Question 8: In the Appendix (Chapter 16 "Appendix: A Sample Business Plan"), you will find the income statements and balance sheets for Franks All-American BarBeQue for the years 2008 to 2010. Compute some of the key financial ratios for this business and discuss the meanings of any trends

Table 16.1 "Past Performance of Franks All-American BarBeQue" provides a summary of key financial figures for the last three years2008 to 2010. Figure 16.1 "Past Performance Chart" illustrates these key numbers for that period of time.

Table 16.1 Past Performance of Franks All-American BarBeQue

Past Performance	2008	2009	2010
Sales	$1,637,610	$1,696,564	$1,793,268
Gross margin	$851,557	$909,358	$943,259
Gross margin %	52.00%	53.60%	52.60%
Operating expenses	$542,080	$577,315	$600,408
Inventory turnover	13.20	12.10	12.90
Balance Sheet	2008	2009	2010
Current Assets
Cash	$102,665	$125,172	$102,665
Inventory	$391,238	$331,045	$345,678
Other current assets	$278,372	$230,074	$278,372
Total current assets	$772,275	$686,291	$726,715
Long-Term Assets
Long-term assets	$504,580	$388,820	$423,675
Accumulated depreciation	$180,856	$135,739	$145,765
Total long-term assets	$323,724	$253,081	$277,910
Total assets	$1,095,999	$939,372	$1,004,625
Current Liabilities
Accounts payable	$155,534	$132,206	$145,321
Current borrowing	$170,000	$150,000	$135,000
Other current liabilities (interest free)	$81,888	$63,972	$74,329
Total current liabilities	$407,422	$346,178	$354,650
Long-term liabilities	$220,000	$190,000	$175,000
Total liabilities	$627,422	$536,178	$529,650
Paid-in capital	$75,000	$75,000	$75,000
Retained earnings	$281,838	$234,377	$287,114
Earnings	$111,739	$93,817	$112,861
Total capital	$468,577	$403,194	$474,975
Total capital and liabilities	$1,095,999	$939,372	$1,004,625
Other Inputs
Payment Days	30	30	30

Figure 16.1 Past Performance Chart

Market Analysis Summary

Since the 1930s, the American public has spent at least 5 percent of its disposable income on eating out. Even with annual fluctuations, this is a strong indicator of the viability of this industry. This can be best illustrated by reviewing industry results for the last few years.

Both 2009 and 2010 were difficult years for the restaurant industry. In 2008, sales increased by 3.8 percent. However, sales fell by nearly 0.75 percent in 2009. This was the first year in the history of the industry that sales actually declined. The restaurant industrys sales in 2009 were $566 billion, down from over $570 billion. Prices rose by 2.2 percent in 2009. The increase in sales for 2010 was 0.5 percent, and price increases stabilized at 0.75 percent.

It is anticipated that there will be significant price competition in every segment of the restaurant industry. Some analysts argued that the poor performances for the restaurant industry in both 2009 and 2010 could be attributed to declines in both business and personal travel. Hotel occupancy rates in 2009 were down by nearly 10 percent. A study conducted by the National Restaurant Association argued that 20 percent of the sales in casual dining restaurants might be due to travelers and visitors. Franks All-American BarBeQue relies to a far lesser extent on travelers as customers. A rough estimate based on credit card receipts, for the period 20062010, indicated that travelers represented less than 2 percent of Franks sales. The pressure on the restaurant industry has been felt by many chain restaurants, which significantly curtailed their expansion plans.

Even though the recession was in full bloom in 2009, many food prices rose and rose significantly. Beef prices rose between 4 percent and 12 percent, while pork prices rose between 5 percent and 13 percent. Numerous studies have indicated that the increase in commodity prices will not be a transitory phenomenon.

With 925,000 food service locations in operation in the United States, this translates into 1 restaurant for every 330 Americans.

The health-care reform bill passed in 2010 should, in the near future, provide some relief for restaurants by creating a system that will assume greater responsibility by individuals to pay for their own health-care coverage.

Restaurants must also be much more cautious in the future about the possibility of hiring illegal aliens. As a whole, the National Restaurant Association supports immigration reform. However, it is concerned that any legislation should not limit a restaurants ability to hire workers. It is also concerned about the cost to assure worker eligibility.

The Mintel Group, a market research firm, found that consumers who are interested in quality opt for independent restaurants over chain outlets. An increasing consumer focus on health translates into an emphasis on natural ingredients. In the barbecue industry, this translates into naturally raised meats (i.e., the avoidance of artificial growth hormones in cattle), which are a hallmark of Franks All-American BarBeQue.

The National Restaurant Association estimated that sales in full-service restaurants in 2010 would exceed $184 billionan increase of 1.2 percent from 2009 sales.

Several macroeconomic factors make opening a restaurant in Darien attractive, including the following:

• Increases in the growth domestic product (GDP). The GDP is estimated to grow 1.7 percent in 2011 and 1.5 percent in 2012. The estimates for Fairfield County are significantly higher.
• Disposable personal income. The national level of personal income should rise nearly 4 percent in 2011, and there is an expectation of 3 percent growth in 2012. These numbers appear to be much stronger in the Fairfield County area.

Although 2010 was not a banner year for the restaurant industryit was one where more restaurants closed than opened each monththere was one bright spot: Chain barbecue restaurants grew between 2 percent and 3 percentan auspicious sign even for independent operators.

The home meal replacement market and the existing investment in restaurant equipment provide a nice growth opportunity for restaurants. It is been estimated that takeout sales in limited service chain restaurants might be as large as 60 percent of total sales. The same study found that takeout food has been growing twice as fast as the overall restaurant industry. Natural competitors in this market are supermarkets that offer prepackaged meals. However, we feel that fewif anysupermarkets provide the quality barbecue food that can be found at Franks.

Figure 16.2 "Market Analysis" illustrates the relative contributions.

Table 16.4 Market Analysis

Potential Customers	Growth	2011	2012	2013	2014	2015
Lunch	8%	17,000	18,275	19,646	21,119	22,703
Dinner	5%	40,000	42,000	44,100	46,305	48,620
Takeout	20%	10,000	12,000	14,400	17,280	20,736
Sauces	15%	12,000	13,800	15,870	18,251	20,989
Total	9.37%	79,000	86,075	94,016	102,955	113,048

Figure 16.4 "Five-Year Forecast of Sales for Two Restaurants and Sauces" illustrates the breakdown of sales for the next five years.

Table 16.5 Sales Forecast

Sales	2011	2012	2013	2014	2015
Franks (Fairfield)	$1,907,183	$1,954,863	$2,003,734	$2,053,827	$2,105,173
Franks (Darien)	$2,222,000	$2,555,300	$2,810,830	$3,091,913	$3,401,104
Sauces	$62,500	$75,000	$90,000	$108,000	$130,000
Total sales	$4,191,683	$4,585,163	$4,904,564	$5,253,740	$5,636,277
Direct Cost of Sales	2011	2012	2013	2014	2015
Franks (Fairfield)	$953,594	$977,430	$1,001,867	$1,026,914	$1,052,587
Franks (Darien)	$1,111,000	$1,277,650	$1,405,415	$1,545,957	$1,700,552
Sauces	$31,250	$37,500	$45,000	$54,000	$64,800
Subtotal direct cost of sales	$2,095,844	$2,292,580	$2,452,282	$2,626,871	$2,817,939

Figure 16.3 Monthly Sales for Two Restaurants and Sauces

Figure 16.4 Five-Year Forecast of Sales for Two Restaurants and Sauces

Key Financial Indicators

Figure 16.6 "Key Financial Indicators" provides historical (20082010) and forecasted (20112015) values for the key financial indicators.

Past Performance $1800,000 $1600,000 Sales Gross $1400,000 Net $1200,000 $1000,000 $800,000 $600,000 $400,000 $200,000 $0,000 2008 2009 2010 Monthly Sales $700,000 $600,000 Frank's (Fairfield) $500,000 Frank's (Darien) Sauces $400,000 $300,000 $200,000 $100,000 $0,000 May January February March April June July August September October Novenber December Sales by Year $6000,000 $5000,000 $4000,000 $3000,000 $2000,000 $1000,000 $0 2012 2013 2015 2011 2014 Frank's (Fairfield) Frank's (Darien) Sauces Past Performance $1800,000 $1600,000 Sales Gross $1400,000 Net $1200,000 $1000,000 $800,000 $600,000 $400,000 $200,000 $0,000 2008 2009 2010 Monthly Sales $700,000 $600,000 Frank's (Fairfield) $500,000 Frank's (Darien) Sauces $400,000 $300,000 $200,000 $100,000 $0,000 May January February March April June July August September October Novenber December Sales by Year $6000,000 $5000,000 $4000,000 $3000,000 $2000,000 $1000,000 $0 2012 2013 2015 2011 2014 Frank's (Fairfield) Frank's (Darien) Sauces