The contingency tactical plan prepared for the proposed company, Dough Pizza, which is a fast-food restaurant planned to be opened in Lynchburg, VA, is based on the estimations of the initial capital requirements and assumptions regarding its business and financial performance in the first year of operations. The contingency tactical plan evaluates the anticipated changes in the company’s earnings based on different projected growth rates.
Start-Up Financing
Based on the assumptions made regarding the proposed business venture, the start-up financing required by the owner is estimated in this section of the report. It is crucial to prepare an investment budget to ensure that the owner can arrange sufficient finances to carry out the project until the end. The owner has two options for financing the project, which is equity financing and debt financing (Broome Jr., 2016). The preference will be given to the equity financing which means that the owner will invest in setting up the new business by using personal equity. The owner is of the view, “The rich rule over the poor, and the borrower is slave to the lender” (Proverbs 22:7).
However, the second option of acquiring finance from a bank will not be overlooked entirely, and if the business requires additional funds in later years, then the management will borrow from a bank. The cost of debt will be the primary factor affecting this decision as it is understood that start-up businesses face the difficulty of getting a bank loan because of their limited credit history (Bamford & Bruton, 2018). The start-up funding requirement is provided in Table 1 given below.
Table 1. Start-Up Funding Requirement.
Table 1 indicates that the management will have to allocate $200,000 to the proposed business. The primary capital expenditures include leasehold improvement and equipment. The economic values of these expenditures will be depreciated on a straight-line method over the next ten years. The depreciation charge estimated is at $12,000 per year. The retail space selected for opening the new restaurant is available at $1.14 per sq. ft. and its total floor size is 2,800 sq. ft. (“Lynchburg city county retail space for lease,” 2019).
The total yearly rent is estimated to be $38,304. The reason for selecting a larger retail space is because the management wants to offer a dine-in experience to its customers in addition to its takeaway services. All other expenses are estimated as per the business plan. The management will carry out various marketing activities before the business is launched.
The company must test the market before it initiates its primary business activities. It will help the management to plan out its contingent business strategies and also formalize its exit strategy in case the business fails to generate the expected earnings. The company will require $21,634 in cash in hand. It is the minimum cash balance that the company will maintain at the end of the financial year. It will ensure that it can sustain its business and purchase the required inventory for food preparation.
Sales Forecast
The sales forecast given in Table 2 indicates that the restaurant will achieve growing sales over the next five years. There are two sources of revenue identified for the proposed business including food sales and drink sales. It is estimated that 70% of the company’s sales will be generated from food sales and the remaining 30% will be from drink sales. The company’s food sales are expected to grow by 50% in Year 2 and then increase at a steady rate of 30% per year in the next three years. Furthermore, the company’s drink sales are expected to grow by 30% in Year 2 and then increase at a steady rate of 15% per year in the next three years.
The reason for the high growth rate in the second year is that the company will attract more customers due to the brand hype to be formed after the initial public relations and marketing activities. In later years, the restaurant will grow based on its brand reputation, customer satisfaction, and high food quality.
Table 2. Sales Forecast.
Proforma Income Statement
The proforma income statement for the first five years of operations is given in Table 3.
Table 3. Proforma Income Statement.
The company will incur a net loss in the first three years. However, the profitability will improve and it is forecasted that the company will have a growing net profit from Year 3 onwards.
Contingency Plan #1
Down-adjustment of Sales
The revised proforma income statement is prepared in Table 4 based on the assumption that the company will not achieve its anticipated sales level. Therefore, its sales are adjusted downward.
Table 4. Revised Proforma Income Statement (Downward Adjustment)
Steps to Minimize the Negative Impact
The revised proforma invoice shows that the company will not be able to achieve profitability in the next five years. The management can take the following steps to minimize the negative impact of poor sales.
- Increase marketing and public relation activities.
- Revise its pricing strategy by lowering the prices of its food items.
- Sign up on different food delivery websites to improve brand exposure and also increase its sales.
- Improve or add new food choices.
- Launch promotional or combo deals for customers.
- Lower the labor cost by hiring a fewer number of employees with better skills.
Contingency Plan #2
Upward-adjustment of Sales
The revised proforma income statement is prepared in Table 5 based on the assumption that the company will exceed its anticipated sales level. Therefore, its sales are adjusted upward.
Table 5. Revised Proforma Income Statement (Upward Adjustment)
Steps to Maximize the Opportunities
The management can take the following steps to maximize the opportunities arising from high-level sales.
- Open up another fast-food outlet.
- Provide training to its staff to improve customer experience.
- Engage with customers and make changes in the business accordingly.
- Carry out marketing activities to promote its brand and challenge its competitors.
Conclusion
The contingency plan provided in this report highlights the measures that could help the company in achieving its mission and objectives. The management should plan out its exit strategy if the company fails to produce the desired level of sales and profit. The management should be prepared to cut its losses, but before doing so, it should take steps that could help to sustain the business. The plan also emphasizes strong planning to take advantage of the opportunities in the market.
References
Bamford, C. E., & Bruton, G. D. (2018). Entrepreneurship: The art, science, and process for success (3rd ed.). New York, NY: McGraw-Hill Education.
Broome Jr., J. T. (2016). Chapter 38: Making a statement how to create financial statements. In T. S. Media, Personal training business: step-by-step startup guide. Irvine, CA: Entrepreneur Press.
Lynchburg city county retail space for lease. (2019). Web.