And finally of course such unpredictable factors as new construction works just by the restaurant entrance or a burglary can sometimes create a critical situation on a temporary or permanent basis.
Market Assessment.
Eating out has continued to command a greater proportion of total leisure spend. As consumers increasingly substitute home-prepared meals for meal out, convenience, casual dinning out and experimentation have become driving forces within the market.
Figure 1: Comparison of UK restaurant numbers with other catering establishments, 1997-2001
What appears to be the case is the need to have the right restaurants in the right place with the right concept
The tourism factor
It is not possible to examine the UK restaurant market without some reference to the role which tourism has played in shaping it. This is not a factor that affects all restaurants, as it is clearly location-dependent. The biggest area of impact is London, which has the highest number of restaurants per capita and it is also the region where some of the smaller chains are heavily focused.
The experience counts
The quality of the dining experience is of major importance to the consumer. While the food plays a key role, restaurant dining is undoubtedly a leisure experience and competes for discretionary expenditure with a multitude of other goods and services. Mintel's research shows that 65% of consumers surveyed feel that the quality of the service is very important to them with a similar amount saying that they do not like to feel rushed. The customer is, therefore, paying for an experience and not just the food. This is reflected in the numbers who are prepared to travel to go to a restaurant that they like, clearly indicating that the quality of the experience is of some importance.
Chains not venue of preference
The level of growing sophistication and desire for a good experience would appear to be bad news for the chain operators. Mintel's research shows that only 3% of consumers (from a small sample/base) prefer a branded chain restaurant to an independent restaurant.
Bar or restaurant or both?
The introduction of a bar now provides a secondary income stream and offers a quicker route to profitability. The overriding financial pressures have been seen to dictate the strategy of the group, evidenced by the move by a large proportion of restaurants towards the bar format from fine dining.
Market Factors
Growing affluence
Hence the forecast growth in the overall size of the ABC1 groups will have a positive effect on the restaurant market. Figure 3 illustrates the current and forecast changes in the groups. The AB group, which eats out most frequently, is forecast to see a rise of 27% during 1997-2006. This represents around 2,750,000 extra adults and using Mintel's consumer research for this report 39% of these or around 1,072,000 adults in this group will dine out at least once a month.
Figure 3: Structure of adult population, by socio-economic group, 1997-2006
It can therefore be concluded from Figure 3 that the growing levels of affluence in this country will have a very positive influence on the restaurant market.
Increasing PDI and consumer expenditure
Rise PDI and the corresponding increase in consumer expenditure will have a positive effect on the restaurant market.
As well as consumer expenditure itself steadily increasing, the proportion that is spent on restaurant meals is continuing to rise. This also means that there is a corresponding increase in average spending on restaurant meals as a percentage of the total spend by consumers on food and alcoholic drinks. Altogether this has a positive effect on the restaurant market.
On average weekly spending for restaurant and café meals in London is £12.90.
The health-conscious consumer
The quality of the food on offer at restaurants and other eating out places has become a particular obsession with some consumers. They are now more frequently apprehensive of the food that they eat, particularly with regards to the source of the ingredients.
On a local level the foremost strength of a good independent restaurant is the emphasis placed on sourcing high-quality ingredients. An independent operator has an unrestrained freedom to meet customers' increasing demands in food standards.
Expanding competition for the leisure pound
While it is valid to examine the direct competitors in the restaurant marketplace it would be restrictive to consider the market only in these terms. Some of the market factors such as the increased level of affluence have resulted in an increased number of ways in which the consumer can spend on entertainment. Operators in the eating out market have reacted to this and there is a growth in the number of venues that combine food with some other activity such as dancing or music. There is a proliferation of café bars and music clubs where food forms part of the offering. As Mintel's exclusive research shows these venues have particular appeal to the 20-34 age group and the most affluent ABC1 market segment (Figure 19) and as such represent a real challenge for the restaurant market. The lifestyle changes particularly in this group which have seen a rise in demand for quick, convenient but quality food may be better met by other sorts of dining venue than a restaurant.
Market Size and Trends
Mintel estimates that between 1997 and 2002 the market will have grown by £5.6 billion. At 1997 prices it can be seen that this growth in the total eating out market is in real terms an increase of 8%. The market has grown at a steady rate and is forecast to continue to do so.
Over the period 1997-2002 it will have grown in value by £1 billion and in 2002 it is estimated to be worth approximately £5.2 billion. However, at 1997 prices this reflects only a small real level of growth of 3%.
Without question the market is becoming increasingly competitive, a trend that is driven by the consumers' desire for new and different styles of cuisine and experiences. Nevertheless the market increased by 19% during 1997-2001
Consumers dine at a repertoire of restaurants
Mintel's exclusive consumer research for this report indicates that around 75% of consumers surveyed visited a restaurant of any type within the last three months.
Market Segmentation
The restaurant sector in total makes up some 67% of the total eating out market and hence in value terms is most significant.
Figure 13: The UK eating out market, by sector*, 1997-2001
The Supply Structure
The restaurant market is made up of many small chains, a few larger chains with mid-market positioning and independent units. As there are many independently operated restaurants as well as branded chains a comprehensive list is not possible.
Industry Innovators and Dragons
Looking at the current marketplace performance and at Mintel's consumer research, some key factors emerge which characterise those companies which are succeeding in the current marketplace and are likely to continue to do so.
These factors include but are not limited to:
- those companies that have the ability to spread margin and profit opportunities
- restaurants that offer value for money
- variety and choice are generally on offer
- service and atmosphere are paramount
- continual evolution in concept or menu
- strong public image either through PR or advertising.
Consumer
British food in general is still popular with 29% of respondents. Ethnic foods in general appeal to around 20-28% of respondents.
Food courts, which serve a variety of foods, are popular among 13% of respondents, while American restaurants appeal to 10% of the people surveyed.
Overall only 2% of consumers never eat in a restaurant which illustrates the importance which restaurant dining plays in our lives and represents considerable market potential. Levels of affluence influence the consumers' likelihood to dine out and it can be seen that those who are not working or who are in the lowest socio-economic group are most likely never to dine out.
The breakdown by restaurant type shows that the most popular type of restaurant overall is the British and/or fish and chip restaurant. This is followed closely by ethnic restaurants, which includes Indian and Chinese as well as Thai, Japanese, Mexican and other ethnic restaurants.
Similarly, when looked at by social class the higher socio-economic groups, the ABs and C1s have a preference for ethnic food. It can therefore be concluded that the most potential for new restaurants will be in the ethnic sector as not only do ABC1s eat out more frequently; they are the fastest-growing and largest socio-economic group.
Those consumers at the pre-family lifestage are most likely to use all types of restaurant with ethnic restaurants being most popular with them. Ethnic restaurants are also the most popular venue for consumers at the family lifestyle, which reflects a willingness to try new and different concepts. As their children grow there will be an increased likelihood of a continuing preference for ethnic food.
Attitudes towards restaurants
The quality of service is very important to just under two thirds of respondents, and furthermore 43% of respondents are prepared to travel to an eatery that they like. An aspect which reflects on quality of service is whether consumers feel rushed when at a restaurant.
A significant 62% of respondents suggested that they did not like to feel rushed. This means that consumers want to feel relaxed and sample the atmosphere as well as eating when visiting a restaurant. Indeed 59% of respondents claim that a good atmosphere is important.
To obtain good service, food and atmosphere, just over a third of respondents are prepared to pay a premium. Of interest is that 23% of respondents feel that independent restaurants give a better service than chains and only 3% of respondents prefer a branded restaurant to an independent eatery.
The most frequent diners are those in the ABC1 socio-economic group and this propensity to dine frequently diminishes with social class being inherently linked to lifestyle. This is reinforced by attitudes towards being prepared to pay for quality, which again diminishes across the socio-economic groups. Here respondents in the ABC1 groups have a higher propensity to pay more for their dining experience.
Respondents in the ABC1 socio-economic group are also most likely to think that better service will be found at small restaurants rather than large ones.
Categories used to describe consumer behaviour include:
Quality Seekers
This consists of 84% of respondents who value quality of service and will, therefore, choose restaurants which they perceive as providing this. Of note is that these consumers are not restricted to branded (chain) restaurants but invariably will visit independent restaurants, viewing them to be better able to provide the quality of service that they seek.
Innovators
Representing 67% of respondents, these are typically consumers who are susceptible to new foods, venues and concepts when eating out. These diners are likely to be more inclined to choose restaurants providing different cuisine from British food restaurants and are also likely to visit eateries that change their menus on a regular basis. These include independent restaurants that are more able to change their menus due to their supply structure being less restricted
Ambience seekers
With just over 60% of respondents representing ambience seekers these are a group of consumers for whom the restaurant surround is as important as the food. Consumers in this category place a greater value on entertainment and will visit restaurants that provide some sort of theatre. Restaurants which appeal to this group include themed restaurants where memorabilia plays an important part in creating the general feel of the restaurant; and traditional restaurants providing British, French, Italian, Indian and Chinese cuisine where the ambience is captured by the music played and design of the furnishings. More recently minimalist restaurants have become popular. These typically have basic furnishings such as wooden tables and benches in a modern setting. Music played at these venues will also be contemporary.
Special treat seekers
This category is represented by 42% of respondents and typically includes consumers who do not eat out often, but are more likely to dine out for special occasions, events or when there is a special promotion undertaken by restaurant operators.
Independent restaurant lovers
The findings of the exclusive consumer research undertaken by Mintel for this report point to consumers who are becoming more inclined to favour independent restaurants, judging them as providing a better service
Frequent diners
The respondents in this group also demonstrate the increased interest in eating out on a regular basis by the British. New foods and increased emphasis by operators on ambience, décor and entertainment have created a demand for eating out more regularly.
Settled diners
Contrary to respondents who fall into the innovators category, settled diners represent 26% of respondents in Mintel's survey. Though they are not adventurous they do represent a constant and loyal market for operators.
ABC1s show the highest propensity to be quality seekers. This is a reflection of this group being able to pay for quality food and service. They are also more demanding of ambience and more likely to be seeking innovation but much less likely to be special treat seekers, suggesting an informality and spontaneity to their dining habits.
The Future
Lifestyle changes bode well for restaurant market
The restaurant market has a huge range of choice of mid-market restaurants which offer informality and convenience at an affordable price. This sector fits perfectly with the increase in consumer spending on casual dining. Eating out is no longer a luxury but part of everyday life. Eating habits are continuing to change and are even now significantly diverged from the three meals a day around the home table. Food is increasingly being consumed at any time of day and in a variety of environments. The challenge for our restaurant is to ensure that their format and offering is the preferred choice of venue. Nowadays, it is easier for new theme restaurants and cuisines to enter the evolving market.
Future success will depend increasingly on being able to create a point of difference which has continual appeal to the customer base. New entrants with new concepts will readily lure customers away even if only temporarily which reiterates the need to create a point of difference that cannot be replicated by the competition.
In looking towards the future of the restaurant market the most significant factor would appear to be the consumer desire for the fresh and the new. In all aspects of life consumers are faced with a myriad of choices from their gas supplier to their bank and therefore become accustomed and even expect this level of choice. They have become used to products developing and changing faster than ever before and this will tend to extend to the restaurant market too. This will make for a very dynamic market and one that is continually challenging to operators.
The analysis of the restaurant market shows that there is great potential for Russian Theme restaurant. As consumers have become more sophisticated, their level of expectation has risen with regard to quality, service and choice which has put increased pressure on the restaurateur.
Since there is a decline or break up of the very large brands our independent small venture would have more market opportunities.
In general, changing demographics and the growth in the affluent consumer groups have been, and will continue to be, significant in determining and shaping which restaurants and concepts have the most scope for success. Ageing population, rising incomes, increasing demand for eating out and theme restaurants in particular give our idea a great opportunity to succeed.
Changing lifestyles with an increased desire for the quick and convenient are changing how people eat out and represent a real challenge for the market.
Tourism plays a significant role in the fate of some restaurant groups. In our case the affect comes from location of the restaurant. As it is located amongst many tourist attractions, the affect could be very significant.
Marketing Plan
The marketing portion of a business plan addresses how we will get people to visit our restaurant to try our service in sufficient quantities to make your business profitable. It consists of:
• Market analysis, which we have done earlier and which assesses the market environment in which we compete, identifies our competitors and analyzes their strengths and weaknesses, and identifies and quantifies our target market;
•Our marketing strategy, which explains how we will differentiate our business from our competitors' businesses and what approach we will take to get customers to buy from us;
•Our marketing and sales plans, which specify the nature and timing of promotional and other advertising activities that will support specific sales targets.
First of all, to start with we have to identify our mission statement, which will guide our employees, investors and customers to the same vision of the business.
Mission Statement
“To provide a place where people can enjoy the genuine Russian atmosphere, traditions and customs, while getting pleasure from traditional Russian food and entertainment in the heart of England.”
SWOT Analysis
SWOT Analysis is a very effective way of identifying our Strengths and Weaknesses, and of examining the Opportunities and Threats we face. Carrying out an analysis using the SWOT framework will help us to focus our activities into areas we are strong, and where the greatest opportunities lie.
STRENGTHS
- Geographic location: opportunity to market a lifestyle
- Access to variety of customers
- Provided Entertainment
- Uniqueness (Russian Theme)
- Friendly staff
- Quality of food and services for suitable price
WEAKNESSES
- Too narrow service line
- Weak market image
- No parking space
- Lack of space (space is expensive)
OPPORTUNITIES
- Target different consumer groups
- Create customer loyalty
- Expand to night club or karaoke
- Market growth
THREATS
- New competitors coming in
- Expansion of existing ethnic restaurants
.
PEST
Political
- Government policies such as taxes, alcohol and entertainment licence
- Health and Safety legislation will effect work practices and product costs
Economical
Economical factors will influence the future potential profit of our business. The level of consumer demand is a key variable affecting the quantity of sales and the price of our services and food. Interest rates will determine the cost of finance to the restaurant. Final profits will be taxed by the government. The economic cycle of recession and recovery is an important influence on the opportunities and threats to the organisation.
Social
Consumers reflect changes in lifestyle over time. This means business must observe shifts in the characteristics and habits of the population, especially where these influence segments of the existing market. Nowadays, consumers are more health conscious; they demand good and quality food.
Demographic variations may also represent a threat to the company, and our target market ABC is expanding.
Technology
- Stock control
- Modern kitchen and other appliances saving energy, helping to provide quality, healthy food
- Internet used for advertising purposes helps to attract more and more customers, provides new ways to target market
Green Issues
Consumer and government are becoming increasingly aware of the impact on businesses upon the environment. Organisations must now monitor their actions and consider their environmental implications. We will try to reduce wastage and cooperate in recycling products.
Now we can set clear objectives which will help us to arrive to the best possible marketing strategy. Objectives are targets that can give the sense of direction to our new venture. If we would have a sense of common purpose it would become much easier to coordinate our actions
Objectives
- Survive
- Create customer base
- Create recognition of brand name
- Make profit
- Growth
The primary objective of our new business is to survive in the current highly competitive market. There are many restaurants and food providing ventures which present threats to our Russian Restaurant. By creating and following a successful strategy we will try to reduce this risk and increase the chance of survival.
First thing that we have to do to achieve this is to create loyal customer base and build up good reputation of our restaurant within the target market. Customer relationship is also very important for the business to reach a success.
Brand name, in our case “IZBA”, has to be recognised; therefore we will focus on heavy promotion in the beginning. Our brand name gives a clear description of the business particularly for Russian customers, for foreign visitors we will do our best to make them familiar with our traditional theme. Successful branding would add value to our business and would ensure brand loyalty.
Not the last thing for all businesses is profit. Sufficient profit should be created for/from efficient operations. Cost of sales and all expenses should be covered. Our profit will help us to maintain our position in the market and improve services.
At the start point we may experience some difficulties, however once we have established ourselves we are aiming to grow and expand. This would enable us to compete more successfully in the dynamic market. Since consumer preferences are changing continuously, we will try and follow the trends. For example, while consumers are becoming more and more health conscious we may consider innovating into introducing organic dishes.
Objectives form bases for decisions on strategy, the plan for the achievement of our goals.
Strategy
“Strategy is the direction and scope of an organisation over the long term: ideally which matches its resources to its changing environment and in particular its markets, customers or clients so as to meet stakeholders expectations.”
Johnson and Scholes
The two major goals of our business are to achieve customer recognition and to maximise profits.
Our strategy is the way to achieve our goals, maintain and improve our image.
Through market research we have discovered what is our preferable market and our target audience are, and now our aim is to fit services and products we offer into the niche we have chosen. Unique design we developed plays the prime role in the achieving recognition by customers and creating their loyalty. Thorough understanding of customers’ needs and wants was achieved when doing research.
The point of competitive advantage is strongly enhanced by our unique design development which adds even more value to our offered product. High quality service provided by staff is another significant point in the value chain of our product.
We strongly believe in the concept of value for money and therefore we charge fair prices to our customers. By doing that we would like to secure their loyalty to us. We may say that we partially apply competitive pricing strategy. Also because our product is new, we have decided to apply a special-offer pricing at least on the initial stage.
A vital point in success of our new business is promotion, especially in the introductory part of the business life cycle. This will be conducted by means of above the line promotion, for example direct advertising through consumers, TV, radio, press. In our case it will be a mixture of Russian and English newspapers and magazines, Russian radio, websites etc.
We have carefully selected the location on Baker Street, as in our view this is full of locals, tourists and students and this means a big number of potential customers. The examining of new location of nearby offices, universities and tourist attractions proves our point.
Financial Plan
Sales forecast for the first year ending 31 December 2004
January £38,417
- February £38,417
- March £42,686
- April £42,686
- May £42,686
- June £469,55
- July £46,955
- August £46,955
- September £42,686
- October £42,686
- November £42,686
- December £44,820
£518,635
Sales forecast limitations
Businesses are always trying to predict the future. This helps with planning and beating competitors. One simple way of predicting the future is to assume that it will be just like the past. Another way is forecast the sales figures using primary research. For the immediate future this may be very realistic. However such stability and predictability are rare. The values of data plotted over time, called time-series analysis, can vary because of seasonal influences and also because of genuinely random factors, which can never be predicted.
Cash Flow Forecast
Cash flow is a movement of cash into and out of a business. A cash flow forecast sets out the anticipated cash inflows and cash outflows over the coming months. Each column shows money coming into and out of the business in that month. The forecast then shows the effect of each month’s cash flows upon the firm’s cash balance/total. It is like a mini bank statement. One essential rule when constructing a cash flow forecast is that money is shown when it is received or paid. The cash flow forecast will show if there is sufficient cash available each month. A negative cash flow in any time period will indicate that the company has insufficient funds. If the firm has an overdraft facility, this may be sufficient to cope with the period of negative cash flow. If not, preventative action must be taken quickly. Banks always request a cash flow forecast when considering an application for a loan from a new business, such as our restaurant. They do that in order to insure that the business: has enough cash to enable it to survive is able to pay the interest on the loan will be able to repay the loan is aware of the need for cash flow management.
Cash flow management is a vital ingredient in the success of any small business. For a new business, cash flow forecasting helps to answer key questions. Is the venture viable? How much capital is needed? Which are the most dangerous months?
Nevertheless, completing a cash flow forecast does not ensure survival. Consideration needs to be given to its usefulness and limitations. It must be remembered that cash flow forecasts are based on estimates. These estimates are not just amounts but also timings. The firm must be aware that actual figures can differ wildly from estimates – especially for a new, inexperienced firm. When preparing cash flow forecasts managers need to ask themselves “what if?” A huge mistake is to only look at one central forecast. Far better to look at best case and worst-case scenarios. Spreadsheet allow for easy manipulation of data. It is easy to see the impact of single and multiple changes to the forecast figures. This should help to reduce the risks. It does not guarantee results. Continual awareness of the economic and market climate is just as important as number crunching.
Notes to accounts
- Sales - these are the only receipts of the business.
- Purchases – purchases will be about 30% of the forecasted sales
About 35% will be cash purchases. This is because some of the products will be bought in small amounts and therefore it will be quite hard to get credit for these products. E.g. very expensive and old win
Other 65% will be credit purchases and will be allowed 2-month credit. Therefore there won’t be any credit purchases payments during the first two months.
- Rent – the rent for the restaurant will be approximately £90,000 p.a. as I stated above in the Marketing plan. It will be paid each month and includes rent of two floors as well as business rates.
- Loan interest – this will be 10% and will be paid monthly.
- Wages and salaries – have been estimated earlier in the Human Resource Section of Marketing Plan.
- General expenses – these are very small expenses which hard to predict for the first time.
- Wastage of materials – this is the expense of the products, which might become out of date and won’t be used in the future.
- Other expenses – these are expenses such as gas or electricity, which I predicted referring to the figures of other restaurants.
- Advertising – estimated in Marketing Plan section.
- Payments for property are split over three years and are paid on quarterly basis. Property is shown as a Fixed asset in the companies Balance Sheet and is depreciated on straight-line basis ( %5)
Trading and Profit and Loss
A profit and loss account is an accounting statement showing a firm’s sales revenue over a trading period and all the relevant costs generated to earn that revenue. By preparing P+L a/c it will be easier to obtain the loan from the bank or to get a credit for goods. This is because the creditors would want some proof that the business is capable of repaying loans. It also helps to plan ahead so the firm will know what to expect from the next year.
First Year of trading:
Forecasted Trading and profit and Loss a/c for the year ended 31 December 2004
Revenue 518,635
Opening stock -
Net purchases 155,591
Stock available 155,591
Less closing stock (4,034)
Cost of goods sold (151,557)
Gross Profit 367,078
Less expenses:
Lawyer’s fees 400
Wastage of material. 9,684
Depreciation on property (5%) 17,500
Registration 150
Rent 90,000
Appliances 7,650
Waitress wages 39,420
Accountant 4,164
Chefs and Assistants 55,188
Loan interest 15,000
Electricity 5,040
Advertising 19,575.3
Casual labour 13,140
Gas 300
Heating 584
Insurance 2,400
General expenses 3,600
Barmen 24,091.2
Total expenses (307,886.5)
Net Profit 59,191 . 5
Second Year of trading:
Forecasted Trading and profit and Loss a/c for the ended 31 December 2005
Revenue 570,503
Opening stock -
Net purchases 171,154
Stock available 171,154
Less closing stock (4,437)
Cost of goods sold (166,717)
Gross Profit 403,786
Less expenses:
Wastage of material. 9,684
Depreciation on property (5%) 17,500
Rent 90,000
Waitress wages 39,420
Accountant 4,164
Chefs and Assistants 55,188
Loan interest 15,000
Electricity 5,040
Advertising 3,800
Casual labour 13,140
Gas 300
Heating 584
Insurance 2,400
General expenses 3,600
Barmen 24,091.2
Total expenses (283,911.2)
Net Profit 119, 874. 8
Balance Sheet
Extracts of:
First Year of trading:
Forecasted Balance Sheet for the year ended 31 Dec 2004
Fixed assets Capital
Fixtures & fittings 350,000
- depreciation (17,500) Net profit 59,191.5
332,500
Long-term liabilities
Loan 150,000 Current Assets
Stock 4,034 Current liabilities
Bank 133,782.5 Creditors 17,064
Property(outstanding) 233,334
Second year of trading:
Forecasted Balance Sheet for the year ended 31 Dec 2005
Fixed assets Capital
Fixtures & fittings 350,000
- depreciation (17,500) Net profit 119,874.8
332,500
Long-term liabilities
Loan 150,000
Current Assets
Stock 4,437 Current liabilities
Bank 168,828.3 Creditors 18,770
Property (outstanding) 116,667
Ratio Analysis
The function of accounting is to provide information to stakeholders on how a business has performed over a given period. What is needed is comparative information. A way of judging a firm’s financial performance in relation to its size and in relation to the performance of its competitors. The method used for this called ratio analysis.
Financial accounts, such as the P+L a/c and the balance sheet, are used for three main purposes:
financial control
planning
Ratio analysis can assist in achieving these objectives. It can help different users of financial information to answer some of the questions they are interested in.
The main classifications of ratios are as follows:
Profitability ratios
Measure the relationship between gross/net profit and sales, assets and capital employed. These are sometimes referred to as performance ratios.
Activity ratios
These measure how efficiently an organisation uses its resources such as stocks or total assets.
Liquidity ratios
These investigate the short term and long term financial stability of a firm by examining the relationship between assets and liabilities. These are sometimes called solvency ratios.
Examines the extent to which the business is dependent upon borrowed money. It is concerned with the long-term financial position of the company.
Shareholder ratios
This group of ratios is concerned with analysing the returns for shareholders. These examine the relationship between the number of shares issued, dividend paid, value of the shares, and company profits.
- R.O. C. E. (Return On Capital Employed) = net profit/capital employed
Year 1 = 12.9%
Year 2 = 29.6%
- Net Profit Margin = Net profit/sales
Year 1 = 11.4%
Year 2 = 21%
These are two profitability ratios, which show how well the business has performed during the year. ROCE shows the percentage return from the capital employed within the business. ROCE increased, which suggests that the business performance is good and there is tendency towards stability.
Net Profit Margin informs as to how much profit is being made from sales. The higher the % the better the business has performed. NP Margin shows % increase, which again suggests positive future for the business if it is to be measured in terms of profits,
Liquidity
Current ratio: CA/CL
Year 1 = 0.5:1
Year 2 = 1.3:1
Liquidity is crucial for newly established business. Liquidity for the first year is quite low, however there is sufficient increase in the second year of trading. Results are close to norm and will improve when the third payment for property is repaid.
Gearing
Gearing = Long term liabilities/capital employed
Year 1 = 32.6%
Year 2 = 37%
This ratio focuses on the long-term financial stability of an organisation. It measures long term loans as a proportion of a firm’s capital employed. It shows how reliant the firm is upon borrowed money.
Gearing for our restaurant is considerably low, which is good as it attacks lower risks.
Break Even Analysis
Break-even analysis compares a firm’s revenue with its fixed and variable costs to identify the minimum sales level needed to make a profit. This can be shown in a graph known as a break-even chart.
Break-even point is the level of output at which total revenue equals total costs. At this level of output the business makes neither a profit nor a loss.
Break-even point = Fixed costs/Contribution per unit
Contribution per unit = Selling price – Variable Costs
Fixed costs for the restaurant are as follows:
Rent £ 90,000
Wages £136,003
Servicing of finance £ 15,000
£ 241,003
Considering the fact that the expense of running this restaurant will be around £241,000 then the total contribution is £241,000 in order to break-even.
The restaurant is working at 71% gross margin and therefore the contribution per unit would be 71% of selling price.
Break-even = 241,000/71% of price = £339,437
This means that in order to break-even the restaurant must have sales of £339,437 in one year or £28,286 per month.
£ Total revenue
Total costs
339 437
241 000 Fixed costs
Customers
Evaluation of break-even analysis
Break-even analysis is simple to conduct and understand. Also it is cheap and can be carried out quickly. It shows profit and loss at various levels of output, particularly when it is presented in the form of a chart. This may be of a particular value when a business is first established. Indeed it may be that financial institutions will require this sort of financial information before lending any money to someone aspiring to run a business.
Although it is a rudimentary technique, break-even analysis can cope with changing circumstances. We have seen that the technique can allow for changing revenues and costs and gives a valuable rule-of-thumb guide to potential profitability.
However, break-even does have some drawbacks. It pays little attention to the realities of the marketplace. A major flaw is that it assumes all output is sold. This may well be untrue and, if so, would result in an inaccurate break-even estimates. If a firm sells less than it produces it incurs costs without earning the corresponding revenue. This will substantially reduce profits. In times of recession, a firm may have difficulty in selling all that it produces.
Although break-even can cope with changes in prices and costs, in the real world such factors change regularly making it difficult to as a forecasting technique. Changes in tastes and fashions, exchange rates and technology are all examples of factors, which could invalidate break-even forecasts.
The model assumes that costs increase constantly and that firms do not benefit from economies of scale. Similarly, break-even analysis assumes the firm sells all its output at a single price. In reality firms frequently offer discount for bulk purchases. Finally, break-even analysis is only as good as the data on which it is based: poor quality data can result in inaccurate conclusions being drawn.