Profitability and possible success of a mobile phone shop at a new location
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Title: Profitability and possible success of a mobile phone shop at a new location To: Paco Bravo, Manager of Feria Fone SA From: Dennis Kirpensteijn Date: 14 July 2002 * Introduction This report is to advise Mr. Paco Bravo make a vital decision concerning his company. He owns various mobile phone shops in the south of Spain, in Estepona, the town centre of Malaga, etc. He is now considering the opening of another shop in the area between Malaga and Fuengirola, in Torremolinos, a town full of foreigners that move to Spain with a possible need to purchase a new mobile phone. The outcome of this report will show if it would be profitable to open the shop in that area, considering financial but also non-financial factors such as the existence of similar shops in the area, population, location of the shop, etc. The financial factors will be analysed by putting the financial information that is known already or has been predicted through a thorough ratio analyses process. * Research Question: Is a new shop in the Torremolinos area likely going to be successful and profitable?
multiplied by 100, = 41, 7%= 42% Liquidity Ratios * Current Ratio: this basically shows what relationship there will be in between the current assets and the current liabilities. Current Ratio- Current assets divided by current liabilities, =2, 38 =2, 4 * Acid Test Ratio: this analyses the relationship between current assets and current liabilities not including stock as an asset, giving more reliable data than the current ratio. Acid Test Ratio- (Current Asset minus Stock) divided by Current Liabilities, = = 1, 19= 1, 2 Payback Period In order for the shop to be efficient, the payback period should not exceed an overall period of 4 years. The total amount invested in the shop is of 31,450,000 pesetas, and the expected average income every year is of 17,200,000 pesetas the first year; 17,400,000 pesetas the second year; 17,600,000 pesetas the third year and 17,800,000 pesetas the fourth year. Year 1: 31,450,000-17,200,000 = 14,250,000 Year 2: 14,250,000-17,400,000 = (1,350,000) As you can see, the shop is likely to be very efficient and successful, as the amount of money invested will be recovered in less than two years.
The different ways are either, renting, buying or leasing the new location. Generally, the best way would be to rent the place with the option of buying it. This is therefore recommendable as, when the shop works well, then the location can be bought and counted as sure income with minimum expenditure on premises. If the business turns out not be profitable then the shop can simply be closed again and without having to carry the burden of trying to sell and maintain a property or fulfil a minimum leasing term, spending money in a useless project. It is also highly recommendable to consider the opening of the shop as soon as possible, taking the opportunity of the brilliant location of the shop. In order to fight and possibly decrease liquidity problems the solution would be to stock less phones and aim to keep the stock level at its minimum practising a JIT system of stocking, which would also be useful when considering the fast rate of change of technology where a completely new phone today might be worthless tomorrow. Really this is the only answer to Paco Bravo's problem, who would loose out by not setting up the shop, gaining not only money but also new clients and the satisfaction of current clients.
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