Cyber Cafe Business
The Business Proposal
The business I am going to set up will provide a service to local community through an Internet cafÃ©. My cafÃ© will be located in Rotherham and will provide a service to nearby locations such as Sheffield, Doncaster and Barnsley. The reason why I chose Rotherham, as my location is that even though there are some competitors I believe that there is enough room for one more Internet cafÃ© to increase the competition. Another reason for the location in Rotherham is that it is close to where I live so it will be easier for me to run and manage the business. I know the market trends of this area so that is also a benefit. I will be concentrating on introducing unique new things into my business, which can include different type of services given in business, as well as introducing a new franchised Muffin Break coffee bar. Introducing a franchise means I will have an established business and already developed products and services to sell. This is a new thing and no other cyber cafes around Rotherham have got franchise so that will be a unique plan for my business to attract more customers.
The cafÃ© will incorporate a franchise business in my cafÃ© to provide customers with food and drinks to make their time worthwhile. The sort of business I am looking to introduce is Muffin Break. This business layout signifies an opportunity to own and operate a proven business with reduction in financial risk. There is no need to spend time or money developing products because ranges of products are immediately available to you. Development of product is also taken care of. As training and business advice are already available in a franchise system, a strong understanding of this particular style of business is not vital. A franchise system gives you the benefit of being part of a larger organization, increasing credibility in the consumer environment. These benefits themselves will not guarantee success; however they are striking compared to the risks associated with starting a totally new non-franchise business.
Another advantage of having a franchise business in my cyber cafÃ© is making the surroundings more relaxing and comfortable for customers. Cyber cafes are not usually relaxing atmosphere around Rotherham area but coffee shop will appeal to people and that can make my cyber cafÃ© unique.
My target market will be a wide variety of people, from teenagers to much older people using the Internet cafÃ© for research. I predict that the ages will vary from 18 to 50. Competition will affect my market share and I will have to provide a selling point/differentiation to my business in order to succeed. There is massive potential for the Internet and is only going to grow in the future so that is a positive in my business.
The aim of my business will be to become the biggest Internet cafÃ© in Rotherham and the surrounding areas. To achieve this I will have many objectives and strategies. The main objective for my business would be survival at first, then going onto profit maximization after the survival period. I would be quite happy if the first few years were not great in terms of profit but that I made enough to survive. Then eventually as word of my business got around through heavy promotion and the high quality of service I would expect a profit. Also this would allow me to get credit off the banks and take a few more risks and expand my business.
This would then lead to profit maximization and then to increasing market share which would also be growth for my business. I would do profit maximization and growth through promotional offers, advertising and expansion of the business and also look to offer more services and change to better suppliers. Producing a high quality service will be of great importance and I will do this by having a supportive workforce and smooth running of the business. Also I would try not to make process of starting a membership in my Internet cafÃ© too complex, as this would drive potential customers away. Instead my Internet cafÃ© has to appeal to a broad audience to guarantee maximum profit. Profit is essential to my business as without it I would find it difficult to expand, pay wages and invest in better technology.
By franchising I will make a cut profit of another business without worrying about setting it up or running it. However one disadvantage I will have to keep an eye on, will be that the franchise business does not destabilize my business through poor quality. Looking at the Muffin Breaks previous successes as a franchise business will not let me down and definitely play a key role in making my business a more successful cyber cafÃ©. As a sole trader who will have to invest in a big workforce this could be a better option for me instead of starting up more businesses. This would be a big investment and I would also have to develop a skilled workforce. The disadvantage of that is that my workforce could take their skills elsewhere and work for a rival business and become a competitor to me. Eventually if all the business went well I would make some charitable or environmental objectives, also I may do this earlier if my business was going badly to generate some good press. These aims will change over time due to business needs. My objectives and strategy have to be SMART. This means specific, measurable, agreed, realistic and time bound. My aim is to make my Internet cafÃ© profitable by 2010 after starting in 2007. Eventually I would look to expand from the year 2013 onwards.
The main objectives of my businesses are survival, increasing market share, growth, profit maximization, producing high quality goods/services, providing services to the community, developing a skilled workforce, and charitable or environmental objectives.
Survival is the term used when a business is just generating enough to pay its day-to-day expenses for the next economic year. This is an essential step for first time businesses but may also become multipurpose when a company has a bad year and its forecasts are low. To be able to survive for the next year when they can return to profit is very important. An example of this is British airways. When September the 11th took place British airways nearly went into liquidation due to the lack of customers and delays. However because they changed there objective for that year into survival they survived for the next year. If they had not taken that objective they would have likely gone out of business.
Growth is similar to increasing market share although it applies to small business a little more. Growth for these could mean various things, such as making a little more profit, increasing the stock, or expanding in facilities. An example of this is Jackson’s. This started out small and has now grown quite significantly. I also have this as my key aim and will concentrate on increasing stock and introducing new services to the customers as my business get established.
Producing high quality service, maybe upgrading suppliers in the future
Heavy promotion and advertising
Reliable and quality renowned suppliers
Quality image portrayed throw premises
These aims will change over time to various factors such as business performance, market trends and self-ambition
Equipment & Machinery
For my first piece of machinery I will need the most important one to my business, the computers. I have decided that the PC’s have to be high tech but that I have to find a balance between this and the price. Because I am buying 25 PC’s I can’t afford to spend lavishly as it would eat into my budget. However it is possible I will get some sort of discount if I buy in bulk like I am going to do. I was considering investing into Apple imacs, however considered to myself that the majority of people have Microsoft software enabled machines and thus may find the Apple Imacs too alien and this would destroy my business. So instead I have gone for the tried and tested formula and gone for windows operated systems. However because I want to portray an image of a state of the art Internet cafÃ© I will invest in 5 Apple imacs, thus giving a broader range of PC’s and also making my Internet cafÃ© look high in stature. I will invest in TFT monitors as this is now the trend and this will make the Internet cafÃ© look professional. I will be keeping the Apple imacs separate to the traditional windows PC’s and will make the area look different to make it stand out. It will be a kind of showpiece for my Internet cafÃ©. I will also have to buy slightly extra just in case some develop faults, which will be likely. I will get good warranties for these products and will not have to pay out of my pocket for repairs which could be costly and time consuming. I will also need two quality printers, one that prints in colour and one in black and white. Within this I will need paper and ink cartridges as well.
I will also invest in two paper shredders to make sure the cafÃ© does not get messy. For the printers I will charge fees to the clients, as ink cartridges are expensive. Some more machinery that I will invest in will be mainly for the Muffin break area and will compromise of a big double size fridge, a microwave, 42 inch plasma for live sporting events, a boiler to keep the internet cafÃ© warm and hot water running, security systems to protect my internet cafÃ© such as CCTV, and burglar alarm. I will also need a van and this will be my form of transport to and from the business. I will also use this van to carry out home repairs on computers and also to buy stock for my business and any other additional needs. I will buy a used van to keep costs down but will have to ensure it is a reliable make. I will also need tills and I expect to buy two of these. Another vital piece of machinery will be the coffee maker. This will be a high quality machine to make sure it offers the best coffee possible. Hopefully then I can make sure the customers stick with me and I get a good reputation. It is likely that I will invest in two vending machines also, one that has snacks on offer and the other a drinks machine.
In my analysis folder you can see these products in more detail, the price that I will be buying them at and a explanation on why they are needed. This will help me in my financial forecasts. Also by looking at the physical resources that I will buy in analysis folder you can get a view on how I want my internet cafÃ© to look and style that I want it in.
Below is a list of all the machinery I have considered.
Item Description Quantity Item cost Discount Total cost Supplier
1 PC basic 20 399.99 500.00 7498.9 PC World
2 Van 1 1250.00 0.00 1250.00 Autotrader.co.uk
3 Apple Imac 5 950.00 500.00 4250 PC World
4 Boiler 1 429.00 10.72 429.00 B&Q
5 Surveillance camera 1 269.80 6.74 269.00 B&Q
6 Security alarm 1 150.98 3.77 150.98 B&Q
7 Fire extinguishers 2 24.98 1.24 49.96 B&Q
8 Fridge 1 699.00 17.47 699.00 B&Q
9 Plasma TV 1 2400 0.00 2400 Sony
10 Cooker 1 1039 25.97 1039 B&Q
11 Dishwasher 1 304.49 7.61 304.49 B&Q
12 Microwave 1 59.95 14.98 59.95 B&Q
13 Vending machines 2 500 0.00 1000 www.expressvending.
14 Server 1 246.00 0.00 246.00 PC world
15 Coffee machines 2
199.98 25.00 399.96 Tassimo.co.uk
16 Tills 2 176.24 50.00 302.48 www.offer.co.uk
Total Total Total Total Total-Discount
43 8060.17 1137.53 19309.6 18172.07
* I will receive 2.5% trade discount from B&Q on all purchases as I am buying in bulk.
For equipment I will need 25 mouse mats, 25 web cams, 25 headphones, 25 mini fans that will be sat next to the computers to provide the customers a nice environment, kitchen utensils such as dishes, and cutlery. Also I will purchase bins to keep the Internet cafÃ© tidy. I will also need an A4 laminator and A4 trimmer. I will also invest in a safe to keep peace of mind and to guarantee information is not lost. Once again this is the part people do not consider in their budget and the reason why they overspend. I will also be spending on broadband Internet and want to get a 10MB connection to make sure all the computers run smoothly. In analysis I have listed this equipment and shown the prices so that I can work out a final total. Also I have given reasons why I will need this equipment. Below there is a table summarizing the equipment that I will be purchasing.
Item Description Quantity Item cost Discount Total cost Supplier
1 Headphones 25+ 9.99 5.99 239.75 Argos
2 Lamps 5 34.99 4.37 174.95 Argos
3 Paper shredder 2 39.99 1.99 79.98 Argos
4 Printer 2 175 8.75 350.00 Argos
5 Laminator & A4 trimmer 2 50.00 2.50 100.00 Argos
6 Luxurious bin 4 61.60 6.16 246.60 Argos
7 Mini fans 25+ 12.42 7.76 310.55 Argos
8 Safe 1 199.98 4.99 199.98 B&Q
Total Total Total Total Total-Discount=
66 583.97 42.51 1701.81 1659.30
For stocks I will mainly need stocks of ready made meals and food for the mini eating area. Also I will need large amounts of coffee stocks. Eventually I will have a mini PC store and for this my stocks will have to increase. I will then have to have stocks of computers, their accessories and their software. Also any other additional computer related hardware I would have to stock up also. I would then have to get stocks for items such as paper, pens, ink cartridges etc and make it a sort of a mini PC world shop.
Item Description Discount Total cost Supplier
1 Coffee stocks 17.50 100.00 Makro
2 Food stocks 87.50 500.00 Makro
3 Stocks of computer hardware and software 175.00 1000.00 PC world/Makro
4 Stationary 26.25 150.00 Makro
Total Total Total-Discount=
306.25 1750 1443.75
* I will be buying stocks from makro, where once I become a member I will be allowed to have 17.5% off in the form of VAT. This is because I will be buying in bulk.
For my Internet cafÃ© I will need workforce for the various aspects of my business. The first employee will be under the title of computer engineer. This will be a cousin of mine who has 6 years experience in fixing and repairing computers. Because the work of this is high skilled I will have to pay him slightly more then the average pay. One advantage for him will be the hours he will have to work. He will only have to come in when there are computers to be repaired or computers to be set up. So his hours will be varied and this will make him less stressed and hopefully happy with this business. I expect to pay him £7.50 per hour and believe he will input 24 hours a week into the business. This will come up as £8640 per year.
Another employee I will need is a general person to keep a lookout in the Internet cafÃ© and this will be my brother. I will pay him 5k and his hours will also be varied although I expect him to attend Monday to Saturday. His job will be to make sure the customers are happy and are getting the service they require. Another job will be making sure he gives a professional image to the Internet cafÃ© and keeps the place in tiptop shape. For all these human resources no training will be required as they have the necessary skills and this will cut down on costs for me. The overseeing manger will be me and my job will be to make sure everything within the business runs smoothly. This will include doing the accounts, organizing promotional activities, making improvements to my business, making sure the employees are doing there jobs, paying the bills and making sure the business is making a profit and if not making quick decisions on how to rectify the problems. My aim is to create a harmonious atmosphere amongst the work force, as I believe this will impact on the service to the customers. I will pay out bonuses if work is done well and also be lenient towards the staff. There is a possibility that I will need extra human resources in the future and for this I will once again look into any available family members. If there are no available family members left then I will look outside in the employment sector for additional staff. The combined total of all the wages will be £23 640. This will not be a start up cost, it will be a running cost so I would be paying £1970 per month.
Below I have listed the people I will employ and the wages I expect to pay.
Title Duties Total per annum
General Engineer Computer expert 8640
General worker Customer service 5000
Ahsan Kaleem General manager 10000+
Sum total 23640
My franchised business will be separate and I don’t have to worry about employing staff as it will automatically be done through Muffin Break.
Form of Ownership
My business is in the private sector as I am the sole trader. I will be heavily involved in the day to day running. There are also many advantages such as being quick and easy to set-up and more self-fulfilling. Another advantage of this is that I will be in control and make the decisions. This would mean I get to keep the profits and decide what I spend it on and also there will be no arguing as I will be responsible for everything. As a sole trader I will be taking limited liability. This means that I will be obligated to pay the amount that I have invested into the business, which seems fair.
The amount of owners in my business is one as I am the sole trader. I will however be employing staff to maintain and offer customer service at my Internet cafÃ©. The profits will go directly to my bank, although I will have to pay wages, bills, maintenance costs and other bills.
Because I am the sole trader the costs of setting up will be higher for me as I am the only one providing the funds. However the legal requirements will be less for me, so will the ease of setting up.
Another option I could take is a partnership. The advantages to this are you can share skills and expertise, can share the workload, ease of cover whilst on holidays, and significantly easier to raise capital. These partnerships can be very successful, however you need to have partners, which you can put your faith in to make it work. If you don’t trust and fully understand your partners it can go very wrong. Disagreements, slower decision making, legal requirements to start up, unlimited liability, and limitations to capital raising are all disadvantages. For my business I believe sole trader will be better then a partnership as it is quite a small business. Maybe in the future when I want to expand my business I will think of making a partnership with someone.
One interesting business solution I am looking at is something called incorporation. It basically means that if things wrong in the business, the business will be sued but not the person’s assets. It has limited liability thus meaning it encourages shareholders to invest. The reason why they invest is that the losses will be very little compared to what they invest so for them it is a good business proposition. To become an incorporated business you have to register with the register of companies and sign a memorandum of association and articles of association. This then makes your company a LTD, limited company. This is certainly something I am looking to do and something my uncles have done in their businesses. However there is a slight disadvantage and that is by investing in shareholders they could take you off the board if they are not happy with you performance. For me it would be my family and friends who would have the shares so this would not be the greatest of problems. The shares cannot be sold on the stock exchange and the amount of capital investment is limited to 50,000, which should be enough for me. However growth could be restricted and the company accounts audited and is more complex to set up. For these reasons I have decided that I will start off as sole trader and then eventually become a PLC although if my business is doing well as a sole trader I may not see the benefits and decide to stick with what I am doing.
The difference between a PLC and LTD is that in a PLC stock shares are available on the market and decisions usually go through the board, whereas in LTD it is a private company and shares are not available on the stock exchange.
My business will be located in a position where there are a lot of customers but also not too much competition and more importantly where rent is not too high. I have chosen Rotherham as my primary location for the business.
The property I considered was the one pictured below Riley’s snooker club and beside RCAT College. The location of this premise is superior, as more people would pass this Internet cafÃ©, thanks to Riley’s and RCAT. This I believe would mean more business and it would give my business a more prestigious image as it is set beside Riley’s and RCAT. Also the amount of space is perfect although I will re fascia and re design the front to give it a higher image and make it look like an Internet cafÃ©. This would cost in the region of £1000. Another advantage is that the premises are not on rent but on for sale for the price of £20 000, which is quite a coup.
The most important of my concern is that the nearby RCAT College could work against me, as some students will just decide to go there, as it is free. I will have to combat this by making my Internet cafÃ© a cool place to be and offer other services that are appealing.
I also had to weigh up numerous factors such as expenses, amount of exposure to the people and which one had the most potential. The property has greater potential and will be with an upmarket business in Riley’s and also will target a similar age group of people. This should generate more sales. Another vital advantage is that the property was on for sale and not for rent. Considering that the sale price was cheaper then the annual rent price of the other property it was pretty obvious which was the better financial option. This was a massive factor in making my decision, as being able to buy the property out right is a massive bonus as you can then be sure you will not be driven out of the premises in the future. Also because the actual buy out price is quite low there is not much risk involved.
I will as stated in the earlier part of my coursework try to strike up a friendly but working relationship with the owner. Another problem is that mostly teenagers hang around this area and this could drive away some older potential customers. Thus I will have to have a zero tolerance regime and may separate out the computers for the customer’s enjoyment. Another advantage I liked about this property is that it is on a corner and if designed correctly could become a nice looking property with wow factor, which would make my business look very upmarket. Below is a table summarising the amount I will pay for the property. This is a start up cost. I will have to put down a deposit for the mortgage, which will be the amount of 2-3 months in advance.
Property sale price £20 000
Redesign of exterior £1000
Sum total £21 000
For my business and better understanding of the surrounding areas and Rotherham I have noted down some key points that will have to be considered. I got this information off the Rotherham Council site and is called Rotherham in Focus. It gives a better understanding of demographic trends.
Rotherham and Sheffield have strong links in terms of workforce and many workers come to Rotherham from Sheffield and vice versa. Rotherham’s employment has been increasing dramatically since 2001 and this is a good sign for my business. In 2005/06 there were 1600 job announcements. The economic inactivity remains below average. 2003 also saw the number of VAT registered businesses increasing. This shows that more businesses are making a greater profit.
Another important factor to consider is the population of Rotherham and this will affect my business profits and sales. The population of Rotherham had been declining but recently it has been increasing although lower then the national average.
My target market will be a wide variety of people, from teenagers to much older people using the Internet cafÃ© for research. I predict that the ages will vary from 18 to 50. There will be two groups within this. One will be the younger generation where they understand the ability to use a computer and this group will include such people as students and businessmen. The second group will be the older generation where they don’t have the ability to use a computer.
Here is the breakdown of its target market.
Costs of physical resources
Now that I have chosen my desired property and listed all the machinery, fixtures and fittings, equipment and stock I have to work out the total this will come to. However it is not as simple as that as there will be additional costs that I will pay on top of the buy out price on my premises. These include council tax, tax on yearly earnings, VAT on most purchases, bills such as water, gas, electricity and also additional costs such as the business rate, which will be quite considerable as I am in the middle of town and also other costs that will only be found when I have set the business up.
Below I have made a prediction of how much it will cost to run the property for one year.
Here I listed the amount it will take to get the business up and running. This is pretty accurate, as I have got the actual prices for the physical resources that I will be buying.
Start up finance required
Buyout of Property + redesign 20000 + 1000
Working capital 5856.60
Sum total £49618.01
Sum total £35140 per annum
Total per month £2928.30 per month
Start up costs will be capital and running costs will be revenue. It is important to differentiate between the two as running costs I will have to pay on a yearly basis, and thus my business must make more then this amount per annum. Capital I will pay over a period of 5-10 years in the form of loans. I have entered a slightly different sum total for start up finance costs, as this will leave me some reserves for safety.
TQM (Total Quality Management)
Total quality management is a whole organizational approach to quality. It is always a philosophy and not a method or a management tool. For this it is necessary that everyone in the workforce contribute together to ensure quality within the business. Also this is about building quality rather then inspecting it. For a company to take this approach they would want a reputation for quality. They would have to then ensure that they incorporate training and that a strong culture is developed. The benefits of TQM include job security, having a competitive edge over the competitors, job satisfaction and the benefits and as a result increased profit and revenues. However there are also disadvantages such as costs, bureaucracy and the fact that it needs a lot of commitment from the outset.
My Quality control methods
For my business it is likely that I will consider the approach of quality control as my standard of quality throughout the business. This means I will have to go through a process of firstly trying to prevent the faults, trying to detect them if faults occur, finding a correction and finally leading onto an improvement. For my business faults could be checked by inspection which will mean to inspect the final product which in my case will be the physical resources such as computers. The suppliers will usually carry this out, however to ensure that quality is within my store I will do a self-inspection where I test and try to locate faults. Another method I could use is statistical analysis where I could see the product I am buying and weather it has a good reputation. Also market research is similar to this where I could carry out some research to determine weather the product is safe to buy. Also I will consider quality assurance, as I will be aiming to provide and keep providing a quality service. This means I will have to invest in quality suppliers, have a committed workforce, and to have good quality advice. Also I will be buying from suppliers with quality recognition in the form of ISO 9000. I will also have to locate alternate suppliers just in case of an emergency. There will also be a need for continuous improvement and quality within my business as needs of the customers and market trends will change. All 3 stages of quality control will be important to make this a success. The aspects that my business will have to continually improve will be customer satisfaction, the actually deliverance of the service of my Internet cafÃ© and quality of products where I will have to keep up to date, particularly the computers. Once a month I will hold a meeting with my workforce to determine what changes we could make to make our work and the service of our Internet cafÃ© better.
To ensure that my staff do provide a good service I will supervise them at first, but most importantly get them all to sit down before the business starts and ensure they understand the aims of the business and how we are going to ensure quality. To monitor the customer satisfaction I will provide surveys and suggestion boxes once a month.
To implement Quality control within my business I will have to consider a various amount of issues such as costs, training, time that will be taken up and the fact that changing to a culture of business will be difficult as change always is in business. However the advantages are well worth it as it has been proved that the benefits have included increased competitiveness thus increased revenues, enhanced image and the fact that the workforce moral could be raised higher.
Now I will go onto constructing a break-even chart, which will identify my break-even point and my expected margin of safety. This will be created after I have investigated my firm’s fixed costs, variable costs and a realistic price of my service. My fixed costs will be the amount I will be paying monthly for services such as employers and expenses such as bills. This comes to the total of £35140 per annum as shown above. It will be important that my business makes more then this amount just to make sure it does not make a loss. I will also be able to show the margin of safety, which will be the amount of sales that I will get after breaking even. This will be in shown in my break-even chart.
The variable costs are costs that will vary with the business. So in my case if I was to increase the amount of customers coming into my business the variable costs would go up. My variable costs are likely to be the amount of stocks I hold and the amount of computers that I will use. If I will need to invest in more, then my variable costs will go up. To calculate my variable costs I must consider the amount of electricity the computers consume and how much they cost within one hours usage. Below I have done this and calculated how much I need to charge to cover the variable costs and the fixed costs. I must make sure that I can cover all my costs and also undercut local rivals, or maybe slightly charge more as I am offering high quality services.
Once I have done this I will be able to work out my contribution, which is difference between the revenue per unit (amount made) and the variable costs (the cost of the unit in my case computers). This calculation will be used to create my break even. The formula for this is selling price per unit-variable cost per unit. So for my business this translates to the amount I will receive per hour from use of a computer take away the amount it will cost to run that computer per hour. This will be my contribution per unit.
To calculate a realistic price point for my service I had to look at the competition and my fixed costs, as I had to make sure I went above this figure. I had a rough estimate of what I was going to charge, however I had to make sure I was going to price my service competitively. So I did some research on Internet cafÃ©’s to determine what they charged and how and I have included a piece of research in analysis, which I used to construct my prices from. My prices are lower then the ones in my research, as I want to start off with a lower price to encourage consumers and then eventually start upping the price.
Standard session Standard price
5 minute quick check 25p
15 minute session 75p
Half hour session £1.00
One hour session £1.50
Above One hour £2.00
Internet access 50p
Printing per page 10p
Below are prices for food for the Muffin break. I will not be including this in the financial section, as it is relatively separate and not the primary basis of my Internet cafÃ©.
Hot snacks Drinks Cold snacks
Two slices toast 60p
Toasted teacake 60p
Bacon roll 95p
Beans on toast £1.00
Cheese on toast £1.30
Bacon sandwich £1.40
BLT (bacon, lettuce & tomato) in a bap £1.50
Jacket potatoes from 12:00 to 2:00 pm only
Plain jacket potato with butter and salad garnish £1.25
Tea (mug) 30p
Coffee (mug) 50p
Filter coffee 80p
Hot chocolate 65p
Cup a soup 65p
Fruit Juice 40p
Canned drinks from 60p
Cakes from 50p
Sausage roll 65p
Rolls from 75p
Cornish pasty 85p
Sandwiches from £1.00
Ploughmans snack with cheese, pickle and salad £1.75
Ploughmans snack with pork pie, pickle and salad £1.75
My opening hours will be Monday to Sunday 10am-6pm. I will be offering memberships to encourage repeat customs and also make my Internet cafÃ© more accessible to people. Below are my membership plans.
Membership type Cost
5 hours £5.00
10 hours £10.00
15 hours £15.00
Unlimited for one year £25.00
Below I have listed my totals for fixed costs, variable costs, contribution and also a break-even chart to show my proposed financial situation of my company.
Type of cost Amount
Fixed Costs £4.35 per hour (£35140/12/4/7/24)
Variable costs 0.25p per hour
Contribution £1.25 (Service price-variable cost)
*All costs have been calculated per hour. This will enable me to calculate how much I make each hour, thus making my breakeven more accurate and relevant
My financing will be a loan from a. I will borrow £20000 from the. To decide what bank to loan the money from I must consider the interest they charge and also other additional fees. In analysis I have compared the 3 main banks I am looking to get a loan from which are Halifax, Natwest and Barclays.
From this I have concluded that I will be getting a loan of £20000 from Halifax bank. This is because Halifax lets me take the amount of £20000 out and also allows that payment to be stretched over a longer period. This will mean I have more room for manoeuvre and this loan offers the greatest flexibility. The loan will have to be repaid over 5-10 years. I have also decided to go for a fixed loan and not a variable loan. This means that the interest charged will remain the same throughout the payment. This is an advantage if interest rates were to go up, however could be a disadvantage if they were to go down as I would not benefit from that. Overall I believe it is better to know what you are paying from the outset so fewer problems occur in the future so I will be going for a fixed loan.
From these figures I will now be able to construct the break-even chart. The break-even chart will show my expected safety margin and will be important, as it will financially forecast my businesses performance. However there are many disadvantages to this method, which I will explain later. The definition of break even is the point at which sales revenue is equal to running costs. To calculate the break even I had to use a formula. This formula is fixed costs added to variable costs. In my case I first calculated the break even via the number of hours. This meant that I could see how much money I was making per hour.
I also calculated the contribution. For this the formula was selling price of my item-the variable cost of the item. So for one hour the price I charged was £1.50 minus the variable cost of 25p. This came out to £1.25. This basically means for every one hour spent on the computer the £1.50 I receive, of that 25p will go towards paying the bill for that computer and the rest will go towards paying off my fixed costs and producing a profit for me.
The main reasons for using break even is so that I can calculate in advance how much output would be needed to cover costs. This then gives me an idea of weather the business model is profitable and worthy to go ahead. Also I can use it to calculate different levels of output needed and the corresponding profit. This allows me to figure out if I can get away with charging higher prices. There are two ways to calculate the break even, the formula method I have just shown and the graph method, which I will also show. The graph method is better as it provided more information to the business manager concerned. Here is my breakeven below,
This is my preliminary bar chart that I constructed from my set of figures. The costs on the Y-axis show the fixed costs, which was £4.35 per hour. I calculated this from the fixed costs per month of £2982. (£35140/12/4/7/24). I felt it was better that I worked out the day to day costs as this would make it a more fair and realistic comparison especially since my variable and revenue lines were for one hour also. On the bottom I listed the amount of computers.
From this break even you can see the variable costs, fixed cost, total cost and my expected revenue. It is quite clear that I will start to make a profit from about the region of 4-6 units. This means that 4-6 computers will have to be used for one hour each day to cover my total costs of that day. Already this seems like a very good business idea and by the 25th unit you can see I will be making high profits. This is mainly because the price I am charging per hour easily covers the costs.
Below you can see a superior final version of my breakeven, which was created using, advanced ICT. Here you can see I have showed the break even and expected margin of safety and the profit and loss zones. From this break-even, you can see that per day I will be making an overall profit of £39. (Sales-fixed costs-variable costs per day (£12) the total coming to £27.
(27*8*7*4*12=£72576), slight adjustment due to rounding up)
The overall profit per annum will be £72240 per year including fixed costs (£11760) and variable costs (16800). Total sales were estimated as £100800, which is indicated on my cash flow forecast.
The what if situation
Here I have made a what if situation. This is a worst-case scenario, which I think will prove useful. For this I was prudent and underestimated profit and overstated costs to make sure I had the worst-case scenario covered for
In this first break-even experiment I increased the fixed and variable costs to their worst possible cases. For fixed costs I set the level at 7.00 from the previous 4.35. The variable costs I increased from 0.25 to 0.50. These were big increases, as I had to make sure I had the worst-case scenario covered. I also reduced the amount I received from a use of a computer for one hour from 1.50 to 1.00. This then gave me the break-even chart above. From this you can still see I am making a profit although a drastically reduced one. This is what I was expecting when designing the business plan so for me this is more realistic. As you can see I break even on the 13-14 units and from on I have a margin of safety and then profit.
Below you can see a superior version of this break-even, which was created using, advanced ICT.
Opening Balance Sheet
Here I have produced a Balance sheet. The balance sheet provides a snapshot of what an organization owns and owes at a particular time. Therefore the Balance sheet will provide me with valuable information because it will summarize my financial position at that instance in time, for me at the beginning of trading.
Start-up Balance Sheet for Internet cafÃ© as at 1st January 2006
£ £ £
Fixtures and Fittings 1000
Working capital 14027
less Long Term Liabilities
NET ASSETS 36039
CAPITAL EMPLOYED 56039
This balance sheet shows my fixed assets, current assets, current liabilities, working capital, long-term liabilities, net assets and capital employed. Fixed assets are what the business owns for use in the business and over a long time such as the premises. Current assets are items which the business is expecting to convert into money within the next 12 months such as stock, current liabilities is money owed by the business which must be repaid within the next 12 months such as creditors and long term liabilities is money owed by the business which will be paid over 12 months such as loans or mortgages. Working capital for me was the amount left in the bank. This balance sheet will be useful to me by summarizing my Businesses opening financial situation.
Further analysis of my balance sheet indicates the following. Fixed assets are all the items that I will have when starting up the business. In current assets there is stock, which will be limited as my business will be mostly concentrated on providing a service via computers. The stock level will likely increase in the future as my business expands. I will have no creditors or debtors, as I have not started trading. Likewise there will be no reserves and no drawings. These will come into play once I begin trading. Also of consideration will be depreciation on my fixed assets and possibly bad debts may be incurred in the future. I may also have to take money out of the business, which will be classed as drawings.
The figure representing cash in bank is £12,277, which is proven correct, as this was my estimated figure outlined in section B. This figure represents the £1000 for the exterior redesign, 2 months working capital of £5000, which will be needed for any possible cash flow problems, and also £420 pounds of rounding up, to be prudent.
Profit and Loss account
Finally I produced a profit and loss account for my business, which shows the expected produce from one years trading of business. The profit and loss account lists all sales and purchases to give gross profit, from which expenses will be taken away to give net profit, which will be my overall profit. This will be necessary to keep in the bank as a dip in sales could occur or the need to buy new equipment or repair something of importance. However it can be generally accepted that the net profit will be the overall profit of my business.
The advantage for using a profit and loss account is that I can anticipate the expected probability of my Internet cafÃ© and make any necessary adjustments needed. For me this is a better form of showing the probability of my business than the break even or any of the other methods I used in this coursework. However there are disadvantages to the profit and loss account. These are that it is once again assuming that I will make a certain of amount in sales, when there could be various factors that could change this. Also because I have not set up the business I do not know what additional expenses or the exact expenses that I will have to pay. So the accuracy of the profit and loss account is in doubt although it will be more accurate than the break even as it will be simpler to understand. Here is my Profit and Loss account below,
Trading Profit and Loss account for internet cafÃ© as at 31.12.08 £ £
SALES REVENUE 110,880
Opening Stock 1750
Cost of Materials 5040
Closing Stock 1443
COST OF SALES 5347
GROSS PROFIT 105,533
Loan repayments 3564
Rent and Rates 3756
Other expenses 40992
NET PROFIT BEFORE TAX 64,541
NET PROFIT AFTER TAX 64,541
From this Profit and Loss account you can see I am going to make an overall profit of £64541. To check the accuracy of this figure, on the cash flow forecast I took away the closing cash flow surplus balance from the opening cash flow surplus balance. This came to the figure to the exact same figure and as a result confirmed the accuracy of my results. The Gross Profit from my sales will be £105840 with expenses mounting to £40992 due to other costs being incorporated. Therefore the overall Net profit will be £64848 as shown although once again I will be have to make sure I don’t treat this as outright profit as I may have to spend on other things such as maintenance or new facilities.
From the profit and loss account I calculated ratios to show the profitability of my business. These were the gross profit method, net profit method and also the most important and useful the return on capital invested. This shows what I will be getting pound for pound from my business.
Gross Profit margin
For my gross profit the calculation was gross profit divided by sales times 100. This for my business translated into £105533 divided by £110880 times by 100. This gave me 95%, which is very high although it matches in with my previous business financial forecasts.
Net Profit margin
The net profit ratio after the calculation gave me a figure of 58%. The formula for this was net profit divided by sales times by 100.
64541 / 110880 x 100 = 58.2
Return on Capital Employed
The most valuable ratio return on capital invested gave me the figure of 101%, which is fantastic. However it seems slightly optimistic and this may be as a result of the figure not being realistic. However there is an optimistic sign that even if my expenses were considerably higher and sales considerably lower, I would still make a profit. If I was to make a worst-case scenario like I did with my breakeven it would in my opinion be more realistic and the profit margin would be reduced.
64541 / 63901 x 100 = 101
It is important to know that I have not including other sources of income I will receive such as printing, income from the computer shop and also use of facilities such as scanners, TV’s and other facilities. I did not include these because they were not the major part of my business and also I didn’t want to clutter the financial forecasts. Also some of these facilities will be implemented at a later date than others and some deal in minuscule amounts.
Analysis of cash flow
The cash flow forecast is a very important financial calculation of business performance as stated before and thus it is necessary that I am able to comment on and explain what my own cash flow states and what can be drawn out from it.
As you can see from my cash flow forecast slightly above I am expecting to make a profit from the start. Basically it is showing money coming in and money going out. Total receipts as expected have been growing steadily with total payments also growing. There could be fluctuations in my income and expenditure over the year and I will have to anticipate these using the concept of prudence. For example wages may have to go up and sales may drop off during a particular period. To this affect I will be able to use my cash flow forecast for various what if scenarios particularly as it is on the computer. The cash flow surplus indicates that no deficit will be apparent and that both the opening and closing cash balance will both be going up throughout the year. Also to know on the cash flow forecast are that the cash flow surplus indicates the amount being made, a loss or a gain, and the opening cash balance indicates the amount in the bank. The closing cash balance shows the cash flow surplus plus the opening cash balance, which is taken forward for the next months opening cash balance. Once again in the next month gains or losses are added or subtracted to create the new closing balance.