Wall Street Bar Financial Feasibility

Date of Submission: 16/4/2015

Team 14: Gina Salvo, Mario Roma, Maeve Cronin

Managerial Finance & Entrepreneurialism

MSc Hospitality Management

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Table of Contents 1. Legal form of organization and its justification ................................................. 3

2. Equity, set up costs and working capital .......................................................... 4

3. Operating costs - first year ................................................................................. 5

3.1 Fixed Costs ........................................................................................................................................... 5

3.2 Variable costs .................................................................................................................................... 7

4. The research and justification of revenue pricing volume and mix ............... 8

5. Financial Feasibility ............................................................................................. 9

5.1 Profitability ............................................................................................................................................ 9

5.2 Break-Even Point (BEP) ................................................................................................................. 9

5.3 Return on Investment (ROI) ....................................................................................................... 9

5.4 Safety Margin .................................................................................................................................. 10

5.5 Important Assumptions for C.V.P analysis .................................................................... 10

6. Sensitivity Analysis ............................................................................................ 11

6.1.1 Change in Variable Cost Scenario ............................................................................... 12

6.1.2 Change in Fixed Costs Scenario .................................................................................... 13

6.1.3 Change in Sales Volume Scenario ............................................................................... 14

6.1.4 Change in Sales Price Scenario ...................................................................................... 15

6.2 Feasibility Assessment ................................................................................................................ 16

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1. Legal form of organization and its justification

To provide protection from liability, an entity called Wolf of Wall Street

LLC will own the Wall Street Bar. Directly invested in Wolf of Wall Street

LLC will be private capital from Maeve Cronin, Gina Salvo, Mario

Roma-Momma, as well as a fourth entity called Wolf of Wall Street Inc.

The Inc. entity will take on the responsibility of the bank loan used to

fund the business therefore shielding the private investors from

additional liability.

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2. Equity, set up costs and working capital

We will require a bank loan of € 200,000 which we will obtain from the

Bank of Ireland and were quoted a 5.74% interest rate to be repaid

over 60 months. The monthly repayment fee will be € 3,839.90. Each

owner will invest € 50,000 for a total of € 150,000, bringing the overall

initial investment to €350,000.

The premises we are renting is fully fitted out as a bar and kitchen by

the previous occupier, which influenced our decision to rent it as it

reduces start up cost. The annual license for the bar will cost € 3,805

(Revenue.ie). Purchasing all of our barware, flatware, glassware, and

crockery from Nisbets, we estimate about € 21,742.40 in initial set up

costs. To purchase the ten stock ticker screens that will be displayed

throughout the bar will cost $ 9,990.00 or € 9,235.12 from an American

company called Tickerplay.com using the exchange rate of 0.92444 on

March 22, 2015 (Oanda.com). Our table and chairs will come from an

American company called Webstaurant Store and will cost $ 11,639.00

or € 10,759.56 using the same exchange rate and purchase date as our

stock ticker screen purchase. The tablets that will be placed at every

table will cost €9,999.75 from D.I.D. Electrical. The software package

provided by Business Software Solutions will cost $5,605 or €5,181.49 and

the app will come from Krunksoft at €12,177.

First month stock will cost € 65,846.32 and an additional €15,000 will

help us facilitate the grand opening. Our total start up costs will

therefore be €153,746.64. We estimate our monthly fixed costs to be

approximately € 32,000, broken out in the table below. This should keep

us in operation for at least the first 6 months.

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3. Operating costs - first year

3.1 Fixed Costs

The Wall Street Bar’s fixed costs are divided into Rent, Wages, Utilities,

Insurance, Loan and Depreciation. Variable costs change according

to each item sold as they have individual costs according to brand,

percentage of alcohol and cocktail ingredients. All costs are up to

date and the suppliers were chosen to ensure low costs.

Our premises is located in the Grand Canal Dock Area with a capacity

of 350 people. Based on rates from CBRE of a similar premises in the

area at 9,000 sq ft our annual rent would be €150,000. Negotiating a

lease of 5 years with an option to renew another 5 years, we would

give ourselves a safety net to grow into a bigger space if necessary in

the future.

Annual wages are calculated at € 146,057.40, divided as follows:

3 managers will share responsibilities each week. Busier days will

require all 3 managers on site, other days will require only 2

managers.

o Mario has 8+ years of management and marketing

experience and will be responsible for marketing and

promotion strategies. Annual salary of € 20,000.00.

o Gina has 9+ years experience in the finance industry and

will be responsible for finance and accounting. Annual

salary of € 20,000.00.

o Maeve has 8+ years in the bar industry and will be

responsible for kitchen and bar operations. Annual salary

of € 20,000.00.

2 part-time bar supervisors will work alternate days of the week, if

necessary both will work together on busier days. Supervisors

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hired will have a minimum of 3 years relevant experience. Annual

estimated cost for both employees: € 14,573.00.

1 full-time chef working together with one staff as a kitchen

porter. Chef hired will have a minimum of 3 years relevant

experience. Annual cost: € 18,408.00.

8 part-time ‘bar and floor’ staff will interchange among kitchen,

floor and bar duties according to service demand. On busier

days Wall Street Bar can operate with 5 bar and floor staff and

other days only 2-3 will be required. Staff team members will be

asked for proof of 1 year minimum experience (former employers

references). Annual estimated cost all 8 staff members €

53,057.40.

Included in the fixed costs are the utilities quoted with Electric Ireland

totalling €19,112.00 (quote attached), divided as follow:

Water

Electricity for blender, microwave oven, freezer, fridge, TVs,

screens, music system, DVD player, computers, printer, modem,

halogen lamps, heating circulation pump. Washer and Dryer for

uniforms and towels to be defined, but already quoted;

Gas for cooker oven, radiant natural heater, open natural gas

fire, hot water cylinder (large size);

Insurance is quoted €15,125.00 annually and loan interest is fixed at

5.74% APR costing us € 46,078.80 per year. Depreciation is predicted at

€ 6,000.00 (Broken glasses, plates, tables, chairs or missing forks and

knives or repair of screens, ipads and computers etc.).

Tab 1: ‘Fixed’ shows our fixed costs.

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3.2 Variable costs

Variable costs were quoted with several established suppliers, and in

order to meet our needs we considered the following key elements:

delivery time, variety of beer and spirit brands, volume discount,

payment conditions, quality and price per litres or per bottles.

For beer bottles and kegs our main supplier is Four Corners Wholesale;

for wines and spirits our supplier is going to be Celtic Whiskey Shop and

Wine on the Green, and for our tapas we will visit the local farmers

markets to get the freshest ingredients at competitive prices. In our

menu there are 7 varieties of draft beers and 10 varieties of bottled

beer of various alcohol percentages, 3 brands of whiskey, 3 types of

wine, 12 cocktails varying according to alcohol type and ingredients,

and 10 different Tapas platters.

Stock will be controlled on a daily basis through an electronic inventory

count and a manual check once a week. Waste will be accounted for

daily. Items will be ordered from suppliers once a week. Tab 2:

‘Variables’ shows every single item sold at the Wall Street Bar, each

items respective variable cost and the cost for the initial stock that

totals around € 65,844.00.

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4. The research and justification of revenue pricing volume

and mix

In researching our competition and our target market it was

determined that the Wall Street Bar, in our prime location, would

attract consumers that are not entirely price sensitive and therefore

would be inclined to pay a little bit more for an “experience”. Recent

trends in the market imply that we should and will offer several craft

beers, as well as the latest technology.

The gamification provided by the NYSE themed premise, a novelty in

Dublin, together with the high quality drinks and tapas will create a

sense of value added, justifying our prices. The average price of a pint

is € 5.69, a cocktail is € 6.41, a beer bottle is € 6.15, a glass of wine is €

6.28, a shot of whiskey is € 7.11 and a tapas platter is € 5.75, giving a

total item’s average price of € 6.07. We expect that clients will spend

on average € 20.99.

We estimate 52,520 clients for the first year, which represents around

43% of our target market. This forecast can be achieved through direct

communication and promotional strategies. We believe that the mix of

quality, variety and the gamification element plays a significant role in

attracting and maintaining our clients.

Tab 3: ‘Forecast’ shows our sales forecast for a Tuesday, each item’s

respective cost and selling prices, forecasted number of clients,

volume, contribution and estimated units of each category one client

will consume.

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5. Financial Feasibility

Tab 4: ‘CVP’ shows our marginal costing profit forecast.

According to our understanding of the market and benchmarking, we

believe that for the first year 52,520 clients will have an average spend

of €21.00 and a total of 181,688 units sold, comprised of 30.3% draught

beer, 30.9% cocktails, 21.6% beer bottles, 4.6% wines, 2.8% whiskey, 9.7%

tapas platters.

5.1 Profitability

In terms of profitability, our products ranked from most profitable to

least profitable are draught beers, followed by cocktails, beer bottles,

tapas, wines and whiskey.

For the first year we estimate a profit of € 284,644.70 deriving from sales

of € 1.102 million euro, € 435,330.10 related variable costs and €

382,373.20 fixed costs.

5.2 Break-Even Point (BEP)

We offer several items and therefore have several different selling

prices per unit, which varies according to each item and its related

cost. Thus the BEP in euro is calculated with the contribution to sales

ratio instead of using selling price, which in our business is 60.51%, or

€0.60.

The BEP for our first year is € 631,929.57, corresponding to 30,107 clients

(96 per opened day), spending an average of €20.99, with 104,154

units sold (€ 6.07 average price per unit).

5.3 Return on Investment (ROI)

To achieve 20% ROI for the first year, which is € 30,000, Wall Street Bar

must sell € 681,509.11, meaning 185,635 units at the average selling

price per unit of € 6.07, corresponding to 53,661 clients.

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5.4 Safety Margin

Our safety margin of 42.67% represented by 77,534 units, €470,418.43, or

22,413 clients, is high and provides us with breathing room and the

ability to sleep at night.

5.5 Important Assumptions for C.V.P analysis

All 6 employees will be hired from day one of operations (the

analysis does not assume employee growth during the initial

three years of operations)

Zero growth in employees’ salaries over the first three years, after

initial three years, employees will have opportunity for profit

sharing.

Management salaries remain constant over the initial three years

of operations.

Average selling price: €6.07

Average spend: €21

Sales mix won't change for the first three years of operations

Tab 4: ‘CVP’ details the C.V.P. analysis for our first year of operations.

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6. Sensitivity Analysis

Gearing

Wall Street Bar has an operating gearing percentage of 46.76%, which

is acceptable for the industry, showing that our fixed costs are a little bit

less than half of total costs. This operating gearing implies that there is

no need for larger sales volume to cover fixed costs.

Profit Sensitivity

Wall Street Bar Profit Sensitivity Ratings are:

Key Variable Sensitivity Rating

Variable Costs 1.55

Fixed Costs 1.37

Sales Volume 2.34

Sales Price 3.91

Tab 5: ‘Sensitivity’ outlines in detail our analysis given a few different

scenarios and their respective break-even points and safety margins.

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6.1.1 Change in Variable Cost Scenario

Wall Street Bar has a profit sensitivity of 1.55 times to variable cost

changes.

This means that for every 1% average increase or decrease in our raw

material supplier’s price, our profit will increase or decrease by

1.55%. In the case where variable costs go up 10%, safety margin

reaches 38.7%, BEP goes up to € 676,052.20 with a related sensitivity

rate of 0.70, meaning that for every 1% increase in fixed costs, BEP also

increases 0.70%. If fixed costs decrease by 10%, safety margin reaches

46.2% and BEP decreases to € 593,213.42.

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6.1.2 Change in Fixed Costs Scenario

Wall Street Bar has a profit sensitivity of 1.37 times to fixed costs

changes.

This means that for every 1% increase or decrease in fixed costs our

profit will increase or decrease by 1.37%. Where fixed costs goes up

10%, the safety margin reaches 36.9% and BEP goes up to € 695,122.52

with a related sensitivity rate of 1.00, meaning that for every 1%

increase in fixed costs, BEP increases also 1%. If fixed costs decrease by

10%, safety margin goes to 48.4% and BEP decreases to € 568,736.61.

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6.1.3 Change in Sales Volume Scenario

Wall Street Bar has a profit sensitivity of 2.34 times to volume changes.

If volume (number of total units sold) increases by 1%, profit also will

increase by 2.34% and safety margin reaches 47.9%. Where volume

increases by 10%, profit will increase by 23.4% or €351,346.49. BEP stays

the same in relation to the main forecast.

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6.1.4 Change in Sales Price Scenario

It’s important to assume that the increase in average spend per client

is driven only by increasing the selling price of items, and number of

units sold doesn’t change.

If we increase average spend per client to €23, giving us a net profit of

€ 390,256.70, safety margin reaches 50.5%, BEP drops to € 597,817.31

with a related sensitivity rate of 0.56, meaning that for every 1%

increase in the average spend per client, BEP will drop 0.56%. In relation

to profit, sensitivity rate is 3.91, meaning that for every 1% increase in

average spend, there will be a 3.91% increase in profit.

On the other hand, if average spend drops to €18, the safety margin

reaches 25.0%, net profit drops to € 127,656.70, BEP raises to €

708,743.41 with a related sensitivity rate of 0.86, meaning that for every

1% decrease in average spend BEP will increase by 0.86%. With regard

to profit, every 1% decrease in average spend will result in a 3.91%

decrease in profit.

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6.2 Feasibility Assessment

It’s clear that the Wall Street Bar is more sensitive to its items’ prices

given the 3.91 sensitivity rating for sales changes. Thus management

must pay attention to this figure and avoid big changes in average

spend, especially with the most profitable categories. This is crucial

when executing the sales strategy in regards to the NYSE gamification.

In relation to the other variables, Wall Street Bar is not very sensitive, but

variable costs play an important role in order to increase profits. Should

management achieve a 1% reduction in variable costs, profit could

increase by as much as 1.55%.

Wall Street Bar is feasible mainly because it maintains an attractive

safety margin in any circumstance of an increase of variable or fixed

costs.

Monitoring would be necessary if there were a drop in sales of 14% or

more equalling an average spend of €18 or below. Although it is above

the industry accepted average of 20%, this would reduce the safety

margin to 24.5%, a significant drop worth taking note of. In our scenario

of €18 average spend, break even point in units would be 255,025 units

sold (817 units per opened day). In all other negative scenarios, with

increase of fixed and variable costs, respective safety margins are still

maintained above 20%.

The Wall Street Bar is feasible because:

According to the forecast, our safety margin is comfortably at

42.2%.

97 clients per day spending an average of € 20.99 as a daily

break-even point is acceptable and aligned with average

market practises.

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Even with a 10% increase in either variable or fixed costs,

sensitivity ratings and the BEP sensitivity margin are small and

safety margins are maintained above 20%.

The Wall Street Bar is a low risk investment because of its low

break even point, high safety margins and lower than average

sensitivity to changes.

Even in the undesirable €18 average spend scenario explained

above, safety margin is maintained above 20%, giving a

possibility of lowering our prices a little bit in order to generate

more volume.