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Pro Forma Cash Flow Statement Accounting Essay

THE BUSINESS

Muffin Break will begin its operations as on January 2010 under the corporation named Tea-stores Inc. This would be a start-up bakery and coffee retail establishment which would be located on MM Alam road.

Muffin Break would be offering coffee from various countries and there would be array of pastry products available, these would attract a strong customer base and offer the residents of Lahore a variety in tastes.

Muffin Break aim to be a strong player in the restaurant industry of Lahore, this would be due to the experience of the owners and due to the low competition in the market.

Muffin Break would be offering its products at a competitive price to meet the demands of the middle-to-higher income residents of Lahore, especially students who seem to be a large target market for restaurants.

The Company

Tea Stores Incorporated has its headquarters in Karachi. It’s equally owned and managed by four partners.

Ms Saniya Malik has extensive in sales and marketing, Ms Hajra brings experience in finance, Ms Benish has been the HR manager in several well established multinationals and would be using her experience for the management of the company and Ms Saba has been a culinary expert and has all the know-how of how food items should be presented.

Products and Services offered

Muffin Break offers a broad range of snacks and drinks for its target market.

There would be a wide array of coffee and espresso products, using coffee beans from various countries such as Brazil and Columbia.

There would be fresh bakery and pastry products that would be made at all times of the day. Since we’re aiming for youngsters there would also be various salads available for the youngsters and diet conscious people to select.

Some of the primary products would be hotdogs that will be regular, foot-long hot-dogs and barbeque sauce served on specialty home made buns.

Muffin Break would also be offering side dishes and deserts such as coleslaw, French fries, Onion Rings, potato chips and cookies.

MARKET ANALYSIS

The café and restaurant industry in Pakistan has been experiencing a rapid growth.

The increased awareness amongst the urban population for a cuisine that has various cultures blended in it, it has made it compulsory for any café to offer the best taste from various countries.

Muffin Break wants to establish a large regular customer base, and will therefore concentrate its business and marketing on local residents which for now would be the Lahori population, which will be the dominant target market.

This will establish a healthy, consistent revenue base to ensure stability of the business that has just started its operations.

In addition, the student traffic is expected to comprise approximately 35% of the revenues. High visibility and competitive products that have a variety of tastes, ingredients, side orders etc and service are critical to capture this segment of the market.

IV. Marketing Plan

Muffin Break would be using a variety of methods to advertise this includes direct mailings, flyers, mailer coupons, and door hanger menus. Initially, their planning to offer students a discount card this would increase the sales their generating from students.

Muffin Break plans to use an innovative customer survey card/ visitor log this would help it in maintaining a database of its customers and this would eventually help in generating a mailing list.

Keeping its student target market in mind, Muffin Break is also planning to sponsor events organized in universities such as Lums, LSE, BNU and UCL. This would also give the café a medium to distribute its door hang menus so that there is increased awareness about the new café that’s opened in Lahore.

V. Financial Considerations

Muffin Break plans to open its business with a Rs. 5,000,000/- capital. A capital of Rs4,000,000/- would be raised by the partners, and the remaining Rs 1,000,000/- would be raised by borrowing a loan from the Bank of Punjab.

All the four partners would be investing an equal sum of capital which in this case would be Rs1,000,000 per partner.

The loan being taken from Bank of Punjab would be under its ‘Karobar Barhaou’ loan products available, an interest rate of 10% annual would be charged on the loan that would be paid in 3 years. Payments for this loan are set by the bank at Rs110,000 that has to be paid quarterly [4 payments in 1 year].

This would provide Muffin Break with its initial start up capital, which is highly crucial.

One of the partner’s uncle’s restaurants had just closed down in MM Alam and now Muffin Break would be using this premise for its café, although it does need immediate renovation which would be included in the start-up expenditure.

Muffin Break anticipates in its first year an annual sales of Rs 4,910,000, followed by sales of Rs 5,670,000 and the third year sales would be Rs 6,550,000.

As far as breakeven is concerned there are high chances that Muffin Break breaks even in the fourth month of its operations as its sales would be rising steadily.

Profits would be approximately Rs 130,000 at the end of year 1, Rs 360,000 at the end of the year 2 and Rs 460,000 for the year ended 3.

VI. Start-up Summary

Muffin Break is a start-up company. Financing will come from partners’ capital and the 3-year loan from Bank of Punjab.

The following table contains the projected start up costs:

Start-up Assets

Rs

Long term assets

790,000

Total assets

790,000

Start-up expenses

Legal Fees

30,000

Premise Renovation

200,000

Other expenses

10,000

Total start-up expenses

240,000

Total Required

550,000

Assumption: The initial start up revenue expenditure has been accounted in the balance sheet under the heading of current assets.

The long term asset that Muffin Break has to immediately purchase is a generator, so that its high quality customer service does not get hindered by any electicity shortages. This has been accounted for the 3 years since Muffin Break’s inception in its fixed assets.

Capital Investment

Rs

Saniya

1000000

Saba

1000000

Benish

1000000

Hajra

1000000

Total Capital

4,000,000

Loan from Bank of Punjab

1,000,000

Total capital required

5,000,000

Sales Forecast

Muffin Break is in its initial few years hoping to generate most of its sales from its different from the rest hotdogs that would have the student market craving for more.

The next area it seeks to penetrate is the coffee segment, and the café wants its own people to make the coffee which is why no coffee machine would be bought.

2010

2011

2012

Unit Sales: Hotdogs

13,500

14850

16624

Unit Prices:Hotdogs

300

315

325

Sales revenue:hotdogs

4050000

4677750

5402800

Unit sales: Coffee

8600

9460

10430

Unit prices: Coffee

100

105

110

Sales Revenue: Coffee

860000

993300

1147260

Total Sales

4910000

5671050

6550060

Direct Unit Costs

Hotdogs

25

26

27

Coffee

50

53

55

Direct cost of sales

Hotdogs

337500

389810

450230

Coffee

430000

496650

573630

Total Cost of Sales

767500

886460

1023860

Assumption: The prices herein have been set using market analysis the café that have been used for this forecast are: CTC, Jammin Java, Hotspot, Espresso and Gloria Jeans.

Cost of sales have been assumed 15.63% which is again as per the market analysis.

HR Expenditure

Since Muffin Break wants to stand out from the rest of the cafés its ensuring that it has the best and educated servers, chefs that have great expertise and credibility would be hired, thus a great amount of investment would be made in hiring the right type of people for Muffin Break.

2010

2011

2012

Managers

918,890

1,050,000

1,102,500

Cooking staff

401,000

428,400

449,820

Servers

1,102,650

1,260,000

1,323,000

Total Payroll

2,422,540

2,738,400

2,875,320

Assumption: Here we have specifically used only the estimates of Gloria Jeans, that works a lot on its customer service. These are the annual HR expenditure.

Pro-forma Income Statement

Pro-forma Profit and Loss Statement

2010

2011

2012

Sales

4,910,000

5,671,050

6,550,060

Direct cost of Sales

-767,500

-886,460

-1,023,860

Total Cost of Sales

767,500

886,460

1,023,860

Gross Margin

4,142,500

4,784,590

5,526,200

Expenses

Payroll

2,422,540

2,738,400

2,875,320

Sales and marketing

270,000

352,000

714,600

Depreciation

118,500

118,500

118,500

Utilities

12,000

12,600

13,230

Maintenance

391,200

410,760

431,300

Total Operating expenses

3,214,240

3,632,260

4,152,950

EBIT

928,260

1,152,330

1,373,250

Interest rate:10%

Interest Expense

87,036

62,106

12,376

Tax rate: 12%

111,391

138,280

164,790

Net Income

729,833

951,945

1,196,084

An interest rate of 10% has been charged by the Bank of Punjab.

The tax rate prevailing on restaurants in Pakistan are 12%.

It can be seen that over the years Muffin Break’s sales are steadily growing, although this is couples with the increase in Total operating Expenses.

Loan Amortization

Loan Amount

1,000,000

Annual Interest rate

10%

Loan period (years)

3

Number of payments years

4

Sr. No

Principal

Payment

Interest (2.5%)

Principal repaid

Loan Balance

1

1,000,000

110,000

25,000

85,000

915,000

2

915,000

110,000

22,875

87,125

827,875

3

827,875

110,000

20,697

89,303

738,572

4

738,572

110,000

18,464

91,536

647,036

5

647,036

110,000

16,176

93,824

553,212

6

553,212

110,000

13,830

96,170

457,042

7

457,042

110,000

22,852

87,148

369,894

8

369,894

110,000

9,247

100,753

269,142

9

269,142

110,000

6,729

103,271

165,870

10

165,870

110,000

4,147

105,853

60,017

11

60,017

110,000

1,500

60,017

0

Muffin Break has received a loan of Rs 1,000,000 from the Bank of Punjab.

The interest rate charged is 10% although a payment of Rs 110,000 has to be made in every quarterly payment, this includes both the principal repayment as well as the interest payment.

This loan would be according to Muffin Break’s estimations be paid by 2.75 years even though the bank has offered a 3 years period.

Fixed Assets

The only fixed asset that would be purchased would be a generator and its details are as follows:

2010

2011

2012

Generator Cost

790,000

790,000

790,000

Depreciation expense

118500

118500

118500

Balance Sheet

Generator Cost

790,000

790000

790000

Less Accumulated Depreciation

118500

237000

355500

Net Generator

671,500

553000

434500

The depreciation method being used is ‘Reducing Balance method’.

The depreciation expense is 15% of the original cost.

Pro-forma Cash Flow Statement

Pro forma Cash Flow statement

2010

2011

2012

Cash from Operations

Cash Sales

4910000

5671050

6550060

Total Cash received

4910000

5671050

6550060

Cash Outflows

Cash Expenditure

3,095,740

3,513,760

4,034,450

Cash Flow from Operating Activities

1,814,260

2,157,290

2,515,610

Purchase of Generator

790000

Cash outflow from finacing activities:interest payment

87,036

62,106

12,376

Cash flow Principal paid on loan

352,964

377,894

269,142

Cash outflow from finacing activities

1,230,000

440,000

281,517

Net Cash Flow

584,260

1,717,290

2,234,093

The cash receipts are mainly generated from the sales of the restaurant.

The cash flow expenditure is based on the cost of goods sold.

The only fixed asset for which there has been an investing activity is the purchase of a generator.

The cash flow principal payment on a loan is the summation of four quarterly principal payments.

Pro-forma Balance Sheet

Pro forma balance sheet

2010

2011

2012

ASSETS

Current Assets:

Cash

584,260

1,717,290

2,234,093

Other current assets

3,402,016

1,256,553

380,881

Total Current assets

3,986,276

2,973,843

2,614,974

Long term assets

Long term assets: Generator

790,000

790,000

790,000

Accumulated depreciation

118,500

237,000

355,500

Net Assets

671,500

553,000

434,500

Total Assets

5,242,036

5,244,133

5,283,566

Total Liabilities and capital

Liabilities:

Long term liabilities:Loan

647,036

269,142

60,017

Total Liabilities

647,036

269,142

60,017

Owners capital

4,000,000

4,000,000

4,000,000

retained earnings

595,000

974,991

1,223,549

Total liabilities and capital

5,242,036

5,244,133

5,283,566

 

 

The cash figure has been calculated in the cash flow statement

The owners capital would be the same throughout the years, unless there’s an investment made.

The retained earnings: these include the profits that have been invested by the Parent Company Tea-stores Incorporated

The other current assets estimate has been assumed using the market analysis.

NPV ANALYSIS

The NPV analysis has been used to show the feasibility of this café, whether the bank or other prospective investors should invest in it.

It shows the present vales of the future cash flows, for this NPV estimation has been done using the WACC.

 

 

2010

2011

2012

Depreciation

118,500

118,500

118,500

EBIT

928,260

1,152,330

1,373,250

Tax rate: 12%

 

1-t

0.88

 

Ebit (1-t)

816,869

1,014,050

1,208,460

OCF's

 

935,369

1,132,550

1,326,960

Cost of debt

Kd

10%

Cost of Equity

Risk free rate

7.50%

Market Risk

9%

Beta

1

Weighted average cost of debt

Wd= debt /total equity

0.2

Wc= equity/ total debt+equity

0.8

Tax Rate

0.12

Growth rate (g)

5%

0.05

WACC

Wc*Kc+ Wd*Kd (1-T)

Wc Kc

0.072

Wd*Kd

0.02

1-t

0.88

Wd*kd (1-t)

0.0176

WACC

0.0896

8.96%

NPV using calculator

3,092,463

NPV using excel

2,838,182

The Wacc has been found using the Capm Model.

Since the NPV has turned out positive this project should be taken, as it promises high profitability.

An IRR calculation also suggested the internal rate of return of this project was highly positive that makes it a highly lucrative investment.

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