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Plan for the Period of the Olympics - Case Study Example

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This case study "Plan for the Period of the Olympics" presents a business plan for a period of 6 weeks to be implemented during the London Olympics. The venture is based on the invitation of the Organizing Committee of the London Olympic Games (OCLOG) forbids…
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Plan for the Period of the Olympics
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Business Plan for the Period of the Olympics Overview This business plan is for a period of 6 weeks to be implemented during the London Olympics. The venture is based on the invitation of the Organizing Committee of the London Olympic Games (OCLOG) for bids. It is one of the stalls that will be established in the Olympic area as a food stall for a period of 6 weeks. A grant of £ 10,000 (£ for pound sterling) is to be given to the winning bidder. Venture partners. Three partners have decided to band themselves and to submit a bid for the food stall. They expect though to get a short term loan from the bank at an interest rate of 7.5% to be paid out from the income in the venture. They expect to draw weekly from the expected profits at the rate of £ 600 each per week or £1,800 weekly for all of them. Consequently, they made inquiries on the food they will sell, the pricing thereon, and the cost of sales as well as the operational expenses they expect to incur. Market strategy The marketing strategy and program of the venture is simple. The target market is those who will be entering the games area who watch the games. They are expected to buy their snacks or for some their entire meals. It is expected that substantially most of the people going to the games will be buying their snacks which will consist of sandwiches, soft drinks, chips, or bottled water. Product line. The product line that is intended to be sold are burgers, bottled water, soft drinks, and chips. These will be available in the stalls, and some are to be sold by one of the two sales assistants who will be peddling the items inside the stadium ad around the area. There will be a variety of burgers to be sold. The mix of burgers will depend on the weekly experience of the sales which will be the basis of the purchases to be made. Nonetheless, the partners have estimated the volume of sales by kind of product line. It is only in the variety of the burgers that decisions have to be made on a weekly basis. The main product expected in the venture is the sales of burgers where the price per piece is £1.50 against a cost of £1.20 each. This is a margin of 25% of cost. The other three products are to be sold at cost. Pricing Strategy The pricing is based on the margin based on the variable cost. Considering that the main product is burgers the pricing is to add a mark-up on the cost at the rate of 25% only on the burgers. There are no mark ups on the other three lines. Below is the price, cost and margin for each product: (All in pound sterling. Assumed that there are 100 pennies per pound sterling) Product line Price per piece Cost per piece Gross margin % of margin Bottled water .20 .20 0 0 Soft drinks .50 .50 0 0 Chips .50 .45 .05 10% Burgers 1.50 1.20 .30 25% The pricing of the water soft drinks and chips do not carry any mark up. It is expected that the grant will cover up for the “no mark-up” and to subsidize the operational costs to be incurred during the games. This policy though means that the burden to cover the operational costs is on the sales of burgers. This policy will only be during the games. After the games it is expected that the venture will continue but with margins on the sale of all products to be sold. Product cost strategy The venture will merely purchase the items to be sold. This will be done by entering into contract of supply from reliable suppliers for the duration of the games. Since the burgers are perishable items there is a need to be keen on the preferences of customers on the kind of burger and to order these items accordingly. Spoilages are expected to be incurred and therefore have to be minimized by closely analyzing the sales for the previous week. The other products are packed or bottled so there is no danger of spoilage. However, in the case of the bottled drinks there is a need to stock a few items for the day. Promotions The venture will embark on some advertising posters around the Olympic grounds and inside the stadium. An advertising company will be engaged for this purpose for a weekly fee of £300. Organizational Structure. The venture will have two sales assistants. One will go around the stadium and around the grounds to peddle the items or to take orders. The other assistant will tend the stall for the walk in customers. The venture partner will assist in the sales, administration, like purchasing, and a little of accounting of the days sales and expenses. Activities after the games It is the intent of the venture partners to continue the business after the games. Therefore, the equipment and deliver van to be purchased shall not be sold. This intention is on the concept that the prices shall be increased immediately after the games so that the business will show a net profit at the end of each year. Profitability The projected income statement and projected cash flow statement show that the venture, at the projected pricing schedule is not viable. At the end of the games there will be an operating loss of £6,886 before interest charges. After the games, however, the venture is projected to incur a net gain of £2,,878. In terms of cash flows the cash deficit for the same period is projected at £35,300. This means that the venture cannot repay the loans in 6 weeks. Shown below is the condensed projected income statement and cash flow for the period of 6 weeks: Condensed Projected Income Statement and Cash Flow from Operations     For the period of 6 weeks       In British Pounds Sales Cost of Sales Margin % to sales Bottled water 4,000 4,000 0   Soft drinks 14,750 14,750 0   Chips 12,000 10,800 1,200   Buger 36,000 28,800 7,200   Total 66,750 58,350   Gross margin 8,400 12.58% Operating costs 11,700   Depreciation 2,386   Interest on loan 231   Total 14,317 21.45% Net income (loss) (5,917) -8.86% Add back non cash - deprn 2,386   Net cash inflow (outflow)   (3,531)   Below is the net gain of £4,083 on the business venture after the grant of £10,000 and from an operating loss of £5,917 Loss (5,917) Grant 10000 Gain 4,083 Justification for the loan While it is true that the venture cannot be paid from the cash flow to be generated during the games the venture partner will still proceed to borrow from the bank. Otherwise, it cannot go into the venture for lack of funds. The proposal is to get a loan that is to be paid partially within the year and on the balance on the 2nd year of operations. By that time, with increase in revenues the operations will be sufficient cash for repayment. The internal rate of return (IRR) for five year is 164%. The venture will show a return on the first year after adjustment on the prices by adding a mark-up of 15% of cost. Letter of application for loan Bank Manager ABC Bank Dear Sir: We are herewith applying for a loan in the amount of £36,300 for the purpose of financing a venture to set up a food stall during the Olympic Games for a period of 6 weeks. The OCLOG will give us a grant in the amount of £10,000 which shall be our counterpart against the loan. Considering however that the subsidized pricing scheme during the games will not generate sufficient net cash inflow to repay the loan at the end of the games we propose to pay it within two years. The first payment will be on the first year at £10,000 and the balance on the second year. This is possible in view of our intention to increase our prices on the other three products that do not have mark ups during the games. Attached herewith are our projected income statements and cash flows for the 6 week’s period (Annex A) and for the next 5 years (Annex B). We shall appreciate your favourable action. Thank you and best regards. Sincerely yours, Report to OCLOG We have the honour to submit herewith our report on the venture that we are bidding on for the Olympic Games. Our Business Plan The business plan that we are submitting herewith is designed to cater to those who are going to the Olympic Games over a period of 6 weeks. There are 4 product lines, namely, bottled water, soft drinks, chips, and burgers. These will be sold in the stalls that will be rented by us inside the grounds. With two sales assistants we expect to fully serve the customers who are watching the games inside the stadium and on the walk-in customers who loiter in the grounds. We shall offer the best quality burgers which are our main product lines, and bottled or packaged products. Our pricing is modest. We intend to put a mark up on the burgers at the rate of 25% of cost. The rest will be sold at cost. The gross margin on burgers will contribute to our operating costs although this is not enough. The operations alone will mean a net loss of £5,917. Consequently, we expect that the grant will cover up for the shortfall. This will net us a net income after games of £4,083. We shall purchase the items to be sold which will give a gainful employment to others. We shall contract 2 sales assistants who will tend the store for walk in customers, and the other to peddle or take orders from those inside the stadium. Our venture partners will assist in the sales, administration, purchasing, and preparation of reports weekly. We intend to get an administrative assistant in the future. But in the meantime it is not appropriate to hire one during the games. We intend to get a bank loan of £36,100 to finance the operations and to purchase the necessary equipment and delivery van totalling £30,000. The loan will be for a period of two years in view of the fact that we cannot repay it within one year. The income during the games is not adequate to generate cash for repayment of the loan. However, with increase in prices we expect to be able to realize more profits and thereby have more cash from operations. As mentioned above we need to add a mark up on the bottled water and soft drinks, in order to generate enough margins that will cover our operating costs. We intend to continue the business venture after the games. This is dependent on the experience on the volume of sales during the games. We did not project increase in the volume of sales after the games. However, we shall increase our sales price at the rate of 10% yearly, and the cost of sales and operating cost to go up at the rate of 5% annually. Our return on investment (IRR) over a period of 5 year is expected to be 164%. We are limited by the lack of time to do a more comprehensive study on the market especially on the expected volume of people who will watch the games. If permitted we shall add a mark up on the other three products that are currently projected without a mark up. A 15% mark up is possibly attainable. Otherwise, we shall just go without mark ups if there is a significant reduction and volume that would not allow us to realize our projections. (A more comprehensive Business Plan is attached) The role of the administrative assistant The role of the administrative assistant is to do the paper work on the venture, follow up on the orders, and to pay bills as they mature. In case there are large walk in customers the assistant will help the other sales assistant to take care of orders. At the end of the day the assistant will help in the inventory count of unsold items, store them, and prepare and make the order for the succeeding week’s sales. Job requirement and skills of administrative assistant The assistant must be at home with paper work, orderly in his work files, and is at comfortable with numbers. It is not necessary for him to be a college or high school graduate. But he should be trusted and honest. He is willing to work for long hours when necessary during the games. Available immediately to work at the start of games and is willing to work only for a period during the games. Learnings The most significant learning I had is the interaction with the group particularly in the gathering of data on cost, coming up with the options on pricing strategy, projections on volumes of sales, and deciding on what are the product lines to venture into. The accounting theory I learned to apply is the projection on the pricing whereby the unit cost and unit prices are applied on the volume of sales by product line. This also included the determination of the variable cost and fixed cost and how these are applied in determining the break even sales, and the desirable total revenues for the 5 year projection. I also learned the importance of determining the cash needed during the 6 weeks period, the weekly drawdown, and the repayment scheme that the venture can afford. I learned more importantly the importance of dealing with bankers who ask a lot of questions that I have not thought of earlier. Presentation (MS PowerPoint slides) References Internal Rate of Return – IRR, http://www.valuebasedmanagement.net/methods_irr.htmlhttp://www.planware.org/bizplanchecklist.htm Plan Your Marketing Strategy http://marketing.about.com/od/marketingplanandstrategy/Plan_Your_Marketing_Strategy. Writing an Effective Business Plan, Deloitte & Touche, Fourth Edition, http://www.deloitte.com/dtt/cda/do Read More
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