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Contingency Tactical Plan for Dough Pizza Report

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Updated: Jul 20th, 2021

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.

Description Amount ($)
Business license 50
Business name registration 12
Lease improvement 35,000
Equipment 85,000
Marketing 9,000
Public relations, website development, and road shows 11,000
Store rent 38,304
Cash in hand 21,634
Funding required 200,000

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.

Year 1 Year 2 Year 3 Year 4 Year 5
$ $ $ $ $
Food sales 201,600 302,400 393,120 511,056 664,373
Drink sales 86,400 112,320 129,168 148,543 170,825
Total sales 288,000 414,720 522,288 659,599 835,197

Proforma Income Statement

The proforma income statement for the first five years of operations is given in Table 3.

Table 3. Proforma Income Statement.

Year 1 Year 2 Year 3 Year 4 Year 5
$ $ $ $ $
Food sales 201,600 302,400 393,120 511,056 664,373
Drink sales 86,400 112,320 129,168 148,543 170,825
Total revenue 288,000 414,720 522,288 659,599 835,197
Cost of sales 168,000 241,920 304,668 384,766 487,199
Gross margin 120,000 172,800 217,620 274,833 347,999
Labor expenses 163,360 163,360 169,894 169,894 176,690
Marketing 15,000 15,000 10,000 10,000 10,000
Other expenses 5,000 5,000 5,250 5,513 5,788
EBITDA (63,360) (10,560) 32,476 89,426 155,521
Depreciation 12,000 12,000 12,000 12,000 12,000
EBIT (75,360) (22,560) 20,476 77,426 143,521
Tax (13.3%) 2,723 10,298 19,088
Net profit (75,360) (22,560) 17,752 67,128 124,432

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)

Year 1 Year 2 Year 3 Year 4 Year 5
$ $ $ $ $
Food sales 100,800 151,200 196,560 255,528 332,186
Drink sales 43,200 56,160 64,584 74,272 85,412
Total revenue 144,000 207,360 261,144 329,800 417,599
Cost of sales 84,000 120,960 152,334 192,383 243,599
Gross margin 60,000 86,400 108,810 137,417 173,999
Labor expenses 163,360 163,360 169,894 169,894 176,690
Marketing 15,000 15,000 10,000 10,000 10,000
Other expenses 5,000 5,000 5,250 5,513 5,788
EBITDA (123,360) (96,960) (76,334) (47,990) (18,479)
Depreciation 12,000 12,000 12,000 12,000 12,000
EBIT (135,360) (108,960) (88,334) (59,990) (30,479)
Tax (13.3%) (11,748) (7,979) (4,054)
Net profit (135,360) (108,960) (76,586) (52,012) (26,425)

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)

Year 1 Year 2 Year 3 Year 4 Year 5
$ $ $ $ $
Food sales 302,400 453,600 589,680 766,584 996,559
Drink sales 129,600 168,480 193,752 222,815 256,237
Total revenue 432,000 622,080 783,432 989,399 1,252,796
Cost of sales 252,000 362,880 457,002 577,149 730,798
Gross margin 180,000 259,200 326,430 412,250 521,998
Labor expenses 163,360 163,360 169,894 169,894 176,690
Marketing 15,000 15,000 10,000 10,000 10,000
Other expenses 5,000 5,000 5,250 5,513 5,788
EBITDA (3,360) 75,840 141,286 226,843 329,520
Depreciation 12,000 12,000 12,000 12,000 12,000
EBIT (15,360) 63,840 129,286 214,843 317,520
Tax (13.3%) 17,195 28,574 42,230
Net profit (15,360) 63,840 112,091 186,269 275,290

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.

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