Prepare Pro Forma 1996 and 1997 Financial Statements and conduct breakeven analysis to assess (1) breakeven $ sales, (2) whether CL could breakeven in 1996 or 1997.
need help with break even analysis for dollar value and reasoning if the company can break even.
FINANCING The Udderlies used their first meeting with Paul MacNeil, an account manager with the Confederation Bank, to build support for the Lily's concept. They presented MacNeil with the preliminary market research, their revenue projections, photos of the store in P.E.I., and a mail-order catalogue. MacNeil was generally opti- mistic about both the idea and his ability to work with the Udderlies. MacNeil was also cognizant that the Confederation Bank had yet to build a strong customer base in the London area and was looking to secure more clients to establish a better presence. At the second meeting, the Udderlies informed MacNeil that they had received a verbal offer from the franchiser to negotiate a deal. In addition, they had chosen a site for the store and had begun negotiating a lease with the owner. The chosen location was on Richmond Row, on the corner of Richmond Street and Central Avenue, across from Victoria Park. Richmond Row contained a number of unique upscale retail stores just north of the downtown area. Victoria Park featured a number of free concerts in the summer and a popular outdoor skating rink open to the public in the winter. James expressed his concern that timing was critical since the whole deal was contingent on the financing, and he would soon be receiving written offers from both his prospective landlord and the franchiser. At this second meeting, James also provided MacNeil with costs estimates. Start-up costs would include $160,000 for equipment and Icaschold improvements which would be depreciated on a straight line basis over 10 years. Opening inventory, including ice cream, would be $100,000 and all payables were due to the franchiser on a net 30-day basis. James estimated average inventory, for the next two years, to be about the same amount. Other start-up costs, such as training and other administrative costs, would total $25,000 and could be expensed in the first year. Projected variable costs were 54 per cent of sales for ice cream and 68 per cent of retail sales and included labour Operating costs, including the manager's salary and rent, would be $7,000 per month and the Udderlies would receive a management fee of $500 per month. Operating costs would likely increase with inflation, which was estimated to be three per cent, but Cow's prices would not. The tax rate was projected to be 23 per cent. James anticipated maintaining a minimum cash balance of approximately $5,000 MacNeil outlined his initial thoughts to the Udderlies. The Udderlies would have to provide a significant amount of collateral and he would need to include several loan covenants in any agreement. However, the Udderlies would likely qualify for a federal program which encouraged small business start-ups while limiting down-side risk. Specifically, the Canadian Federal Government made loans to start up small businesses, under the Small Business Loans Act, as part of its mandate to encourage entrepreneurs to develop enterprises. The Ontario Provincial Government had a new ventures loan program which tended to offer smaller amounts of funding. According to MacNeil, the advantages of using these programs were that there would be fewer collateral and covenant requirements, and the interest rate on these loans was typically in the prime plus 1.75 per cent range. Currently, the prime rate, the rate at which the Bank's best customers could borrow, was seven per cent. Principal re-payment would take 10 years, with one-tenth of the original loan paid off each year starting at the end of the first year. MacNeil could manage the whole loan process for the 48 Part 1 An Assessment of the Firm and its Cash Needs Exhibit 2 ESTIMATED SEASONALITY AND AWARENESS FACTORS AND FORECASTED MONTHLY SALES Month April 1995 Awareness 0.1 0.2 0.3 0.4 0.5 0.6 0.7 May Seasonality 0.70 0.85 0.95 1.00 1.00 0.60 0.50 0.30 0.30 0.25 0.25 0.35 June July August September October November December January 1996 February March Sales $ 9,266 21,146 34,808 48,470 60,350 43,718 42,530 29,462 29,462 24,710 24,710 34,214 0.8 0.8 0.8 0.8 0.8 $ 402,850 Total (fiscal year 1995-96) nmn 0.8 0.8 0.8 0.8 0.8 0.8 0.70 0.85 0.95 1.00 1.00 0.60 0.50 0.30 0.30 0.25 0.25 0.35 67,478 81,734 91,238 95,990 95,990 57,974 48,470 29,462 29,462 24,710 24,710 34,214 April 1996 May June July August September October November December January 1997 February March 0.8 0.8 0.8 0.8 0.8 0.8 $681,436 Total (fiscal year 1996-97) 46 Part 1 An Assessment of the Firm and its Cash Needs Udderlies, including any term facility secured from the two levels of government, and any operating line of credit received from the Confederation Bank. The Udderlies felt that, given their life-cycle stage, they could invest all of their liquid assets, about $150,000, but had to limit the collateral. Given the various start-up costs and initial inventory requirements, the Udderlies estimated the need for $160,000 in term loan financing, as well as an operating loan to meet seasonal and other short-term needs. It was anticipated that peak seasonal financing needs would occur between January and March. ECONOMIC OUTLOOK The province of Quebec was scheduled to have a general election in the fall of 1994. The Parti Qubcois, a political party whose platform centered on Quebec's secession from Canada, was ahead in the popularity polls. This, along with the fact that Canada had the highest per capita debt levels among the major industri- alized countries, had made foreigners leery of investing in Canada. The result was a Canadian dollar that was experiencing increased volatility relative to other currencies and that required intervention by the Bank of Canada to protect its value by increasing short-term interest rates. The effect on the bond market was a noticeable widening of the Canada-U.S. interest rates spread to about 1.50 per cent from 1.15 per cent in April 1994. Canadian economic indicators were showing increasing strength on the domestic front as retail sales were up 1.3 per cent in both February and March of 1994 over the previous month. These results were partly off- set by a weaker trade performance. Nevertheless, real gross domestic product (GDP) increased by 0.5 per cent in March and by three per cent in the first quarter of 1994 over the same period a year previously. The inflation environnent remained very good with the annual consumer price index (CPI) increasing only by 0.2 per cent and wage settlements averaging up 0.5 per cent during the first three months of the year over the same period a year earlier. DECISION The Udderlies were passionate about the franchising idea. They both loved ice cream and found (Ls to be unique and exciting. They considered the consequence if Lig turned out to be simply a fad. The costs that the Udderlies would incur to start up the store were significant, and the store would need to generate income over a number of years to guarantee that the loans were covered. They were confident that Cs was not simply a fad since the ice cream was of very good quality and the retail line was a social satire and was, there fore, perpetually renewable. The Udderlies knew that the ice cream might be moderately cyclical and was certainly seasonal, despite the franchiser's active development of products aimed at smoothing revenue flow, and wondered how that would affect their ability to repay any loans. In order to prepare for his next meeting with MacNeil, James needed to calculate their cash needs and sat down to develop proforma financial statements. FINANCING The Udderlies used their first meeting with Paul MacNeil, an account manager with the Confederation Bank, to build support for the Lily's concept. They presented MacNeil with the preliminary market research, their revenue projections, photos of the store in P.E.I., and a mail-order catalogue. MacNeil was generally opti- mistic about both the idea and his ability to work with the Udderlies. MacNeil was also cognizant that the Confederation Bank had yet to build a strong customer base in the London area and was looking to secure more clients to establish a better presence. At the second meeting, the Udderlies informed MacNeil that they had received a verbal offer from the franchiser to negotiate a deal. In addition, they had chosen a site for the store and had begun negotiating a lease with the owner. The chosen location was on Richmond Row, on the corner of Richmond Street and Central Avenue, across from Victoria Park. Richmond Row contained a number of unique upscale retail stores just north of the downtown area. Victoria Park featured a number of free concerts in the summer and a popular outdoor skating rink open to the public in the winter. James expressed his concern that timing was critical since the whole deal was contingent on the financing, and he would soon be receiving written offers from both his prospective landlord and the franchiser. At this second meeting, James also provided MacNeil with costs estimates. Start-up costs would include $160,000 for equipment and Icaschold improvements which would be depreciated on a straight line basis over 10 years. Opening inventory, including ice cream, would be $100,000 and all payables were due to the franchiser on a net 30-day basis. James estimated average inventory, for the next two years, to be about the same amount. Other start-up costs, such as training and other administrative costs, would total $25,000 and could be expensed in the first year. Projected variable costs were 54 per cent of sales for ice cream and 68 per cent of retail sales and included labour Operating costs, including the manager's salary and rent, would be $7,000 per month and the Udderlies would receive a management fee of $500 per month. Operating costs would likely increase with inflation, which was estimated to be three per cent, but Cow's prices would not. The tax rate was projected to be 23 per cent. James anticipated maintaining a minimum cash balance of approximately $5,000 MacNeil outlined his initial thoughts to the Udderlies. The Udderlies would have to provide a significant amount of collateral and he would need to include several loan covenants in any agreement. However, the Udderlies would likely qualify for a federal program which encouraged small business start-ups while limiting down-side risk. Specifically, the Canadian Federal Government made loans to start up small businesses, under the Small Business Loans Act, as part of its mandate to encourage entrepreneurs to develop enterprises. The Ontario Provincial Government had a new ventures loan program which tended to offer smaller amounts of funding. According to MacNeil, the advantages of using these programs were that there would be fewer collateral and covenant requirements, and the interest rate on these loans was typically in the prime plus 1.75 per cent range. Currently, the prime rate, the rate at which the Bank's best customers could borrow, was seven per cent. Principal re-payment would take 10 years, with one-tenth of the original loan paid off each year starting at the end of the first year. MacNeil could manage the whole loan process for the 48 Part 1 An Assessment of the Firm and its Cash Needs Exhibit 2 ESTIMATED SEASONALITY AND AWARENESS FACTORS AND FORECASTED MONTHLY SALES Month April 1995 Awareness 0.1 0.2 0.3 0.4 0.5 0.6 0.7 May Seasonality 0.70 0.85 0.95 1.00 1.00 0.60 0.50 0.30 0.30 0.25 0.25 0.35 June July August September October November December January 1996 February March Sales $ 9,266 21,146 34,808 48,470 60,350 43,718 42,530 29,462 29,462 24,710 24,710 34,214 0.8 0.8 0.8 0.8 0.8 $ 402,850 Total (fiscal year 1995-96) nmn 0.8 0.8 0.8 0.8 0.8 0.8 0.70 0.85 0.95 1.00 1.00 0.60 0.50 0.30 0.30 0.25 0.25 0.35 67,478 81,734 91,238 95,990 95,990 57,974 48,470 29,462 29,462 24,710 24,710 34,214 April 1996 May June July August September October November December January 1997 February March 0.8 0.8 0.8 0.8 0.8 0.8 $681,436 Total (fiscal year 1996-97) 46 Part 1 An Assessment of the Firm and its Cash Needs Udderlies, including any term facility secured from the two levels of government, and any operating line of credit received from the Confederation Bank. The Udderlies felt that, given their life-cycle stage, they could invest all of their liquid assets, about $150,000, but had to limit the collateral. Given the various start-up costs and initial inventory requirements, the Udderlies estimated the need for $160,000 in term loan financing, as well as an operating loan to meet seasonal and other short-term needs. It was anticipated that peak seasonal financing needs would occur between January and March. ECONOMIC OUTLOOK The province of Quebec was scheduled to have a general election in the fall of 1994. The Parti Qubcois, a political party whose platform centered on Quebec's secession from Canada, was ahead in the popularity polls. This, along with the fact that Canada had the highest per capita debt levels among the major industri- alized countries, had made foreigners leery of investing in Canada. The result was a Canadian dollar that was experiencing increased volatility relative to other currencies and that required intervention by the Bank of Canada to protect its value by increasing short-term interest rates. The effect on the bond market was a noticeable widening of the Canada-U.S. interest rates spread to about 1.50 per cent from 1.15 per cent in April 1994. Canadian economic indicators were showing increasing strength on the domestic front as retail sales were up 1.3 per cent in both February and March of 1994 over the previous month. These results were partly off- set by a weaker trade performance. Nevertheless, real gross domestic product (GDP) increased by 0.5 per cent in March and by three per cent in the first quarter of 1994 over the same period a year previously. The inflation environnent remained very good with the annual consumer price index (CPI) increasing only by 0.2 per cent and wage settlements averaging up 0.5 per cent during the first three months of the year over the same period a year earlier. DECISION The Udderlies were passionate about the franchising idea. They both loved ice cream and found (Ls to be unique and exciting. They considered the consequence if Lig turned out to be simply a fad. The costs that the Udderlies would incur to start up the store were significant, and the store would need to generate income over a number of years to guarantee that the loans were covered. They were confident that Cs was not simply a fad since the ice cream was of very good quality and the retail line was a social satire and was, there fore, perpetually renewable. The Udderlies knew that the ice cream might be moderately cyclical and was certainly seasonal, despite the franchiser's active development of products aimed at smoothing revenue flow, and wondered how that would affect their ability to repay any loans. In order to prepare for his next meeting with MacNeil, James needed to calculate their cash needs and sat down to develop proforma financial statements
