty of this business is beginning to become apparent. There is a reasonably high capital output, but the operation of the business is completed with virtually no inventory to purchase and low labor cost. When the reader combines this information with the fact that the sales forecast is conservative, one can see that success is assured.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||$23,230||$23,230||$23,230|
|Total Current Assets||$68,642||$104,639||$134,074|
|Total Long-term Assets||$616,860||$584,220||$551,580|
|Liabilities and Capital||Year 1||Year 2||Year 3|
|Other Current Liabilities||$0||$0||$0|
|Subtotal Current Liabilities||$6,669||$12,726||$12,861|
|Total Liabilities and Capital||$685,502||$688,859||$685,654|
7.6 Business Ratios
As noted earlier, this family entertainment business has no inventory and does not do sales on credit. Therefore several ratios normally deemed important by the reader will not show reasonable numbers. The high value for Profit Before Interest and Taxes is not an error.
The following table outlines some of the more important ratios from the Amusement and Recreation industry. The final column, Industry Profile, details specific ratios based on the industry as it is classified by the NAICS code 713990.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||3.39%||3.37%||3.39%||41.52%|
|Total Current Assets||10.01%||15.19%||19.55%||51.30%|
|Percent of Sales|
|Selling, General & Administrative Expenses||1.11%||0.73%||0.74%||63.25%|
|Profit Before Interest and Taxes||20.22%||23.20%||22.73%||4.21%|
|Total Debt to Total Assets||80.94%||79.56%||77.93%||58.43%|
|Pre-tax Return on Net Worth||4.95%||11.14%||10.80%||6.31%|
|Pre-tax Return on Assets||0.94%||2.28%||2.38%||15.19%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||1.66%||3.98%||4.09%||n.a|
|Return on Equity||3.19%||7.19%||6.97%||n.a|
|Accounts Payable Turnover||23.80||12.17||12.17||n.a|
|Total Asset Turnover||0.37||0.37||0.38||n.a|
|Debt to Net Worth||4.25||3.89||3.53||n.a|
|Current Liab. to Liab.||0.01||0.02||0.02||n.a|
|Net Working Capital||$61,973||$91,913||$121,213||n.a|
|Assets to Sales||2.73||2.71||2.66||n.a|
|Current Debt/Total Assets||1%||2%||2%||n.a|