The Pudong Coffee Shop 3Z --from SHUFE
CaseOverview Financial Forecast Tactics Conclusion Outlines • Balanced Scorecard • Background • Current Situation
Case overview 1 The Pudong coffee shop is located in Pudong area which is surrounded by several large office buildings and a business school. Li, the owner of the coffee shop, puts much attention on the quality of food and service, which he believes will lead to the consumers’ loyalty. 2 3 The coffee shop suffered a loss in 2009 even though it had a net cash inflow. And Li wants to find someone to help him to improve his coffee shop.
The revenue and net profit Current situation 1. The coffee shop’s revenue is 915,000 in 2008,and 930,000 in 2009, which is a slight increase. 2. But the net profit is totally different. It’s 32,300 in 2008 and -13710 in 2009. Conclusion: The revenue is not the only reason that affects the loss.
After a detailed analysis, we find that cost of sales increased a lot from 2008 to 2009, which caused a loss in the end. 2008 2009
why? The customer’s growth rate is below the average The coffee shop’s customer’s growth rate is 1.64% which is lower than average rate of approximately 10% in China. problems The large part of employees are part-time There are only two full-time employees, others are part-time unskilled employees. This would impose a negative impact on the quality of service, which would eventually increase the customer attrition rate. Text The inventories is in a high level It has a inventories of 44000 in 2009,higher than that of 2008, which is too much as a coffee shop and causes a higher fee of garbage collection
Problem 1 customer’s growth rate is low The text tells us that the average spend per customer is 50, thanks to the revenue, we can calculate the number of the customers in the whole year. It can be seen that only 300 more customers in 2009, the growth rate is 1.64%. However, the coffee consumption in China is growing at a double-digital rate.
Compare the promotion costs as a % of the revenue between the local coffee shops and the Pudong coffee shop Conclusion: This indicates that comparing with other coffee shops, the Pudong coffee shop spend less in promotion. And this may explain why its customer’s expanding rate remains low.
Problem 2 The service ? Low wages and remuneration The system of the recruitment
Problem 2 The service EMPLOYMENT SYSTEM: Two full-time employees and several part-time employees would probably influence the quality of service. Bad service will cause customer dissatisfaction and reduce the amount of the customers as well as destroying the reputation of the shop. The increasing rate of losing customers would result a decline in revenue as well as profit.
Problem 3 Too much inventory Conclusion: As is shown in the chart ,the inventory increases in 2009, it’s unwise to keep such a high level of inventory, for as a coffee shop, the drink and the food need to stay fresh to ensure the quality.
Relationship among the 3 problems Low customer expanding rate High level of inventory Bad service Low quality of the food and drink
Customer Loyalty To provide excellent service and achieve high customer satisfaction High Profitability To attain high profits, by increasing sales revenue and controlling costs Let’s see how to solve these problems. Strategic Objectives
·Gross/Net profit Margin ·Operating expenses ratio ·Increase in sales, COS etc · Inventory turnover period Financial Perspective · Customer waiting time · Wastage · Customer complaining times · Customer expanding rate · COS/Gross profit per customer · Customer satisfaction Internal Operations Perspective Customer Perspective · Employee satisfaction · Employee turnover · Training times Innovation and Leaning Perspective Balanced Scorecard —From strategy to actions Strategic Objectives
Financial perspectiveCompared to the previous year Low Profitability For the year ended 31 Dec 2009 · 2,000 cash inflow from Cash Flow Statement · 13,710 loss from Income Statement Why did the coffee shop generate cash inflow, but also suffered a loss?
Financial perspectiveWhy did the coffee shop generate cash inflow, but also suffered a loss? ATTENTION： Control costs Reason Sales increase by 1.64%, COS (paid on credit) increase by 8%, operating expenses increase by 7.5% IS- Accrual basis CFS- Cash basis
Purchasing price increases and excess the average level. Need more promotion to attract more customers. Be way above the average level. Need to better utilize the furniture and fittings. Financial perspectiveCost Analysis
Financial perspective Cost control—Inventory Management PROBLEM: Inventory turnover period(2009)=36 days · Too long for a food service industry · Inventory may get obsolescence and go bad easily SOLUTIONS · Better relationship with suppliers - Obtain trade discount - Deliver in time · EOQ and JIT - Keep safety stock and order in time when the stock is down to that level - JIT purchase
1.6% compared to the estimated expanding rate in China of 10% Increase of 1.3%/Decrease of 1.1% compared to 2008 Customer return rate Five-star service at fair price Customer perspective Customer expanding rate COS/Gross profit per customer Customer satisfaction
Customer perspectiveHow to explore new customers? Market segmentation · Businessman— espresso · Office lady— non-fat coffee · Student— blended coffee Take-away service · Call order · Mail order
1 Quality of food Quality of service 2 Various choices of food 3 Customer perspective How to improve customer return rate?
More full-time staff Staff training Provide intensivies Customer perspectiveHow to improve customer return rate? Quality of service
Internal operation perspective 1 Customer waiting time Staff Training -Economy -Efficiency -Effectiveness Wastage 2 Customer complaining times 3 Also via training
Innovation and learning perspective Employee turnover · More full-time employees · Treat employees equally and equally • Employee satisfaction • · Provide bonus for good performance • · Offer rewards to “star of the month” • · Issue employee satisfaction • survey Employees Training times · Orientation Training · Frequent training per quarter · Depth of training
Financial forecast Pudong Coffee Shop 1 Income statement Cash flow statement 2 Balance sheet 3
1 5 Sales prices will increase by 3% Inventory turnover rate will be unchanged 2 6 Sales volume will increase by 5% 3 Discretionary cash expenses increase by 4% 4 Suppliers will extend trade credit by 4% Financial forecast Pudong Coffee Shop Assumptions No investing or additional financing activities
Income statement for 2010 524,527.5=485,000*(1+5%)*(1+3%) 481,267.5=445000*(1+5%)*(1+3%) 1,005,795=930,000*(1+5%)*(1+3%) 458,640=420000*(1+5%)*(1+4%) These 4 numbers are （1+4%）times of the numbers in 2009
Financial forecast Pudong Coffee Shop Bank loan’s computation process Note: In order to rationalize the computational process, we assume that at the end of 2012, the balance of the bank loan payable is exactly 0.
Cash flow statement for 2010 No investment
Balance sheet for 2010 226,044=207,000*(1+5%)*(1+4%)
Financial forecast Pudong Coffee Shop Inventory’s computation process Take the inventory in 2010’s Balance sheet for example Formula: Inventory Turnover Rate = Cost of sales / Average inventory 458,640 / [( 44,000 + X ) / 2] = 420,000 / 41,000 X = 45,544
Break-even point Pudong Coffee Shop 51.5=50*(1+3%) 23.48=22.58*(1+4%)=458640/19530 Analysis: In year 2009,The Pudong coffee shop had not reached the break-even point, so it had a loss. According to the forecast, in year 2010, the Pudong coffee shop will reach the break-even point, and finally gets a profit.
cost cost profit profit loss loss FC FC 0 0 18,600 19,100 18,814 19,530 the quantity of customers the quantity of customers 2010 break-even point 2009 break-even point Break-even point Pudong Coffee Shop Cost-volume-profit chart 2009 and 2010 Loss Gain However, still low profitability
Overall evaluation Pudong Coffee Shop Assumptions • 1、We use the Enterprise's valuation model. • 2、We use six assumptions in the financial forecast. • 3、We use the loan interest rate 7% as the discount rate. • 4、Because of the depreciation and bank loan payables， • we can only get the data of year 2008 to 2012, so the • period for evaluation is from 2010 to 2012.
Overall evaluation Pudong Coffee Shop Balance sheet of three years’ forecast
Overall evaluation Pudong Coffee Shop Income statements of three years’ forecast
Overall evaluation Pudong Coffee Shop Cash flow statementsof three years’ forecast
Enterprise's valuation model From the cash flow statementsof 2010, 2011 and 2012. Note: Perpetual Growth Rate 4.15% = (1+5%)*(1+3%)-1-4% Final value 4,046,632 = 115,329 / (7%-4.15%) 3,303,266 = 4046632 * 0.8163 3,494,874 = 3,303,266 + 191,608
Action Plans Objectives hierarchy Expand to other areas Three-year Achieve average customer growth rate One year Three months Reverse loss and attain profit
Action Plans 1. Control costs Three-year · Better relationship with suppliers - Obtain trade discount - Deliver in time · EOQ and JIT - Keep safety stock and order in time when the stock is down to that level - JIT purchase One year Three months
Provide discounts for both. Action Plans 2. Market Segmentation & Take-away service Three-year Market segmentation · Businessman— Espresso for most successful businessmen. · Office lady— Non-fat coffee for office ladies who care more about their slimness. · Student— Blended coffee for the students who love multiplied tastes. Take-away service · Call order · Mail order One year Three months
Action Plans 3. Improve quality of food Three-year · Shorten purchasing period to make food more fresh · Develop featured coffee and special coffee of the day · Provide various kinds of coffee to satisfy different customers‘ requirements One year Three months
Action Plans 4. Improve quality of service Three-year · More staff training, including orientation training and frequent training per quarter. · Offer rewards to the “star of the month”. · Employee more full-time employees to enhance loyalty and decrease employee turnover rate. One year Three months