Its September, 2021 and Katherine MacDonald has a decision to make. She owns Windsor Caf and Bakery,
Question:
It’s September, 2021 and Katherine MacDonald has a decision to make. She owns Windsor Café and Bakery, located in Windsor, Nova Scotia. It has been a busy local meeting and eating spot for many years but unfortunately, Katherine has never made a lot of money with the business and the lease will be expiring at the end of the year. While she is finally starting to see a light at the end of the pandemic tunnel, she also thinks it may be time to think more carefully about her future in the food service industry. Katherine is considering closing down the café to work from home as a caterer instead.
The Location
Windsor is a small town of just 5,000 people but it is only 60 km from Halifax, the largest city in Atlantic Canada, and is considered to be one of the most historic towns and service hubs leading into the Annapolis Valley. It is also just 25 km from Acadia University and the several wineries in the area that draw thousands of tourists as well as many weddings and other events each year.
The café is located in a 150 year old building in downtown Windsor near the railway museum and several other shops and services. When Katherine moved in she signed a ten year lease which expires at the end of December this year. If she renews the lease, she is expecting at least a 20% increase in the current lease payments of $1,875 per month.
The Café
Katherine has always had a passion for baking. From a young age she has created her own recipes and been a popular invitee to any pot-luck. Her dream had always been to own her own shop and when the owners of the Windsor Café and Bakery decided to retire ten years ago she jumped at the opportunity. By continuing to offer the classic sandwiches, soups and desserts of the previous owners and slowly introducing some changes of her own she has been able to keep the regular clientele happy and slowly modernize the look of the bakery and the menu at the same time. One aspect that Katherine was quite happy about was that the two full time staff members who were there when she started are still working with her.
Windsor Cafe and Bakery caters to the morning and lunch crowd. They are only open from 7:00 am to 4:00 pm. Mondays to Fridays. This allows Katherine to usually leave by 3:00 to pick up her young children from school while trusting her long term staff to close up at 4:00. Katherine, however, like most bakers, is up early so she can be at the shop by 5:00 am and get the daily product baked in time for the 7:00 opening. About 70% of their sales are take-out, even higher over the last year and a half during the pandemic, and they serve mostly regulars. Katherine and her employees know almost everyone by name and what their regular orders are. Many of the retirees in town have made Windsor Cafe and Bakery their regular place to just sit and chat with friends over a morning coffee and biscuit. Despite the low COVID-19 cases in the Windsor area, many of these regulars have decided to stay home or just get something to go. The retirees have been a fixture at Windsor Cafe and Bakery for many years, but given their average check of only $5.00 each, not a major contributor to the bottom line. Overall, sales during the pandemic have not declined noticeably since most have always been take-out anyway.
While Windsor Cafe and Bakery was reasonably busy between 7:30 and 9:00, their busiest time was lunch time between 11:30 and 1:00. Not only would they get the regular walk in traffic, they would also get several orders placed during the morning for pick-up. Their phone orders would sometimes be for over $100 each and since the shop did not deliver (and delivery services such as Uber Eats or Door Dash don’t exist in Windsor) the customers would have to pick them up. As a result of this lunch time rush, Katherine has hired a part time person to help out. A Nova Scotia law requires that any employee who comes in for a shift must be paid for at least three hours, even though they may be only needed for two. Once the lunch rush is over, there tend to be few afternoon customers. As a result, Katherine’s part time employee, and sometimes her full time employees, have little to do after 1:30 or 2:00 until closing at 4:00.
Katherine pays her two full time employees, Sally and Rozina, $15.00 per hour and her part-time employee, Claire, $13.00 per hour. All three share the tips received at the counter in the tip jar. Sally usually works from 6:00 to 2:30 and Rozina from 7:30 to 4:00, though they will sometimes switch off if needed. They are only paid for eight hours each day since they are not paid for their respective half hour meal break at 10:00 and 11:00. Claire works from 11:00 to 2:00 each day. Katherine comes in at 5:00 am to get the day’s baking started but she also works all day until 3:00 making the soups, sandwiches, special orders and doing all of the paper work and other activities involved in running a small client focused business. She often works in the evening as well testing new recipes and ordering supplies.
Catering Opportunity
After ten years of running her café and bakery, Katherine is tired. She pays herself $40,000 a year as a salary but since the business is only breaking even she has not been able to earn any additional income to compensate for her extra work and risk, or put money aside for her children. She is wondering if maybe it’s time to just close it down and try running a catering business by herself from home where she has a fairly well equipped kitchen. Katherine believes that there would be less stress with no employees or regular rent payments to worry about and she would be able to work around the schedules of her young children.
There is very little competition for catering in Windsor and given her good reputation for decorative cakes and sweets as well as delicious sandwiches and hors d'oeuvres, Katherine is hopeful she could get several jobs as far away as Halifax in addition to many throughout the Annapolis Valley. She estimates that she could cater 90 events per year at an average revenue of $750 each. She also expects that this could possibly grow to 120 contracts or more per year. Given that she would be doing all of the work herself, Katherine doesn’t want to do more than 120 events, even if the demand was there.
Projections
If the bakery stays open Katherine anticipates the current $200,000 in gross revenue per year will likely only increase by 2.5% per year for the foreseeable future. Cost of goods sold average about 30% of sales for ingredients and supplies. Other than labour, her only other costs are rent and utilities which are currently $1,875 and $400 per month, respectively.
If she closes the bakery Katherine would save on rent, utilities and wages. She also believes that making everything to order will cut down on waste so her cost of goods sold would go down to 25% of revenue. However, her catering clients would expect delivery so she would have to buy a van which she thinks she can purchase used for $10,000. In addition, she would need to repaint the van with her Windsor Cafe and Bakery Catering logo for an additional $800. The van would likely also cost $225 per month for gas and maintenance as well as another $150 per month for insurance. If she meets her upper limit of 120 events per year then gas and maintenance would likely increase by $100 per month.
Other costs that Katherine anticipates for the catering business would include $2,000 for a lawyer to help set up the new business licence, $1,200 annually for advertising, $3,000 for a new refrigerator and other equipment for her home kitchen, and $50 per month for the added utilities at home. Katherine also realises she doesn’t have the cash to pay for any of the start-up costs so she would need to borrow on her home line of credit at a rate of 5.5%.
Conclusion
Owning a café and bakery in her home town had always been Katherine’s dream. She has truly enjoyed the last ten years and the people she has worked with as well as all of the regular customers but she is wondering if it is time to change that dream into a home-based catering business instead. Katherine has come to you, her trusted friend and recent CPA graduate, for advice. As a first step, you’ve developed an outline of some of the things you need to think about before you provide the professional advice Katherine is looking for in a well structured report.
Requirement 1. Compare the operating income of the bakery vs. the operating income of the catering business
Requirement 2. How many events does Katherine needs to breakeven, and to make the same or higher income than the bakery she currently operates. (do separate calculations)
Expert Answer:
Requirement 1 Compare the operating income of the bakery vs the operating income of the catering business To compare the operating income of the baker... View the full answer
