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ITeaLongue Business Plan (Part 2)

Alex Vydrin
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Part 2. Table of contents
-------------------------
Operating plan
Geographic location
Computer Equipment Requirements
Management Team: Roles and Responsibilities
Risk Assessment
Financial summary
Summary of Key Financial Ratios Profitability
Liquidity
Financial Leverage
Asset Utilization
Cash Flow
Break-even analysis


Operating plan


Geographic location


The location of our I-Tea Lounge will be in the Mermaid Waters area, situated in a small commercial shopping and office center on the intersection of Markeri Street and Sunshine Boulevard.              












The reasons for selecting this location includes proximity to a large pool of our target market (as previously discussed in the market research) and easy access for our customers. Surfside buses stop near our location on a regular basis. The location is also close to the major shopping centers of Robina Town Center and Pacific Fair. The size of the premises will be approximately 120 square meters, with the monthly rent being $1200.  This is a highly centralised location, also being adjacent to the Gold Coast highway.

Computer Equipment Requirements








Computer Hardware

14 systems each with the following:

<      Celeron 700 Mhz processor

<      64 MB RAM

<      10 GB hard drive

<      48 spd CD ROM drive

<      15 inch monitor

Additional Items

<      Data projector

<      Printer


Software

<      Windows Millennium X 14

<      Microsoft Office X 14

Network cables and fittings

<      40m of cable + switch

<      14 network cards

<      Internet connection


Refer to Appendix J for prices for computer equipment and also for other equipment required in the set up of the business.

Refer to Appendix A for proposed layout of the premises.

Management Team: Roles and Responsibilities












Derryk Xxxxx

<      Running day to day operations

<      Setting class sessions

<      Taking bookings from customers

<      Quality control

<      Problem-solving

<      Teaching/Tutoring


Adrian Xxxxx

<      Coordinating the market marketing mix

<      Monitoring competitors behavior

<      Teaching/Tutoring

<      Development of new courses


Paul Xxxxx

<      Coordinating computer hardware and software set-up

<      Connecting and installing network and internet

<      Teaching/tutoring sessions

<      System maintenance/troubleshooting


Kris Xxxxx

<      Financial Administration

<      Taxation requirements

<      Budgeting

<      Teaching/tutoring


 


 


 





Risk Assessment


As with any opportunity, risk is raised when we try to predict the unknown. The hardest prediction is calculating sales forecasts because there is no sales history to project off. To increase the reliability of our forecasts, two methods are used for a comparison. First we observe the approximate sales of our most similar competitor. This can be achieved by observing their level of patronage throughout the day and recording the number of customers and how long they stay. The problem with this method is that it is measuring an established business therefore the figures may be more relevant for years 2 and 3. Also we are following the consumption habits of those who may not reflect the habits of our potential customers. Our customers have quite a different profile.

The other approach used for projecting the sales forecast is to identify our maximum sales potential. It is possible for this business because our number of computers limits our income. The maximum sales units per day equal 9 hours x 12 computers, or 108 computer hours.

Once both projections are made, divide competitors approximate sales by maximum sales. This ratio shows the percentage of maximum sales required to equal the competitors sales ($3000/ $6000 = 50%). As shown in the cash flow projection, this ratio is used to scale down the sales for the start up period (15%, 25%, 30% etc).

Our competitors’ response to our conception may be quite placid due to our location and target market. They may not consider us a threat. However, our competitors may become aggressive in the market place. This may be in the form of special marketing strategies that focus solely on our target market - discounts to holders of senior cards for example.

An area that presents risk is the ever-changing computer technology. This unstable technology posseses a risk in a number of ways. New software is introduced and upgraded all the time. This can happen so fast that by the time a training course is designed and held, we train our staff and design classes, our customers want to learn the next version.

An advantage of the four-person partnership is that finding skilled staff will not be an issue as there are always 2 back up partners who can fill in for the others. If required in the future, suitable staff can be recruited from employment agencies, as they would only need average computer skills and excellent people skills.

 





Financial Summary


Summary of Key Financial Ratios








































Ratio


Year 1


Year 2


Year 3


Net Profit Margin


0.43


0.58


0.58


Return on Equity


1.22


1.13


1.05


Cash Ratio


1.34


0


0


Total Asset Turnover


2.01


1.96


1.82


Total Debt to Assets Ratio


0.24


0


0


Profitability


Based on the projected sales figures and expected level of expenses, I-Tea Lounge makes a healthy profit of $41,947 before drawings for the first year of operation. The expected drawings are expected to amount to $43,200, which will create a real negative profit, which will reduce the level of owners equity as seen in the balance sheet (Appendix). Into the second and third years, the expected profit before drawings increases substantially, and this is reflected in the increase in net profit margin ratios from 0.43 for year one to 0.58 in years two and three. These ratios are extremely healthy, and even taking into consideration budgeted drawings from the profits are above industry averages. This is mainly a result of the opportunities mentioned in the market analysis.

Liquidity


From a liquidity perspective, the I-Tea Lounge is in a healthy condition. The only current liability the company has is the 1-year loan for the $25,000 for purchase on the computer equipment. This generates a first year cash ratio of 1.34, which means for every dollar of current liabilities we have $1.34 of cash. From a short-term creditor perspective this is extremely healthy.

Financial Leverage


I-Tea Lounge employs a high level of equity funding. The only debt taken on is the loan for computer equipment in the first year. This is reflected a Debt to Assets ratio of 0.24 in year one, which moves to zero for years two and three because of the aggressive repayment of the loan resulting in I-Tea Lounge being totally equity funded.   From a creditors perspective we are in a good position to utilize untapped buying power if the opportunity arises to acquire assets that can generate additional income. This gives us a high level of flexibility in our dynamic market.

Asset Utilization


Because of the nature of our business, our asset utilization will be high. Our main assets are our computer equipment and furniture, and these assets are essential to provide our service, so all sales are directly derived from them. This is consistent with our Total Asset Turnover ratios of 2.01, 1.96 and 1.82 for years one, two and three respectively. The decreasing value of our assets relative to sales due to depreciation is reflected in the slight decline of this ratio.

Cash Flow


I-Tea Lounge’s cash flow situation is very healthy. This is mainly due to the high level of cash injection from the partners during the first month of setup. During the first quarter of the first year, I-Tea Lounge generates a negative cash flow from operations, which is due mainly to the slow and staggered level of sales as outlined in the sales forecast. This early negative operational cash flow combined with the negative cash flow from non-operating sources due to the loan repayment results in the I-Tea Lounge not generating a positive cash flow until January 2003 or seven months after opening. This factor was taken into consideration when deciding on a level of equity investment from the partners. No additional cash will be required from external sources, which saves the business in terms of interest and other associated borrowing costs.

The second and third year cash flow is very healthy due to a stable level of sales and no debt repayment requirements. The cash flow generated from the business for year two and year three is $10,768.

Break-even analysis


As shown by the following graph, the break-even point for the I-Tea Lounge will be at a level of 7606.5 annual usage of computer hours.

width=400 src="BPlan/img003.gif"> 


This is based on the total annual expenses being $85,953 and a weighted average contribution margin of $11.11. The weighted average contribution margin is based on the sales mix of 63% of usage time available for general internet access at a rate of $10 per hour, and 37% of usage time available for tutorials at the rate of $13 per hour. The break-even point of 7606.5 represents approximately 22% of total potential computer usage capacity. In year one I-Tea Lounge is expected to have a total annual usage of approximately 8350 computer hours, resulting in a profit of $41,947. We expect a higher usage level for our primary, tutorial operation than we do for the general Internet access.


       Appendix A


Layout of Premises


 


 


 


 


 


 


 


 


 





Appendix E


Brief Resumes


Derryk Xxxxx


I have recently completed a Griffith University Business degree majoring in Management. Before studying full time I was employed on the Gold Coast in the automotive Industry as an assistant manager. Duties included general daily operations management. Duties included staff supervision and training, operations management, inventory control systems and budgeting.

My previous experience in management combined with my dedication to total customer satisfaction will be very useful in running the day to day operations of the I-Tea Lounge.

Paul Xxxxx


Having recently completed my business degree, while still having a year remaining to complete my information technology studies I will be able to provide essential technical knowledge and skills to the business. I will be highly involved in designing the topics and material covered in the tutorials, as well as creating and maintaining our own web site.

Due to my five years in the customer service industry, I am well equipped to deliver exceptional customer service. My major responsibility will be the technical side of things, including network maintenance and workstation integrity. I will be responsible fore both hardware and software upgrades, and general trouble shooting within the system network. I personally enjoy the information technology industry, and I will relish the chance to apply my business skills while simultaneously gaining practical experience that relate to my studies.

Kris Xxxxx


Being responsible for the book keeping and accounting of I-Tea Lounge will allow me to use my management and accounting skills to ensure the financial stability, and growth of the business. Having a Bachelor of Business majoring in business management and accounting, combined with my experience with small business operations and to a lesser degree financial planning will help me contribute to the success of I-Tea Lounge.

In conjunction with the other three partners I will work hard to not only develop our service to a high quality and reputable standard, but also to continuously improve the system that delivers the service to the end user. Personally I consider the system just as important as the service itself, and will contribute a lot if energy towards this belief.

Adrian Xxxxx


Having recently completed a Bachelor of International Business, I have a broad range of business skills that include accounting, economics, finance, marketing and management. I have worked in my parents clothing retail outlet for a number of years, and have developed a keen sense of what consumers want.

In my role I will enjoy the chance to create innovative and effective marketing strategies that will greatly benefit the business.  Also I will be able to utilise my small business skills in developing new courses that will be extremely applicable to the dynamic industry we operate in and provide maximum benefits to our customers.

 





Appendix F


Time-Line of Major Events


 


June 2002:                    Equipment, legal, financial requirements finalized.

July 2002:                     Setup requirements paid for, doors open first sales

August 2002:                First monthly profit before owner’s drawings

October 2002:             First time positive cash flow generated from operations

November 2002:          Level of owners equity bottoms out and begins to increase from this point on.

January 2003:               First positive total monthly cash flow.

June 2003:                    Final loan repayment for computer equipment

            Net Profit before drawings of $41,947.



June 2004:                    Net Profit before drawings of $49,968.

July 2004:                     Additional $5000 invested for computer equipment        upgrades.

June 2005:                    Net Profit before drawings of $49,968.



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