Sam Kerridge is a music teacher and a lover of music. He has recently received an inheritance of £120,000. He has decided to open a café bar called ‘Peyton Place’. He plans to sell drinks and food, and host music events. Sam will book nine music groups each week of different types e.g. jazz, folk, pop, string quartets. One event each week will feature a more well-known group and tickets will be sold. The other events will be free.

Sam has found a historic building, at a water-side location, available to rent. He can obtain a licence for alcoholic drinks and entertainment.

Sam asks you to help with his business plan. He is uncertain of how many customers will come, and worries about the financial risk. You suggest that he prepares budgets for three levels of activity. Sam feels that Peyton Place will attract a minimum of 700 customers each week, and that an optimistic forecast would be 1,400 customers. He therefore suggests that the middle option should be 1,050. These numbers include the ticketed event.

He estimates that each customer will spend £5 on drinks and one half of customers will buy a bar meal costing £8. Sam estimates that average entry price for the ticketed event will be £10 and that he can sell between 70 and 140 tickets for each event, with a middle forecast of 105.

Investment in the building will involve installing, furnishing and decorating a kitchen, a bar and a stage, including audio equipment. Sam projects that he will need to spend £140,000. This capital expenditure is to be depreciated (on a straight line basis) over seven years (assume no residual value).

The rent of the building will be £2,000 per month, payable quarterly in advance. Heating and lighting will be £500 per month, payable quarterly in arrears. Insurance will cost £7,000 per annum payable as an annual premium in month 1. Publicity leaflets, press advertising and a website will cost £750 per month. Local taxation will be £12,000 per annum payable in two six monthly instalments in month 3 and month 9.

Initial stocks for the bar and kitchen will cost £4,000 (payable in month 1). Thereafter drinks supplied will cost £2 per customer and ingredients for meals £4 each (payable one month in arrears). Sam expects to spend £1,500 per week on the music groups. Sam will work full-time and pay himself a salary of £25,000. He will also need an administrative assistant to run the office, at a salary of £17,000 per annum. He plans to employ two qualified chefs at £22,000 per annum each and two kitchen assistants at £15,000 per annum each. He will also need to employ four bar staff at £12,000 each. Sam and the staff will be paid at the month-end.

You explain that staffing may be a semi-fixed expense. He agrees that at the lower forecast he could do without one of the bar staff. Similarly at the higher forecast he should recruit one further member of bar staff.

Required:

1. Prepare operating budgets for the three levels of activity described above and briefly comment on the viability of the business as shown by the figures.

2. Sam feels fairly confident that he can achieve the middle level of his customer forecasts in the first year. He has spoken to his bank manager about a business overdraft. The bank has asked Sam to provide a quarterly cash budget for the first year, which Sam asks you to help him prepare.

3. You point out that the numbers of customers are likely to be low at first and build up over the year. Sam projects the following numbers of customers per month:

1st quarter (January–March)	3,000 customers per month
2nd quarter (April-June)	4,000 customers per month
3rd quarter (July-September)	5,000 customers per month
4th quarter (October-December)	6,200 customers per month

4. Prepare a quarterly cash budget for Peyton Place based on this forecast. Assume that when he begins trading, Sam will be £20,000 overdrawn in his business bank account. When the bank account is overdrawn, interest is payable at 3% of the quarter’s closing balance.