In January 2010, Burty Wilson and four other students started a business. The business deals in the provision of fast foods and drinks in and around the vicinity of the school. They each contributed 500 pounds bringing their initial capital to 2,500 pounds. They obtained an interest free loan from their parents of 10,000 pounds. The loan is to be repaid fully at the end of three years. The total capital invested on January 2010 is 12,500 pounds. Since then the value of the business has increased to 25,828 pounds in total. This is largely due to the overall profitability of the business. Wilson and his four counterparts work in the business for eight hours a day. Wilson is planning to buy two more vans as a way of expansion and to sustain the demand for the services. To acquire the two vans Wilson needs to inject more capital for purposes of financing this venture. Once the vans are acquired, the total sales are expected to increase. This means more cash flows to meet the maturing obligations as and when they fall due.
The business raises its revenue mainly from the sale of burgers and canned drinks. The costs incurred are those of purchasing the supplies such as food stocks, napkins and sauces. In the first year of operation, the business must reach an amount equal to 40,608 pounds to break even. This is an average of 3,384 pounds per month. However in the second year, Burty expects to break even at 120,900 pounds which is equal to 10,075 pounds per month. Looking at the performance of the business in the first year of operation, then there is no doubt that it can surpass the break even point. The fast growth nature of the business and the fact that it's gearing ratio is low, means the business can maintain its cash flows well and is in position to meet its obligations when they fall due.
Given the high potential of this business, we would like to appeal for an investment of 20,000 pounds. This amount will be used to purchase two extra vans costing 10,000 pounds each to help with our operations. We guarantee that, we will repay the loan in two years with an interest rate of 6%. This is possible because the business does not incur many expenses, especially because the staff is we and also the loan from our parents is interest free. Thus the business is in a great position right now or in the coming future to sustain itself by meeting its obligations. The expected cahflows from the business are further discussed and illustrated below.
Expected cash flows
The business projects that it will be able to serve 100 customers per day. Working 20 days a month, the business expects to generate incremental profit of 45,000 pounds. This is possible if the business can get two extra vans at a cost of 10,000 pounds each. Given the interest rate of 6%, the investor is expected to get 1,200 pounds as interest per year. This translates to 2,400 pounds for the period of two years. Given that the business projects an extra profit of 45,000 pounds, the repayment of the loan will not strain the business in any way. This is especially because the business does not have any obligations at the moment. The business expects to operate as follows:
Incremental cash flows 45,000
Less: Incremental costs
Service (3*20*12)*2/3 (480)
6kg propane gas (16*20*12)*2/3 (2,560)
Petrol (10*8*20*12)*2/3 (12,800)
Interest payable (1,200)
Loan repayment (3,333)
Net cash flows expected 24,627
The business operates with positive cash flows, as shown above by comparing the incremental profit of 45,000 pounds that result if the two vans are acquired. The resulting net amount is enough to cover other expenses such as depreciation. However depreciation does not affect the cash flows of the business.
Sustainability and Social issues
Though the aim of business is to make profits and maximize wealth, we however recognize the fact that, the environment is key in our daily lives. Thus we intend to ensure that, it is kept as clean as possible. We have a bin available where the customers dispose rubbish and we intend to avail more litter bins to facilitate the easy collection of waste papers. Also we would like to use this business to create employment and promote the local community. We have been buying our supplies locally and we intend to continue buying not only the produce but also all components needed for the business from the local entrepreneurs. In conclusion, it's worth noting that, the traditional burgers are much healthier, due to the ingredients used. We have gone to great lengths to ensure that, the food we sell to our customers is safe and of the best quality possible.