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ARMSTRONG'S BOOKSTORE CAFE In late 2016, Marcus Armstrong was finalizing plans for opening a bookstore and caf in Wellesley, Massachusetts, just outside Boston. Even though it was his first entrepreneurial effort, Armstrong was well aware of the pitfalls in starting a small business. He had spent much of the past five years researching the market and identifying a niche where his firm could succeed. Armstrong's Bookstore Cafe would specialize in retailng hardbound and paperback fiction and nonfiction. It would books written for general audiences as well as reprints of classic also carry a wide range of stationery, greeting cards, and party items. As part of his marketing effort, Armstrong planned to display rare books from his personal collection and provide a computer service to help customers locate out-of-print titles. In order to attract a wider range of customers, Armstrong was also planning to add a caf with specialized coffees and pastries. To encourage repeat business, customers could obtain a club membership, which would offer discounts throughout the year. Armstrong intended to plan the early years of operation very carefully. He knew that most small businesses fail for lack of initial capital and managerial skill. He felt comfortable with his business background and wanted to impress his banker by preparing a comprehensive business plan. After graduating from college with a degree in economics, Armstrong had gone to work as a sales representative in Boston for a major college textbook publisher. He was eventually promoted to publisher of the firm's economic and finance group. Having served in that capacity for ten years and growing tired of working for a large conglomerate, he was ready, at age 48, to start his own business. Armstrong recently learned of an opportunity to buy a small building next to a large shopping mall in Wellesley. The building, which had previously been occupied by a franchise of a national computer chain, was located in a growth area, with many young families and college students living nearby. At present, the mall was fully leased and did not have a bookstore. The asking price for the building and land on which it was located was $400,000. However Armstrong had reached a tentative agreement with the current owner to acquire the building for $350,000, contingent upon having negotiations completed by December 31, 2016. Armstrong arranged a meeting with the chief loan officer of Pioneer State Bank to discuss financing needs for the building and residual cash flow requirements for the first year of operations. He estimated that he would need $70,000 to modify the building's interior, $200,000 in inventory to begin operations, and a minimum $25,000 daily cash balance to meet transactions requirements. Amstrong also prepared the following estimates for projecting the firm's balance sheet and income statement: 1. Cost of goods sold will equal the industry standard of 62 percent of sales. 2 Armstrong's inventory will equal 170 percent of next quarter's estimated cost of goods 3. Forty percent of all merchandise purchases other than the initial stock will be paid for in sold. cash in the quarter they are acquired, with the remaining 60 percent paid in the following quarter
