chapter 18

CHAPTER 18 Financial Management 485 connect Starting Up: Tom and Eddie's VIDEO CASE This video features the start-up company called Tom and business. According to CFO Gordon, the restaurant has Eddie's, an upscale hamburger restaurant in the Chicago "net 14" terms with its food vendors. This means that the area. Started in 2009 at the height of the great recession, invoice is paid 14 days after the receipt of the goods. This is the partners had a difficult time securing bank financing a form of financing, according to the CFO, that allows the As a result, they financed the operation themselves with company to turn that inventory once or twice during the the help of a third partner, Vince Nocarando. The partners 14-day period. both had long and successful careers as executives with At the time of the video, Tom and Eddie's was in its McDonald's. Tom was executive vice president for new 15th month of operation with three restaurants in the Chicago locations and Eddie was the president and CEO of North area. According to one of the partners, Eddie, the goal is to American operations grow to 10 stores and then look at franchising the operation. Both partners, as a result of their experience at McDon- When considering where to open a new operation, Eddie ald's, are well suited for the restaurant business. One of the indicates that careful consideration is given to the demo most challenging and important elements of a successful graphics of the area, including the average income level of start-up, like Tom and Eddie's, is a talented financial man those working and living in the area to be served, the age of ager. Recognizing the importance of the financial function, the population, the square footage of the surrounding com- they hired another former McDonald's executive, Brian mercial space, and case of access to the location. Equipment Gordon, as CFO. Gordon explains that cash flow is the is purchased rather than financed by the partners. most important element in starting up a restaurant. In fact, According to the partners, entrepreneurs think in cash flow is more important than profits in the first and terms of opportunities, not in terms of potential failure. perhaps second year of operation. Second to cash flow in With 15 months of successful operation, capital will be terms of importance for sustainability is the management easier to raise from traditional sources of financing, such and control of inventory as banks, to expand the operation. Who knows, maybe a Cash flow is important, according to the CFO, because franchised Tom and Eddie's will be opening soon in a loca of the "known" costs, such as rent, payroll, inventory. tion near you. taxes, and utilities. These are "known" costs because they are recurring and the relative costs are known on a weekly THINKING IT OVER or monthly basis. CFO Gordon explains that cash flow is 1. What are the three factors associated with operating important in managing these known costs because of the funds, according to the video? significant "unknown" factor, which is sales. Tom and Eddie's uses a very technology-intensive inven- 2. What is meant by the term front of the house? tory management and control system because of the per 3. Why, according to the video, was bank financing ishable nature of foodstuffs associated with the restaurant unavailable for Tom and Eddie's start-up