Financial Plan
The most important element of a business plan is the financial plan which presents the necessary financial prospects and expectations of a business. The financial plan is the basic component of the business plan as it provides the feasibility of a project and enables the investors to make logical decisions regarding the acceptance and rejection of the project and whether the business would provide the expected cash flows and profits relative to the amount invested. The financial plan also provides insight into the expected payback period of the business to carry out a comparative analysis with other alternatives to make decisions regarding the investment of funds.
The financial plan of the Cold Stone Creamery franchise illustrates the expected amount of investment required to open the franchise and operate it effectively. The expected financial performance of the company depending on the profits, cash flows, and position of the company is highlighted in the financial plan. The main components of the financial plan can be analyzed individually through the expected sales, profit and loss, breakeven point, and payback period. The expected profit and loss of the business are presented through the prospect income statement. The financial analysis and evaluation included in the financial plan are completed by implementing various assumptions related to the expected level of sales, operating expenses, and growth in future years. These assumptions have been emphasized in a separate section of the financial plan to help in a better understanding of financial statements. The financial viability of the project is further illustrated by applying the capital budgeting technique of the payback period.
Important Assumptions
The expected financial analysis completed in this plan and various tools and techniques applied are based on various assumptions regarding the expected growth rate, the profit margin, and funding of the business. It is expected that sales of the company will increase by an expected annual growth rate of 6 percent and this is based on trends in sales of other franchises already operating in various areas. Some franchises display a high growth rate of up to 9 to 11 percent while other franchises operating in competitive areas depict lower growth rates of 5 to 7 percent. The average growth rate in sales should be around 8 to 10 percent but a growth rate of 6 percent has been implemented to incorporate the adverse effects of the recent financial crisis in almost all areas of business. The ownership of the company will be based on sole-proprietorship as external and passive ownership of franchise is not allowed by the parent company. The owner can however take out a Small Business Administration – SBA loan to finance the investment of the franchise except for the franchise fee which would have to be directly funded by the owner. The fixed assets of the business will be depreciated using the straight-line method of depreciation and an annual depreciation rate of 10 percent. The franchisee will be liable to an annual royalty fee of 6 percent on the annual gross sales of the franchise and the term of the agreement for a particular franchise is ten years (World Franchising, 2009).
Startup Plan
The startup plan is the most important part of a financial plan as it presents the amount of investment required for the proposed business and explains the specific details of the initial investment required in starting the operations of the business. The startup plan outlines the sources of funds required for the initial investment and the uses of these funds in various aspects of the business such as assets, setup costs, franchise fees, and license fees. The startup plan for opening a Cold Stone Creamery franchise has been prepared according to the company requirements and on a higher average as the proposed franchise would be operating on a large scale. The initial amount of investment required for the franchise includes a significant amount of funds in various areas such as equipment, leasehold improvements, initial franchise fees, and working capital among other expenditures. The initial startup cost of the company has been highlighted in Table 1 with a description of all the individual items associated with this cost.
Table 1. Source: (Cold Stone Creamery, 2009)
The total amount of investment required for starting this franchise on a higher scale is $438,850 which includes equipment costing $111,300 which would be installed in the franchise to produce and sell ice cream to customers and $170,000 for leasehold improvements. These are the two most significant amounts necessary to start the business and make up a large part of the initial investment required for the business. The other specific items included in the initial investment are related to overall operations of the company. The additional funds or working capital required for initial 3 months of the company is $35,000 and could vary depending on the season the franchise is opened. The ideal time to start the business would be the start of summer season as the demand of ice cream in this season would be quite high and the franchise could make up for additional working capital required from high level of sales due to higher demand in the summer season.
Sales Forecast
The sales forecast for Cold Stone Creamery franchise has been prepared with reference to the average sales of franchises currently operating throughout the country. The target of the parent company is to increase the average revenue per store to $500,000 in coming years but the current average revenue per store ranges from $350,000 to $375,000 per year. The sales forecast of the current franchise will be based on this average and the expected level of sales in the initial year would be 350,000 with a growth rate of 6 percent for subsequent years.
Table 2
Profit and Loss Forecast
The projected income statement of three years for the franchise presents the expected level of revenue in the first three years of business with the corresponding cost of sales and the operating expenses which will be incurred during business in these years. The sales of the franchise have been implemented as presented in the sales forecast and a growth rate of 6 percent has been applied for the second and third year of business. The income statement does not include any advertising and marketing expenses as the parent company is responsible for the marketing and advertisement of products. The four operating expenses incurred by the company include royalty expense, salaries expense, depreciation expense and general expenses. The general expenses include all miscellaneous expenses related to operating the business such as rent, utilities and maintenance.
Table 3
Breakeven Analysis
The breakeven analysis of a business is performed to evaluate the minimum number of units a company must sell to break even in terms of profit and loss. The breakeven point of a company can be calculated by dividing the total fixed cost of the company by the contribution margin. Contribution margin is the difference between sales price per unit and variable cost per unit of the company’s products (Brigham & Ehrhardt, 2001).
Break-even point = Total Fixed Cost / Selling Price per Unit – Variable Cost per Unit
The total fixed cost of the franchise are the operating expenses which will be incurred irrespective of the number of units sold excluding royalty expense which is tied to the amount of total revenue. The selling price per unit for the franchise is $4 and the variable cost per unit is $1.2 which has been derived from the cost of goods sold and royalty expenses. The breakeven point for the franchise can be calculated by implementing the mathematical formula.
Break-even point = 102,130 / (4 – 1.2)
Break-even point = 102,130 / 2.8
Break-even point = 36,475 units
The breakeven point of the franchise where the company would be earning no profit and no loss is 36,475 units. This is the minimum number of units the company must sell each year to avoid losses and any number of units sold above this level would be a profit to the firm.
Payback Period
The payback period of a company is the time period after which the initial cost or investment of a project or business would be recovered. It is calculated by dividing the initial investment of a project or business by the average yearly cash inflows. The cash flows for the franchise have been calculated by adding back the amount of depreciation to net income. The initial investment required for the franchise is $438,850 which is divided by the average cash inflows to arrive at a payback period of 4.1 years. This indicates that the amount invested by the owner would be recovered in the beginning of the fifth year of business.
Table 4
Analysis and Recommendation
The financial plan for Cold Stone Creamery franchise presents the relevant information which would enable the investor to evaluate the investment decision and accept or reject the business proposal. The financial plan includes various aspects of the franchise such as the startup plan, sales forecast, profit and loss expectations, break even analysis and estimation of payback period. The startup plan of the company indicates that the total amount required to setup and start the franchise is $438,850 which will be used in acquiring assets necessary for operating the business effectively and efficiently. The startup plan includes the various individual amounts required for setting up the business including the initial franchise cost. Sales forecast of the franchise displays the estimated level of sales in the initial years of the business while the estimated profit and loss section covers the amount of profit generated by the franchise based on the sales forecast. The estimated net income for the franchise is $83,622, $89,040 and $94,783 for years 1, 2 and 3 respectively. The two important sections of the financial plan are the break even analysis and payback period sections which provide a basis for making an investment decision. The break even analysis of the firm indicates that it needs to sell at least 36,475 per year to breakeven while the expected sales for year 1 are well beyond this level which means the company would start earning profits in the first year of business. The payback period section of the plan indicates that the amount invested initially to start the business would be recovered in 4.1 years or at the start of the fifth year. The final recommendation for opening this franchise is positive as the evaluation carried out in the financial plan indicates a profitable and viable business opportunity.
Reference List
Brigham, E. & Ehrhardt, M. (2001). Financial Management: Theory and Practice 11th Edition. Cincinnati: South-Western Educational Publishing.
Cold Stone Creamery. (2009). Investment Requirements. Web.
GlobalBX. (2009). How Much Does a Cold Stone Creamery Franchise Cost?
World Franchising. (2009). Cold Stone Creamery. Web.