Pete and Julie are planning to set up a night club in Birmingham which they are...

  

  

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Pete and Julie are planning to set up a night club in Birmingham which they are provisionally calling the Indiana Club. Located in a canal-side warehouse, the club will have a bar and a large dance floor. The couple are also planning to put on gigs (live performances) twice a month, every month. The disco is expected to build up to an average crowd of 500 per week after three months, with each customer paying £10 to get in. The club should also pull in an extra £5 per person and forecasts an attendance of an extra 100 on gig nights. Bands will be paid an average of £5,000 each. Seven full time staff will be employed at an average of £17,000 per year for each person. Pete and Julie plan to take out £25,000 each during the first year of the business. The building is going to cost £1 million to buy. It also needs repair, conversion and fitting out before opening. This will cost about £280,000. Fixed costs include heating, insurance and telephone bills. These costs add up to £24,000 over the year. Variable costs are food and drinks. The problem that the entrepreneurs face is that they only have personal capital of half a million. Pete has been negotiating with Ray, a local businessman, who is seriously interested in investing in their business idea. Julie feels that Ray will want to be involved in the running of the club. As he is now in his 50s, Julie is worried that he will not really be in touch with the kind of service that they are seeking to provide. (A club primarily for 18 to 30 year olds). She would prefer to raise the money from the bank. Why not compromise?" said Pete. 'Make him a minority shareholder, with less than 50% of the shares, and borrow the rest from the bank." Ray himself is impressed with the business plan and thinks that Pete and Julie have got a winning formula. He sees the potential for expanding through a franchised operation if everything goes well in the first couple of years. An (incomplete) cash flow forecast for the first six months of trading is shown below. The forecast shows the position after the building has been bought. It is assumed that there were no borrowings from the bank. CASH FLOW FORECAST FOR THE INDIANA CLUB Opening balance. CASH INFLOWS Entrance tickets Gig tickets Bar Capital introduced Total receipts (A) CASH OUTFLOWS Renovation and conversion Bands Owners drawings Wages Stock (drink and food) Heat, insurance, telephone etc Marketing JUL £ 0 10000 3000 20000 280000 10000 4167 9917 10000 2000 AUG SEP 313000 33000 2000 £ 27491 7 20000 28000 0 10000 £ 1016 10000 1500 10000 3000 3000 3000 3000 0 4800 0 1000 0 4167 4167 9917 OCT NOV £ -4250 2000 0 £ 4167 9917 9917 1500 0 1166 7 3000 4000 4000 0 0 2000 0 6300 6300 0 0 1000 1000 0 0 2000 2000 2000 1000 1000 4167 9917 2000 2000 0 0 2000 2000 1000 DEC £ 2000 0 3000 4000 0 6300 0 1000 0 4167 9917 2000 0 2000 1000 Total Payments (B) Net cash flow (A- B) Closing balance 38083 274917 31808 4208 4708 4708 3 3 3 3 i) il) il) Fixed costs (2 marks) 28508 3 5917 274917 -10167 -4250 1591 7 1166 7 1591 7 2758 3 1: Explain what is meant by the terms: Business plan (2 marks) What would you expect a business plan to contain? (2 marks) 4708 3 iii) Entrepreneur (2 marks) 2: Briefly explain the purposes of a business plan. (5 marks) 3: Complete the cash flow forecast figures for December (10 marks) Hint: to gain full marks reproduce the cash flow in its entirety. 4: Consider whether, from the point of view of the owners of the Indiana club, it would be a good idea to open new clubs through franchise contracts. Do you think other entrepreneurs are likely to buy franchises? (8 marks) 5: What benefits does setting up the club as a private limited company offer? (8 marks) 6: Using the information available to you in the case study, what would be the best way of Julie and Pete raising the finance they need to start-up their business? (10 marks) 7: At present, Julie and Pete are seeking to employ only full time staff. Discuss what alternatives they might have in terms of their approach to employing people. (7 marks) Pete and Julie are planning to set up a night club in Birmingham which they are provisionally calling the Indiana Club. Located in a canal-side warehouse, the club will have a bar and a large dance floor. The couple are also planning to put on gigs (live performances) twice a month, every month. The disco is expected to build up to an average crowd of 500 per week after three months, with each customer paying £10 to get in. The club should also pull in an extra £5 per person and forecasts an attendance of an extra 100 on gig nights. Bands will be paid an average of £5,000 each. Seven full time staff will be employed at an average of £17,000 per year for each person. Pete and Julie plan to take out £25,000 each during the first year of the business. The building is going to cost £1 million to buy. It also needs repair, conversion and fitting out before opening. This will cost about £280,000. Fixed costs include heating, insurance and telephone bills. These costs add up to £24,000 over the year. Variable costs are food and drinks. The problem that the entrepreneurs face is that they only have personal capital of half a million. Pete has been negotiating with Ray, a local businessman, who is seriously interested in investing in their business idea. Julie feels that Ray will want to be involved in the running of the club. As he is now in his 50s, Julie is worried that he will not really be in touch with the kind of service that they are seeking to provide. (A club primarily for 18 to 30 year olds). She would prefer to raise the money from the bank. Why not compromise?" said Pete. 'Make him a minority shareholder, with less than 50% of the shares, and borrow the rest from the bank." Ray himself is impressed with the business plan and thinks that Pete and Julie have got a winning formula. He sees the potential for expanding through a franchised operation if everything goes well in the first couple of years. An (incomplete) cash flow forecast for the first six months of trading is shown below. The forecast shows the position after the building has been bought. It is assumed that there were no borrowings from the bank. CASH FLOW FORECAST FOR THE INDIANA CLUB Opening balance. CASH INFLOWS Entrance tickets Gig tickets Bar Capital introduced Total receipts (A) CASH OUTFLOWS Renovation and conversion Bands Owners drawings Wages Stock (drink and food) Heat, insurance, telephone etc Marketing JUL £ 0 10000 3000 20000 280000 10000 4167 9917 10000 2000 AUG SEP 313000 33000 2000 £ 27491 7 20000 28000 0 10000 £ 1016 10000 1500 10000 3000 3000 3000 3000 0 4800 0 1000 0 4167 4167 9917 OCT NOV £ -4250 2000 0 £ 4167 9917 9917 1500 0 1166 7 3000 4000 4000 0 0 2000 0 6300 6300 0 0 1000 1000 0 0 2000 2000 2000 1000 1000 4167 9917 2000 2000 0 0 2000 2000 1000 DEC £ 2000 0 3000 4000 0 6300 0 1000 0 4167 9917 2000 0 2000 1000 Total Payments (B) Net cash flow (A- B) Closing balance 38083 274917 31808 4208 4708 4708 3 3 3 3 i) il) il) Fixed costs (2 marks) 28508 3 5917 274917 -10167 -4250 1591 7 1166 7 1591 7 2758 3 1: Explain what is meant by the terms: Business plan (2 marks) What would you expect a business plan to contain? (2 marks) 4708 3 iii) Entrepreneur (2 marks) 2: Briefly explain the purposes of a business plan. (5 marks) 3: Complete the cash flow forecast figures for December (10 marks) Hint: to gain full marks reproduce the cash flow in its entirety. 4: Consider whether, from the point of view of the owners of the Indiana club, it would be a good idea to open new clubs through franchise contracts. Do you think other entrepreneurs are likely to buy franchises? (8 marks) 5: What benefits does setting up the club as a private limited company offer? (8 marks) 6: Using the information available to you in the case study, what would be the best way of Julie and Pete raising the finance they need to start-up their business? (10 marks) 7: At present, Julie and Pete are seeking to employ only full time staff. Discuss what alternatives they might have in terms of their approach to employing people. (7 marks)