2.2 second cup plan

Second Cup Business Plan

Business PlanSecond Cup Franchise

Prepared By

Robert DanielsShankar Das

Josephine McKayEdmund Mupondwa

February 2008

Edwards School of Business, University of SaskatchewanDaniels, R., Das, S., McKay, J. Mupondwa, E. 2008

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Table of Contents

EXECUTIVE SUMMARY 41.0 Introduction 41.1 Industry Overview 41.2 Mission Statement 41.3 Goals and Objectives 41.4 Financing 42.0Operations Plan 72.1Location 72.2Second Cup Plan 82.3 Floor Plan 83.4 Average Business Cycle 93.4.1Average Business Day 93.0Human Resources 134.1Organizational Strategy 144.2Training 145. Marketing Plan 155.1 Industry Overview and Current Markets 155.2 Competition 16

5.2.1 Direct Competitors 165.2.2 Indirect Competition 165.3 Customers and Target Markets 16

5.4 Product and Service Features 185.4.1 Product Quality 185.5 Pricing Strategy 205.6 Promotion Strategy 205.7 Distribution 215.8 Sales Objectives 21

5.8.1 Sales Projections 225.8.1 Marketing Expenses 225.9 SWOT Analysis 225.9.1 Strengths (Internal Factors) 225.9.2 Weaknesses (Internal Factors) 225.9.3 Opportunities (External Factors)

235.9.4 Threats (External Factors 23

6. Financial Plan 246.1 Sales Revenue and Net Income: 246.2 Total Operating Expenses 256.3 Working Capital Estimates 256.4 Cost of Capital 266.5 Debt Amortization Schedules 266.6 Risk analysis 266.7 Financing Budget 266.8 Dividend Policy 276.9 Ratio Analysis 276.10 Financial and Investment Analysis 286.11 Risk Analysis 287. Conclusion 30


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LIST OF TABLESTable 1.1 Summary of Financial Results 6Table 2.1: Shift Schedule by Hours 10Table 2.2: Total Hours of Work 11Table 2.3 Capital Budget 12Table 2.4 Operating Expenses 13Table 6.1 Sales Revenue 24Table 6.3 Risk Variables and Level of Importance 26Table 6.4 Financing Structure 27Table 6.5 Dividend Projections 27Table 6.6 Ratio Analysis 27Table 6.7 Summary of Financial Results 28

LIST OF FIGURESFigure 2.1 Site Location 7Figure 2.2 Aerial View of Location 8Figure 2.3 Floor Plan 9Figure 2.4 Daily Work Schedule 10Figure 4.1 Organizational Chart 14APPENDIX 1 Financials 31


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EXECUTIVE SUMMARY

Introduction

This report presents a comprehensive business plan for a Second Cup franchise to be established in

Saskatoon, Saskatchewan. The Second Cup franchise (referred to as Second Cup for the remainder of the

report) will be located at the new University Heights Shopping complex called The Village Square. This

location is also home to one of Saskatoon’s fastest growing areas in the city, with an estimated population

of 30,000 and expected to double to 62,000 by 2015. This area has homeownership of approximately

93.5%. The average value of a dwelling is $218,357; average family income of $81,774; average

household size is 3.2. The Village Square includes a strip mall with street-front coffee shops, boutiques,

and other retail and community services. The area has two elementary schools and two high schools, with

an additional high school recently announced. This location is adjacent to the world class SaskTel Indoor

and Outdoor Artificial Turf Soccer Centre. The SaskTel Soccer Centre is a great magnet for ancillary

business development in this area. Second Cup will provide high quality specialty product lines in four

categories: coffee, specialty beverages, food, and cooler beverages

The operating and marketing strategy is backed by a sound financial analysis that demonstrates the

viability of this plan. Key financial projections are as follows:

Total revenue for 2008 is projected to reach $527,850. This is expected to double by 2013.

The gross margin from total revenue is estimated at 63%, this margin is expected to be remain

consistent year over year.

Net income, after taxes, in the first year of operations is expected to be $7,030 however by 2013

this will grow to $112,392.

Ratio analysis shows that the business is able to meet its current liabilities 4 times over within the

first year.

The ROI after taxes is 13%, for every $1 invested there is an earning of $0.13.

The Net Present Value is $176,326.

The expected internal rate of return on this investment is 94.4%.

These are very positive returns given an initial equity investment of $40,000.


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1.0 Introduction

1.4 Industry Overview

The specialty coffee and beverage industry is dominated by three main companies, namely, Tim Hortons,

Starbucks, and Second Cup. Starbucks has a market share of over 40% of the specialty coffee market.

Overall, the coffee segment is growing very fast. Industry is already benefiting, in terms of increasing

sales and higher prices, from the product differentiation, improved quality and price premiums of

specialty coffees. Coffee quality rather than price, customer demand, or convenience of supply is

considered to be the principal criterion for industry purchasing decisions. According to the International

Coffee Organization (ICO), most potential specialty coffee markets are far from saturated. Specialty

coffee sales continue to expand by 5% to 10% per year. The North American specialty market therefore

represents one of the largest and most vibrant coffee markets in the world. Second Cup has an opportunity

to benefit from this market.

1.5 Mission Statement

To be the leading Canadian Second Cup franchise of specialty coffee and beverages in Saskatchewan,

with a commitment to providing community support, while achieving growth through core competencies

of our people.

1.6 Goals and Objectives

To provide fresh coffee and beverages seven days a week for the neighbourhood

To achieve a return on investment of not less than 15% per annum

1.4 Financing

Mary and Ken Hatch are preparing for a significant career change and are willing to become their own boss. Ken is a supervisor Caretaker at the local school and Mary has worked in a coffee shop for eight years. The Hatches have savings of $20,000 and will be required to raise another $20,000 to become the equity owners of a Second Cup franchise in Saskatoon. Right now there is no other Second Cup franchise in Saskatoon, so the opportunity looks even more attractive for the Hatches. The Hatches will be 50 – 50 shareholders in this private corporation. The financial projections summarized above look very promising for the Hatches (Table 1.1 below).


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Table 1.1 Summary of Financial Results

Year 2008 2009 2010 2011 2012 2013Sales 527,850 594,570 669,724 754,377 849,730 957,136 Cost of Goods Sold 192,948 222,141 250,220 281,847 317,473 357,602 Gross Margin 334,902 372,429 419,504 472,530 532,257 599,535 Expenses 326,483 314,233 362,615 393,928 427,938 464,934

Income Before Taxes 8,420 58,196 56,889 78,601 104,319 134,601 Income Taxes 1,389 9,602 9,387 12,969 17,213 22,209 Net Income(Loss) 7,030 48,594 47,502 65,632 87,106 112,392

Net Present Value of Equity Investment 176,326Internal Rate of Return on Equity Investment at 20% 94.4%


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2.0 Operations Plan

The Second Cup Franchise is a café style coffee shop that will serve a selection of hot and cold beverages

with a value added component of sandwiches and baking products. The manager and the full time staff

will monitor the day to day operations with a part time staff controlling the front end of the operation of

sales and service of coffee products. The objective for Second Cup in Saskatoon is to provide quality

coffee at reasonable prices. The atmosphere is also crucial along with the location of the café. The

chosen location is in the University Heights area of Saskatoon. This area is developing quite fast and

high sales volumes are expected, this is explained further in the marketing plan. Figure 2.1 is an aerial

photo of a 1 kilometre circumference of the actual site of building.

2.1 Location

Figure 2.1 Site Location

The basis for this location was the accelerated development of the area that includes new homes,

condominiums, two new high schools, and the major soccer centre. Figure 2.2 is a close-up aerial photo


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of the site of the new franchise. The site is easily accessible and there is plenty of room to accommodate

a minimal 1000 sq.ft building.

Figure 2.2 Aerial View of Location

2.2 Second Cup Plan

The option to have Second Cup construct the building is be highly beneficial to the plan. The franchiser’s

experience and expertise is crucial in this venture in the development of this new structure that will be

leased from Second Cup for a minimum 10 years.

2.3 Floor Plan

The floor plan, seen in Figure 2.3, will accommodate 10 tables and 40 chairs. The layout includes an

office, washroom, and small kitchen area for minimal food preparation and inventory storage. This is the

floor plan that was recommended to Second Cup, and actual blueprint drawings are not available at this

time for confidentiality reasons.


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Figure 2.3 Floor Plan

EXIT RESTROOMS

Dining

OFFICE

Service Counter

KITCHEN STORAGE

Entrance

3.4 Average Business Cycle

3.4.1 Average Business Day

The average business day is scheduled in such a way that it is user friendly, and that includes making sure

fresh hot and cold beverages are produced so that the customer will return for more “Second Cups”. The

diagram provides the activity schedule that will transpire from opening time (6:30 am) to closing (11:30

pm).

Figure 2.4 Daily Work Schedule

The above components are explained further below as follows:


Opening of the store Administration and float Fresh goods on display

Make fresh coffee Two staff works counter on

4 part time shifts

Manager assist close Cash drop by Manager

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The manager will open the store along with the full time (f.t.) employee who is the partner.

The manager will attend to any administration duties including staff schedule, inventory, and

prepare the day’s cash float.

Fresh foods like subs or sandwiches and baked products will be put into the display unit for

the customers to view. Any other preparation of the food items will take place at this time to

ensure accessibility for staff throughout the day.

The f.t. employee will get the fresh coffee brewing and ready to open for 6:30 am.

The first p.t. employee starts their shift at 7:00 am, so until this time the manager and the f.t.

employee work the counter.

Throughout the day three more part time shifts will start with at least two employees at any

given time. See Table 3.1 for a break down of the shift schedule, including start and end

times. The schedule has been formatted to ensure safety and a smooth running operation.

At 8:00 pm the Manager returns assist with the closing the store front and deal with any

issues that may arisen during the day. Inventory is assessed and orders are place as soon as

possible the following day.

The cash drop occurs after closing at the Bank located next door.

To support these hours of operation time schedules was determined to show how this the shifts will be

formatted and could be adjusted for part time employees on a rotation for preferences of evenings or days

or even after school for employees attending school.

Table 2.1: Shift Schedule by Hours

Manager Full Time Staff Part Time Staff

Monday6am - 10am8pm - 10pm 6am - 1pm

7am- 3pm (1)2pm-9:30pm (2)

Tuesday6am - 10am8pm - 10pm 6am - 1pm

7am- 3pm (1)2pm-9:30pm (2)

Wednesday6am - 10am8pm - 10pm 6am - 1pm

7am- 3pm (1)2pm-9:30pm (2)

Thursday 2pm-10pm 6am - 1pm7am- 3pm (1)2pm-9:30pm (2)

Friday 2pm-10pm 6am - 1pm7am- 3pm (1)2pm-9:30pm (2)

Saturday6am - 10am6pm - 10pm 10am -2pm

7am- 3pm (1)2pm-9:30pm (2)

Sunday6am - 10am6pm - 10pm 10am - 2pm

7am- 3pm (1)2pm-9:30pm (2)


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Table 2.2: Total Hours of Work

Total Hours of WorkManager(Salary)

Full Time

Part time 1

Part time 2

Part time 3

Part time 4

Daily Total

Monday 8 7 7.5 7 14.5Tuesday 8 7 7.5 7 14.5Wednesday 8 7 7 7.5 14.5Thursday 4 7 7 7.5 14.5Friday 4 7 7 7.5 14.5Saturday 8 2.5 7.5 7 14.5Sunday 8 2.5 7.5 7 14.5TOTAL HOURS 48 40 30 21 28 22.5 101.5

Shift #'s ( ) (1) = 7am-3pm (2) = 2pm-9:30pm

Total Part Time Hours 101.5 HourlyTotal Full Time Hours 40 HourlyTotal Manager Hours 48 Salary


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Table 2.3 Capital Budget

Capital Budget 2008 2009 2010 2011 2012 2013Equipment:

Full Size Refrigerator

2,500

Mini Refrigerator

600

Freezer

3,500

2 Blenders

2,000

10 Table ($300 per), 40 Chairs ($60 per)

5,400 1140

Cups (36 tall: 36 short)

160 80 80 80 80 80

Plates (36: 6.5 inch)

35 18 18 18 18 18

Silverware

4

2 Coffee Maker (dbl)

6,000

Espresso Machine

10,000

Cappacino Machine

1,500

Frozen Drink Machine (dbl)

2,200

Coffee Grinder

1,100

Frothing Pitchers

130

Dishwasher

3,800

Cash Register (2)

5,000

Pastry Display Case

209

Refrigerated Deli Case

2,748

Office Equipment 3,098


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Total Capital Costs 49,984 98 98 1,238 98 98


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Table 2.4 Operating Expenses

Operating and Marketing Expenses 2008 2009 2010 2011 2012 2013 Advertising Royalty 52,785 59,457 66,972 75,438 84,973 95,714 Local Advertising 9,285 9,285 9,285 9,285 9,285 9,285 Rent ($30 @ 1000) 30,000 30,720 31,457 32,212 32,985 33,777 Insurance 5,000 5,120 5,243 5,369 5,498 5,629 Repairs & Maintenance 4,950 5,069 5,190 5,315 5,443 5,573 Telephone & Utilities 15,000 15,360 15,729 16,106 16,493 16,888 Compensation 127,728 128,730 160,951 174,190 187,971 202,313 General Supplies 52,785 59,457 66,972 75,438 84,973 95,714 Incorporation Fees 250 40 40 40 40 40 Franchise Fee 27,500 - - - - - Interest on Long Term Debt 1,200 995 775 536 278 0 Total Expenses 326,483 314,233 362,615 393,928 427,938 464,934

3.0 Human Resources

Ken and Mary Hatch are the equity owners of the company. Mary brings extensive experience of the

coffee industry, while Ken comes with supervisory experience. The staff mix of Second Cup will as

follows:

1. One Manager (Co-owner: Mary Hatch)

2. One Full Time Employee (Co-Owner: Ken Hatch)

3. Six Part Time employees.

With the exception of the Manager’s position, the positions are entry level jobs with a focus on customer

service experience and safe food handling certification. These positions will require some shift work, but

there is some flexibility to meet the needs of the individual. The initial expected volume does not require

a large number of employees, until further growth. The overall plan is to recruit happy, energetic

employees who are committed to providing great customer service.


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4.1 Organizational Strategy

Figure 4.1 Organizational Chart

4.2 Training

Part of the franchise agreement with Second Cup includes a 3 week training program for new owners at

the Second Cup coffee college. On the job training will be provided for employees to ensure Second Cup

commitment to service is maintained.


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5. Marketing Plan

5.1 Industry Overview and Current Markets

According to the Coffee Association of Canada, Canadians drink over 15 billion cups of coffee a year,

making coffee Canada's favourite hot beverage. The most recent estimates show that per capita

consumption of coffee increased from 4.27 kg (beans) in 1990 to 4.52 kg in 1999. The average coffee

drinker consumes three cups per day. Of all coffee consumed, 74% is roast and ground, 20% is instant,

and 6% is specialty. Decaffeinated coffee represents 9% of total coffee consumption. From 1990 to 1999,

per capita consumption of tea increased from 0.54 kg (tea leaves) to 0.86 kg. Presently, about 90% of

Canadians drink tea and consume about 7 billion cups per year. The tea and coffee industry represented

1.9% of the total value of food and beverage shipments, 1.1% of employment in the sector, and 1.1% of

the number of food and beverage plants in 1999. The combined sector accounted for 28% on a volume

basis of all non-alcoholic beverages sold at retail in 1998-99 (A.C. Nielsen).

In 1999, manufacturing shipments of tea and coffee combined totalled $1,110 million. The Canadian

market absorbed the remaining $832 million in domestic shipments and a volume of imports worth

$486 million. This industry continues to be a net importer. The specialty coffee sector accounts for 15%

of the retail coffee market. In the US for instance, the retail coffee market recorded a growth of 157% in

value between 2000 ($3,258 million) and 2005 ($8,372 million). This growth was driven by American

consumer demand up-market and premium-priced coffees. Over the 2005-2010 period, coffee sales are

expected to grow by a further 125% to reach $18,839 million in 2010.

Starbucks has a market share of over 40% of the specialty coffee market. The expected growth in this

category will offer the company opportunities for expanding its revenue base. Overall, the coffee segment

is growing very fast. Industry is already benefiting, in terms of increasing sales and higher prices, from

the product differentiation, improved quality and price premiums of specialty coffees. Coffee quality

rather than price, customer demand, or convenience of supply is considered to be the principal criterion

for industry purchasing decisions. According to the International Coffee Organization (ICO), most

potential specialty coffee markets are far from saturated. Specialty coffee sales continue to expand by 5%

to 10% per year. The North American specialty market therefore represents one of the largest and most

vibrant coffee markets in the world. Second Cup has an opportunity to benefit from this market.


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5.2 Competition

On a product basis, tea and coffee beverages compete with a variety of other beverages including

flavoured soft drinks, milk, fruit juices, bottled water, vegetable juices, soy beverages, hot chocolate, low

alcohol wine coolers, and ciders. Retail sales of tea made up about 3.9% of all non-alcoholic beverages in

1998 and 1999, while sales of coffee constituted 8.3% of all non-alcoholic beverages in 1998 and 7.7% in

1999. This decrease in the value of retail sales has been due to falling prices for traded coffee.

(Agriculture and Agri-Food Canada 1999)

At the segment level, there is intense competition in coffee beverage segment from other specialty coffee

shops, restaurants, and doughnut shops. Whole bean coffees sold through coffee shops compete directly

with specialty coffees sold through supermarkets, specialty retailers, and a growing number of boutique

specialty coffee stores. In addition, regional specialty coffee companies also sell whole bean coffees in

supermarkets. Increasing competition has adverse effects a company’s revenue.

5.2.1 Direct Competitors

Second Cup faces direct competition from Starbucks and Tim Horton’s, which are the established

national coffee houses. It also faces direct competition from other locally-owned and operated coffee

shops such as The Broadway Roastery, The Co-op and local restaurants. Other forms of direct

competition include McDonald’s and other fast food chains such as Dairy Queen, Burger King, and

Subway. Convenience stores such as 7-Eleven also provide direct competition.

5.2.2 Indirect Competition

Supermarkets such as Safeway that purchase whole bean coffees directly from suppliers offer indirect

competition by enabling consumers access to specialty coffee for home consumption. Second Cup will

differentiate itself by leveraging its brand identity to provide a high quality product backed by high

quality service. It is the intention of the Second Cup franchise owners will also contributor to local

community activities, especially the Soccer Association, schools, and other charities.

5.3 Customers and Target Markets

Second Cup will be located at the new University Heights Shopping complex called The Village Square.

This area is also home to one of Saskatoon’s fastest growing parts of the city, with an estimated

population of 30,000 and expected to more than double to 62,000 by 2015. These areas include Erindale,

Silverspring, Arbor Creek, and the new Willowgrove estate.


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Willowgrove is an exciting new neighbourhood. Homeownership is approximately 93.5%, and the

average value of dwelling is $218,357, with an average family income of $81,774. Average household

size is 3.2. Second Cup will locate in The Village Square, which is considered to be the heart of the

community, providing residents a central location with a relaxing ambience where they can meet

informally or hold community events. The Village Square includes a strip mall with street-front coffee

shops, boutiques, and other retail and community services. It has two elementary schools (Forest Grove

School and St. Volodymyr School) and two high schools (St. Joseph High School and Centennial

Collegiate), with an additional high school recently announced.

This location is adjacent to the world class new SaskTel Indoor and Outdoor Artificial Turf Soccer

Centre. The SaskTel Soccer Centre is a great magnet for ancillary business development in this area. The

Centre is attached to the Centennial Collegiate and the city operates a walking track on the perimeter of

the indoor turf field, with a future civic facility planned in 5 to 10 years. The Centre was built as a

partnership with the Saskatoon Public School Board and the City of Saskatoon, making it one of a kind in

Saskatoon and in Canada. Since 1998, the SaskTel Soccer Centre has been home to more almost 10,000

soccer players. Provincially, Saskatchewan Soccer Association enjoys approximately 30,000 members

including players, coaches, referees, managers, administrators, clubs, leagues, and districts. There are

approximately 178 adult teams in the indoor season alone, or over 4,200 adult games. There

approximately 200 youth teams with over 8,000 youth games. There are 7,000 registered players in

Saskatoon.

Second Cup is quite confident that it has identified a location that provides an important prerequisite for

success when it comes to the food service business. This location has great visibility, high traffic pattern,

convenient access, established retail shops in the area, enabling Second Cup to consolidate its already

well-known brand supported by its well-known line of fresh African, Colombian, and Brazilian coffee

beans and other beverages served in cleanest equipment, premium serving containers, and consistent

flavours.

Second Cup will implement a low cost but effective advertising and promotion campaign and forge strong

relationships with the Saskatoon Soccer Association, schools, charitable organizations, civic

organizations, and corporations by offering programs that support Saskatoon communities. This

relationship will provide significant free publicity for Second Cup.


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5.4 Product and Service Features

Second Cup’s franchise products are well established. Its product line has also grown from simple whole

bean coffee to more than 30 premium coffees, specialty beverages, complementary foods and

merchandise items. Our proposed location in The Village Square location will provide our patrons with

114 main beverage lines and a line of deserts and prepared deli sandwiches (Appendix 3.1). The lines

include:

Line 1: Specialty Coffee & Lattes

Line 2: Flavoured Lattes

Line 3: Specialty Tea

Line 4: Hot Chocolate

Line 5: Hot Milk Steamers

Line 6: Cider

Line 7: Soda

Line 8: Blended Sensations

Line 9: Creamy Fruit Smoothies

Line 10: Coffee Chillers

Line 11: Chocolate Chillers

Line 12: Tea Chillers

Line 13: Chocolate Vanilla Chillers

Line 14: Athletic Power Smoothies

Line 15: Specialty dry cake, desserts muffins, pastries, sandwiches

5.4.1 Product Quality

Second Cup prides itself for product quality based on the authentic sources of its coffee beans. It will

offer highly differentiated coffee blends sourced from prime coffee growing regions. African blends

include Ethiopian Limu Roast and Rwandan Cup of Hope Roast. Both blends reflect the exotic nature of

Africa in the taste and variety of its coffees, with tastes ranging from fruity citrus to delicate chocolate.

Ethiopia is considered the birthplace of coffee, with its highly respected Limu coffee bean, carefully


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picked and processed to preserve its sweet and smooth flavour. Additional diversity in the product line

comes from Asian blends such as Sumatra Mandheling, a truly exotic coffee prized for its unique and

well-concentrated sweet flavour. Finally, Second Cup provides a product line based on Latin American

blends La Minita Tarrazu from Costa Rica. This is a premium, hand-picked, and estate-grown coffee. La

Minita Tarrazu is exclusive to Second Cup in Canada. La Minita Tarrazu is one of the most carefully

processed and highly sought-after coffees in the world.

Second Cup’s other prized blends come from Panama (El Toucan), Brazil (Fazenda Vista Alegre),

Colombia (San Agustin and Colombia Supremo; Continental Dark, Colombian Supremo Swiss Water

Decaf). The Decaf blends are gently decaffeinated using a 100% chemical-free method of decaffeination

without removing the coffee flavour. Second Cup’s multi-region blends are intended to integrate flavours

from the four regions. The blends include Espresso Forte used to make all of our Specialty Lattes and

Cappuccinos; Espresso Forte Swiss Water Decaf used for all of our Decaffeinated Specialty Lattes and

Cappuccinos; Caffé Venice blending different coffee beans from Latin America and Africa to create a

sweet coffee with a rich aroma; Paradiso, which is Second Cup’s signature blend of unique coffees from

around the world and one of the company’s most popular blends. Second Cup will also offer flavoured

coffee, including:

Butter Pecan: Smooth, medium-bodied, sweet scent

Caramelo: Rich, inviting aroma with a subtle caramel flavour

French Vanilla: Aromatic, clean after-notes, medium body

Hazelnut Crème: Full-bodied, enticing aroma, nutty taste

Hazelnut Crème Swiss Water Decaffeinated: Full-bodied, enticing aroma, nutty taste

Irish Cream: Clean, aromatic and refreshing

Spiced Eggnog: Rich and creamy with a hint of nutmeg

Second Cup’s commitment to product quality comes from understanding the importance of four key

attributes that make a particular coffee or blend unique. These are aroma, acidity, flavour, and body.

Aroma is maintained to evoke an expectation on the part of the customer without being artificial or

overwhelming. Acidity is used to ensure that coffee does not taste flat and lifeless. Flavour refers to

how a drinker’s tongue will interpret the aromatic attributes of the coffee. Second Cup maintains body to

ensure volume and texture as opposed to competitors who offer light-bodied coffees that are watery.

Indeed, the company has a quality competitive advantage over some coffee retailers who disguise the

taste of low grade coffee with flavoured sugar syrup, resulting in an inconsistent cup as the amount of


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syrup added varies. Second Cup uses only high-quality coffee beans and has the distinct ability blend a

customer’s coffee beverage according to a customer’s exact specifications. Our employees will be well-

trained in coffee brewing, blending, and serving.

Apart from its high-quality aromatic coffees, Second Cup will also offer specialty teas, chilled coffee

beverages, power sports drinks, deserts and deli sandwiches, and seasonal specialty drinks. Premium

Second Cup merchandize will be offered at the store and via the web site. These include coffee mugs,

soccer balls, caps, T-shirts, bunny hugs, sweatshirts.

5.5 Pricing Strategy

Second Cup prices will be competitive and comparable to major competitors such as Starbucks and Tim

Hortons. However, the highly differentiated nature of its product based on product origin and target,

location advantage, and image will provide distinctive value-added benefits to Second Cup customers.

The pricing structure is provided in the appendix. Summary prices per cup are as follows: coffee at

$1.50, other specialty beverages at $3.50, food items at $2.50, and cooler beverages at $2.00. Credit terms

will be offered only in the form of valid credit card purchases such as Visa or MasterCard. This policy

makes it easy for patrons who prefer to use credit cards as a means of keeping track of expenditures, say

as a business expense.

5.6 Promotion Strategy

Second Cup will implement a low cost but effective advertising and promotion campaign and forge strong

relationships with the Saskatoon Soccer Association, schools, charitable organizations, civic

organizations, and corporations by offering programs that support Saskatoon communities. This

relationship will provide significant free publicity for Second Cup. In addition to this effort, Second Cup

will advertise in the local newspapers as well as use via direct mail ads which will include discount

coupons. A "frequent drinkers club" discount will be offered to regular customers. Second Cup

merchandize will be offered at the store and via the web site. These include coffee mugs, soccer balls,

caps, T-shirts, bunny hugs, sweatshirts. This will be an indirect way to promote the company. We will

allocate $1,000 per month for the next year towards advertising in local papers. An additional $1,000 per

month will be spent on radio and TV advertising. We will institute and sponsor a new annual City and

Provincial soccer tournament called Second Cup Soccer Tournament. We will also run an annual Second

Cup school fundraising program. These events will generate significant publicity without the need for

incremental spending on professional public relations services. The total marketing expense is $10,999.


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5.7 Distribution

Second Cup will have a lot of traffic owing to its prime location as described above. Well trained food

servers will distribute the product in the coffee shop. All the coffee blends will be mixed on site. Pastries

and cakes will be served fresh. Second Cup does not have a kitchen. However, its pastries, cakes, and

sandwiches will be supplied fresh by a highly reputed local food catering service. Supplies will be

coordinated to ensure that peak-hour demand is met. Our well trained servers will always greet patrons

and proceed to take the order. It is the duty of the server to ensure that every patron receives first-class

service.

5.8 Sales Objectives

Second Cup has set a 10% annual sales growth objective.

5.8.1 Sales Projections


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5.8.1 Marketing Expenses

Marketing Expenses Advertising Royalty 52,785 59,457 66,972 75,438 84,973 95,714 Local Advertising 9,285 9,285 9,285 9,285 9,285 9,285 Total Expenses 62,070 68,742 76,257 84,723 94,258 104,999

5.9 SWOT Analysis

We present an analysis of Second Cup’s strengths, weaknesses, opportunities, and threats (SWOT),

looking both at internal factors (strengths and weaknesses) and external factors (opportunities and

threats).

5.9.1 Strengths (Internal Factors)

Strong brand identity

Canadian leader, with more than 400 coffee houses, 43 of them in Quebec

Robust financial performance

Large scale of operations

Agreements with Air Canada, Via Rail and Delta Hotels, under which it serves over 26 million

cups of coffee a year

5.9.2 Weaknesses (Internal Factors)


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Second Cup prefers franchises or owner-operators who pay royalties on sales. Owner-operators

may have difficulty raising required start-up equity financing, unlike Starbucks which usually

prefers to set up company-owned outlets, sometimes in partnership.

Second Cup has signed a long-term agreement with a coffee multi-national for supply of coffee

beans. Competitors like Van Houtte and Starbucks have their own roasting plants.

Narrow product mix. Any reduction in consumer consumption of coffee for any reason would

have a negative impact company’s performance. High dependence upon a single product

represents a commercial risk.

5.9.3 Opportunities (External Factors)

New markets

Growing specialty coffee market

Growing demographic segment in new location

Prime location close to highly visible and active residential area

New health benefits of coffee

Organic coffee segment

Speciality teas expected to attain strong sales growth. Currently, specialty teas account for only a

small share of consumer purchases.

5.9.4 Threats (External Factors)

Intense competition from established players like Starbucks which has over 13,000 locations in

39 countries and a total of more than 44 million customer visits per week; revenues of $7,787

million in 2006 against its competitors like Diedrich Coffee ($59.5 million) and GMCR ($225.3

million) during the same period. Large economies of scale provide a cost advantage to Starbucks

in the marketplace and pose a threat to Second Cup.

Highly volatile coffee commodity prices

Coffee industry faces social and environmental concerns associated with coffee supplies,

including child labour in developing countries and exploitative prices paid to developing country

coffee producers. Corporate image can be eroded.


24


Emergence of low cost of brewers such as coffee presses (Bodum), mocha coffee-makers and

filter coffee systems (Melitta) will likely influence the purchase of whole beans and speciality

coffees by prime target market of the 18 – 50 year age group.

Rivalry reaction from multinational coffee companies (e.g. Kraft and Nestlé) who aware of

current market trends and have implemented a strategy to reposition themselves more

aggressively in the gourmet coffee market. The sale of coffee beans in grocery stores from major-

league players like Kraft, Proctor & Gamble (Folgers) and Nestlé.

Kraft and Starbucks announced the formation of a long-term partnership to sell Starbucks brand

coffee beans and ground coffee in stores throughout the U.S. and possibly internationally.

Strong competition and market leadership in the tea segment by the multinationals such as

Unilever and Nestlé that dominate the market. (Unilever and Nestlé).

6. Financial Plan

This section reports detailed financial projections for the next 6 years.

6.1 Sales Revenue and Net Income:

All products and services are furnished in four categories: coffee, specialty beverages, food, and cooler

beverages (Table 6.1).

Table 6.1 Sales Revenue

Sales Revenue 2008 2009 2010 2011 2012 2013 Coffee 114,750 129,254 145,592 163,995 184,724 208,073 Other Hot beverages 160,650 180,956 203,829 229,593 258,614 291,302 Food 191,250 215,424 242,654 273,325 307,873 346,788 Cooler Beverages 61,200 68,936 77,649 87,464 98,519 110,972 Total 527,850 594,570 669,724 754,377 849,730 957,136

Total revenue for 2008 is projected to reach $527,850. It is also projected to double in 2013. The gross

margin from the total revenue is estimated to be 63% in 2008 meaning that 37% is accounted for cost of

goods sold in this year.

As expected, net income after tax is very low, at $7,030 in the first year of operations. However it will

grow to more than $112,392 by 2013. However, this increase will result from reduced expenses and

increased sales in the second year.


25


6.2 Total Operating Expenses

Total operating expenses are estimated to be approximately $326,483 in 2008 followed by a decline in

2009 to a just over $314,233 given that expected cash on hand will be greater than $25,000 dividends will

be paid.

6.3 Working Capital Estimates

As far as inventories are concerned, the store will carry a 7-day inventory of all the products. All sales

are on cash basis. Therefore, there are no account receivables. Accounts payable are also paid within 7-

days.

The store’s net working capital for year 2009 is as follows:

Cash + inventories + accounts receivable – accounts payable

= $7,030 + $4,522 + 0 – $4,522

=$7,030 this amount is not enough to run the store for one year. Therefore, an Operating Line of Credit is

required.

6.4 Cost of Capital

As shown in the Operations Plan Section 2.5 Capital budget, the total capital cost in 2008 is a major

expenditure ($49,984) on equipment and related items in the year of establishment subsequent years have


26


little additional capital spending. As shown in Schedule 9 of the Financial Plan in the average capital cost

allowance (C.C.A.) or depreciation is 20% on all equipment. The items will be depreciated to two-thirds

of their original prices in five years.

6.5 Debt Amortization Schedules

Long term debt will be paid at a fixed amount every year for next five years at a interest rate of 8.00%,

resulting in paying-off all the debts by 2012.

6.6 Risk analysis

The risk analysis provides a list of critical success variables which determine the success of the shop in

both short and long run. The critical variables are: units of sales, selling prices, supply and/or cost of

direct material inputs. As shown in Table 6.3, units of sales and selling prices of the products are the most

critical success factors, while the cost of direct materials is important for financial performance.

Table 6.3 Risk Variables and Level of Importance

Variables Level of Importance

Units of sales 1Selling price 1Cost of direct materials 2

Where, 1 = most critical for success2 = important for success but not critical

Both units of sales and selling price will determine if the shop will be financially viable in the long run. In

addition, several intangible factors such as quality and the environment are also equally important for

success as the shop will compete with other competing shops such as Starbucks and Tim Hortons.

6.7 Financing Budget

Two –thirds, or $40,000, of the financial commitment will come from an equity investment from the

owners Ken and Mary Hatch. An additional $15,000 will be obtained from a bank loan at 8% over 5

years.

Table 6.4 Financing Structure

Long Term Debt $ 15,000


27


Owner’s Equity $ 30,000

Total Financing $ 45,000

6.8 Dividend Policy

Dividends will be paid to equity investors when cash on hand exceeds $25,000. This will ensure within

the first couple years, that there is an adequate supply of cash to keep up the operations or cover any

unexpected events. No dividend will be paid in the first year of operations. Dividend projections are

presented in Table 6.5.

Table 6.5 Dividend Projections

2008 -2009 -2010 $ 20,1582011 $ 33,0592012 $ 47,6162013 $ 67,448

6.9 Ratio Analysis

In the first year of operations, the current ratio for Second Cup is 4 (Table 6.6). This ratio indicates that

the business is able to meet its current liabilities 4 times over. In addition, keeping within industry levels,

compensation or wages as a portion of sales is at 24%. The ROI after taxes is 13%, the equity owners

earn $0.13 for every $1 invested.

Table 6.6 Ratio AnalysisLiquidity RatiosCurrent Ratio 4Operating ExpensesCompensation/Sales 24%Marketing/Sales 12%Operating/Sales 27%Total Expenses/Sales 62%Profitability RatiosReturn on Equity 13%Return on Equity * 15%* Using net income before tax

6.10 Financial and Investment Analysis


28


Second Cup’s financial analysis is positive (Table 6.7). The NPV shows a value of $176,326 in future

cash flows, these are very positive returns given an initial investment of $40,000. The expected return on

this investment is 94.4%.

Table 6.7 Summary of Financial Results

Year 2008 2009 2010 2011 2012 2013Sales 527,850 594,570 669,724 754,377 849,730 957,136 Cost of Goods Sold 192,948 222,141 250,220 281,847 317,473 357,602 Gross Margin 334,902 372,429 419,504 472,530 532,257 599,535 Expenses 326,483 314,233 362,615 393,928 427,938 464,934

Income Before Taxes 8,420 58,196 56,889 78,601 104,319 134,601 Income Taxes 1,389 9,602 9,387 12,969 17,213 22,209 Net Income(Loss) 7,030 48,594 47,502 65,632 87,106 112,392

Net Present Value of Equity Investment 176,326Internal Rate of Return on Equity Investment at 20% 94.4%

6.11 Risk Analysis

Second Cup’s initial year will be running near the break-even point. Break-even is 391 customers. If the

sales forecasts are achieved then the first year net income is minimal at $4310. However, in this year

99% of all capital costs are incurred, as a result second year will realize a more substantial gain in next

income.


29


Apply a portion of the cash on hand to the long term debt, this will increase net income.


30


7. Conclusion

This business plan has presented an operating and marketing strategy backed by a sound financial

analysis that demonstrates the viability of establishing a successful Second Cup franchise in Saskatoon. .

Key financial projections show that total revenue for 2008 is projected to reach $527,850. This is

expected to double by 2013. The gross margin from total revenue is estimated at 63%, this margin is

expected to be remain consistent year over year. Net income, after taxes, in the first year of operations is

expected to be $7,030 however by 2013 this will grow to $112,392. Additional ratio analysis shows that

the business is able to meet its current liabilities 4 times over within the first year. The ROI after taxes is

13%, for every $1 invested there is an earning of $0.13. The Net Present Value is $176,326. The

expected internal rate of return on this investment is 94.4%. These are very positive returns given an

initial equity investment of $40,000. These results are projected against sound market research and

SWOT analysis that recognizes both internal and external factors that Second Cup needs to be aware of in

order to achieve a sustainable competitive advantage.


31


APPENDIX 1 FINANCIALS


32


APPENDIX 1 FINANCIALS

Second Cup

Financial Projections 2008 - 2013

Statement of Income and Retained Earnings

For the year ended December 2008 2008 2009 2010 2011 2012 2013

Sales Revenue:

Coffee 114,750

129,254

145,592

163,995

184,724 208,073

Other Specialty Beverages 160,650

180,956

203,829

229,593

258,614 291,302

Food 191,250

215,424

242,654

273,325

307,873 346,788

Cooler Beverages 61,200

68,936

77,649

87,464

98,519 110,972

Total 527,850

594,570

669,724

754,377

849,730 957,136

Cost of Goods Sold

192,948

222,141

250,220

281,847

317,473 357,602

Gross Margin

334,902

372,429

419,504

472,530

532,257 599,535

Gross Profit Margin 63% 63% 63% 63% 63% 63%

Operating and Marketing Expenses

Advertising Royalty 52,785

59,457

66,972

75,438

84,973 95,714

Local Advertising 9,285

9,285

9,285

9,285

9,285 9,285


33


Rent ($30 @ 1000) 30,000

30,720

31,457

32,212

32,985 33,777

Insurance 5,000

5,120

5,243

5,369

5,498 5,629

Repairs & Maintenance 4,950

5,069

5,190

5,315

5,443 5,573

Telephone & Utilities 15,000

15,360

15,729

16,106

16,493 16,888

Compensation 127,728

128,730

160,951

174,190

187,971 202,313

General Supplies 52,785

59,457

66,972

75,438

84,973 95,714

Incorporation Fees 250 40 40 40 40 40

Franchise Fee 27,500 - - - - -

Interest on Long Term Debt 1,200

995

775

536

278 0

Total Expenses 326,483

314,233

362,615

393,928

427,938 464,934

Income Before Taxes 8,420

58,196

56,889

78,601

104,319 134,601

Income Taxes 1,389

9,602

9,387

12,969

17,213 22,209

Net Income(Loss) 7,030

48,594

47,502

65,632

87,106 112,392

Beg Retained Earnings - 7,030

55,624

60,886

78,279 100,653


48,594

47,502

65,632

87,106 112,392

Dividends - - 86,742


34


42,240 48,239 64,732

End Retained Earnings 7,030

55,624

60,886

78,279

100,653 126,303

Dividend Policy - - 42,240

48,239

64,732 86,742

Balance Sheet


Assets

Current Assets:

Cash 15,727

67,240

73,239

89,732

111,742 136,438

Total Inventories 4,805

5,412

6,096

6,867

7,735 8,712

Total Current Assets 20,532

72,653

79,335

96,599

119,477 145,151

Capital Assets:

Equipment 49,984

50,082

50,179

51,417

51,514 51,612

Accumulated C.C.A. (6,238)

(12,016)

(15,832)

(19,391)

(22,603)

(25,504)

Equipment 43,746

38,065

34,347

32,026

28,911 26,108

Total Assets 64,278

110,718

113,682

128,625

148,388 171,258

Liabilities

Current Liabilities:


35


Accounts Payable 4,805

5,412

6,096

6,867

7,735 8,712

Noncurrent Liabilities

Long Term Debt 12,443

9,682

6,699

3,479 0

(3,757)

Total Liabilities 17,248

15,094

12,796

10,345

7,735 4,956

Shareholders' Equity

Owner's Equity 40,000

40,000

40,000

40,000

40,000 40,000

Retained Earnings 7,030

55,624

60,886

78,279

100,653 126,303

Total Shareholder's Equity 47,030

95,624

100,886

118,279

140,653 166,303

Total Liabilities and 64,278

110,718

113,682

128,625

148,388 171,258

Shareholder's Equity

Statement of Cash Flow


Cash from (used in) Operating Activities:


48,594

47,502

65,632

87,106 112,392

Depreciation 6,238

5,778

3,816

3,558

3,212 2,901

Inventory (4,805)

(607)

(684)

(771)

(868)

(978)


36



607

684

771

868 978

Net Cash Flow from Operations 13,268

54,372

51,319

69,190

90,319 115,293

Cash from (used for) Financing Activities:

Owner's Equity 40,000 - - - - -

Long Term Debt 12,443

(2,761)

(2,982)

(3,221)

(3,479)

(3,757)

Dividends - - (42,240)

(48,239)

(64,732)

(86,742)

Net Cash Flow from Financing 52,443

(2,761)

(45,223)

(51,460)

(68,211)

(90,499)

Cash from (used for) Investing Activities:

Equipment (49,984)

(98)

(98)

(1,238)

(98)

(98)

Net Cash Flow from Investing (49,984)

(98)

(98)

(1,238)

(98)

(98)

Increase(decrease) in Cash 15,727

51,513

5,999

16,493

22,010 24,696

Cash beginning of year 0 15,727

67,240

73,239

89,732 111,742

Cash end of year 15,727

67,240

73,239

89,732

111,742 136,438

Supporting Schedules


37


Schedule 1: Economic Forecast

2008 2009 2010 2011 2012 2013

Long Term Debt Rate input 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%

Rate of Inflation input 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%

Schedule 2: Revenues

2008 2009 2010 2011 2012 2013

Growth in Selling Prices

Coffee input 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%

Other Specialty Beverages input 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%

Food input 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%

Cooler Beverages input 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%

Quantity of Sales input 425 468

514

566

622 684

Coffee 0.5 76,500

84,150

92,565

101,822

112,004 123,204

Other Speciality Beverages 0.3 45,900

50,490

55,539

61,093

67,202 73,922

Food 0.5 76,500

84,150

92,565

101,822

112,004 123,204

Cooler Beverages 0.2 30,600

33,660

37,026

40,729

44,801 49,282

2008 2009 2010 2011 2012 2013

Selling Prices (per unit)

Coffee input 1.50

1.54

1.57

1.61

1.65 1.69

Other Hot beverages input 3.50

3.58

3.67

3.76

3.85 3.94

Food input 2.50

2.56

2.62

2.68

2.75 2.81


38


Cooler Beverages input 2.00

2.05

2.10

2.15

2.20 2.25

Sales Revenue

Coffee 114,750

129,254

145,592

163,995

184,724 208,073

Other Hot beverages 160,650

180,956

203,829

229,593

258,614 291,302

Food 191,250

215,424

242,654

273,325

307,873 346,788

Cooler Beverages 61,200

68,936

77,649

87,464

98,519 110,972

Total 527,850

594,570

669,724

754,377

849,730 957,136

Schedule 3: Cost of Goods Sold

2008 2009 2010 2011 2012 2013

Direct Material Purchases

Coffee input 25% 25% 25% 25% 25% 25%

Other Specialty Beverages input 25% 25% 25% 25% 25% 25%

Food input 45% 45% 45% 45% 45% 45%

Cooler Beverages input 70% 70% 70% 70% 70% 70%

Schedule 4: Cost of Goods Sold

2008 2009 2010 2011 2012 2013

Beginning Inventory 0 4,805

5,412

6,096

6,867 7,735

Purchases 197,753

222,748

250,904

282,618

318,341 358,579

Ending Inventory 4,805

5,412

6,096

6,867

7,735 8,712

Cost of Goods Sold 357,602


39


192,948 222,141 250,220 281,847 317,473

Schedule 5: Compensation, Operating and Marketing Expenses

2008 2009 2010 2011 2012 2013

Compensation Expenses

Staffing

Manager input 1 1 1 1 1 1

Full time employee input 1 1 2 2 2 2

Part time employee input 4 5 6 7 8 9

Total staff 6 7 9 10 11 12

Total Annual Salary

Manager Salary input 55,000

56,320

57,672

59,056

60,473 61,924

Total Manager Salary 55,000

56,320

57,672

59,056

60,473 61,924

Hourly Workers

Full Time Employee Wage input 9.00

9.22

9.44

9.66

9.90 10.13

Hours per Employee input 1950 1950 3900 3900 3900 3900

Total Full Employee 17,550

17,971

36,805

37,688

38,593 39,519

Part Time Employee Wage input 8.25

8.45

8.65

8.86

9.07 9.29

Hours per Employee input 5100 4875 5850 6825 7800 8775

Total Part Time 42,075

41,184

50,607

60,458

70,754 81,508

Total Hourly Workers 121,027


40


59,625 59,155 87,412 98,147 109,346

Benefits for Wage-Earning Employees

EI 2.42% 2,776

2,797

3,514

3,807

4,113 4,431

CPP 4.95% 5,674

5,716

7,182

7,782

8,406 9,056

Holiday Pay 6% 3,300

3,379

3,460

3,543

3,628 3,715

Workers Compensation 1.18% 1,353

1,363

1,712

1,855

2,004 2,159

Total Benefits 13,103

13,255

15,868

16,987

18,151 19,361

Total Compensation 127,728

128,730

160,951

174,190

187,971 202,313

Marketing Expenses 2008 2009 2010 2011 2012 2013

Advertising Royalty 10% 52,785

59,457

66,972

75,438

84,973 95,714

Local Marketing input 9,285

9,285

9,285

9,285

9,285 9,285

Total Marketing Expense 62,070

68,742

76,257

84,723

94,258 104,999

Operating Expense

General Supplies 10% 52,785

59,457

66,972

75,438

84,973 95,714

Insurance 5,000

5,120

5,243

5,369

5,498 5,629

Rent ($30 @ 1000) 30,000

30,720

31,457

32,212

32,985 33,777

Maintenance & Repairs 17% 5,573


41


4,950 5,069 5,190 5,315 5,443

Telephone & Utilities 50% 15,000

15,360

15,729

16,106

16,493 16,888

Incorporation Initial & Annual Fees 250 40 40 40 40 40

Start-up Franchise Fee 27,500 - - - - -

Total Operating Expenses 135,485

115,766

124,632

134,480

145,431 157,622

Summary of Compensation, Operating and Marketing Expenses

Compensation Expenses 127,728

128,730

160,951

174,190

187,971 202,313

Marketing Expenses 62,070

68,742

76,257

84,723

94,258 104,999

Operating Expenses 135,485

115,766

124,632

134,480

145,431 157,622

Interest on Long term Debt 1,200

995

775

536

278 0

Total Expenses 326,483

314,233

362,615

393,928

427,938 464,934

Schedule 6: Capital Budget

2008 2009 2010 2011 2012 2013

Equipment:

Full Size Refrigerator input

2,500

Mini Refrigerator input

600

Freezer input

3,500

2 input


42


Blenders 2,000

10 Table ($300 per), 40 Chairs ($60 per) input

5,400 1140

Cups (36 tall: 36 short) input

160 80 80 80 80 80

Plates (36: 6.5 inch) input 35 18 18 18 18 18

Silverware input 4

2 Coffee Maker (dbl) input

6,000

Espresso Machine input

10,000

Cappacino Machine input

1,500

Frozen Drink Machine (dbl) input

2,200

Coffee Grinder input

1,100

Frothing Pitchers input

130

Dishwasher input

3,800

Cash Register (2) input

5,000

Pastry Display Case input

209

Refrigerated Display Case input

2,748

Office Equipment input 3,098

Total Capital Costs 49,984 98 98

1,238 98 98


43


Working Capital 2008 2009 2010 2011 2012 2013

Inventory 4,805

5,412

6,096

6,867

7,735 8,712


5,412

6,096

6,867

7,735 8,712

Total Working Capital 9,610

10,824

12,193

13,734

15,470 17,425

Average Days Inventory

Inventory input 7 7 7 7 7 7

Average Days Payables input 7 7 7 7 7 7

Schedule 7: Financing Budget

2008 2009 2010 2011 2012 2013

Long Term Debt input 15,000 0 0 0 0 0

Owner's Equity input 40,000 0 0 0 0 0

Total 55,000 - - - - -

Schedule 8: Long Term Debt

2008 2009 2010 2011 2012 2013

Interest Rate 8.00%

Payment Period (Years) 5

Beginning Balance - 12,443

9,682

6,699

3,479 0

Addition 15,000 - - - - -

Interest 1,200

995

775

536

278 0


44


Debt Payment 3,757

3,757

3,757

3,757

3,757 3,757

Ending Balance 12,443

9,682

6,699

3,479 0

(3,757)

Schedule 9: Capital Cost Allowance

2008 2009 2010 2011 2012 2013

Equipment Input Rate 20%

Beginning Balance - 42,197

38,065

34,347

32,026 28,911

Additions 46,886 98 98

1,238 98 98

Capital Cost Allowance 4,689

4,229

3,816

3,558

3,212 2,901

Ending Balance 42,197

38,065

34,347

32,026

28,911 26,108

Office Equipment Input Rate 100%

Beginning Balance - 1,549 - - - -

Additions 3,098 - - - - -

Capital Cost Allowance 1,549

1,549

-

-

-

-

Ending Balance 1,549 - - - - -

Total CCA Expense 6,238

5,778

3,816

3,558

3,212 2,901

Schedule 10: Income Tax

2008 2009 2010 2011 2012 2013


45


Income Before Taxes 8,420

58,196

56,889

78,601

104,319 134,601

Accumulated Loss Carryforward - - - - - -

Loss Carryforward Used - - - - - -

Taxable Income 8,420

58,196

56,889

78,601

104,319 134,601

Federal Tax @ 28%, 21% 2,357

16,295

15,929

22,008

29,209 37,688

Small Bus Tax Credit @ 16% (1,347)

(9,311)

(9,102)

(12,576)

(16,691)

(21,536)

Provincial Tax @ 5%, 10% 379

2,619

2,560

3,537

4,694 6,057

Total Taxes 1,389

9,602

9,387

12,969

17,213 22,209

Schedule 11: Ratio Analysis

2008 2009 2010 2011 2012 2013

Cash Conversion Cycle 0 0 0 0 0 0

Liquidity Ratios

Current Ratio 4 13 13 14 15 17

Activity and Operating Ratios

Total Asset Turnover 8 5 6 6 6 6

Inventory Turnover 38 39 39 39 39 82

Average Days Inventory 10 9 9 9 9 4

Operating Expenses

Compensation/Sales 24% 22% 24% 23% 22% 21%

Marketing/Sales 12% 12% 11% 11% 11% 11%

Operating/Sales 26% 19% 19% 18% 17% 16%


46


Total Expenses/Sales 62% 53% 54% 52% 50% 49%

Leverage Ratios

Debt Ratio 84% 21% 16% 11% 6% 3%

Debt to Equity 37% 16% 13% 9% 5% 3%

Profitability Ratios

Gross Profit Margin 63% 63% 63% 63% 63% 63%

Net Profit Margin 1% 8% 7% 9% 10% 12%

Return on Total Assets 11% 44% 42% 51% 59% 66%

Return on Equity 15% 51% 47% 55% 62% 68%

Net Profit Margin * 2% 10% 8% 10% 12% 14%

Return on Total Assets * 13% 53% 50% 61% 70% 79%

Return on Equity * 18% 61% 56% 66% 74% 81%

* Using net income before tax

Schedule 12: Investment Analysis

2008 2009 2010 2011 2012 2013

Required Return on Equity input 20%

Present Value of Equity Investment

Equity Investment 40,000 - - - - -

Present Value of Equity Investment 40,000 - - - - -

Present Value of Equity Returns

Net Cash Flows to Equity 15,727

51,513

5,999

16,493

22,010 24,696


48,239

64,732 86,742

Salvage Value 0 0 0 0 0 107,894


47


Total Net Cash Flow to Equity 15,727

51,513

48,239

64,732

86,742 219,333

Present Value of Net Cash Flows 216,326

Total Cash Flows to Equity (40,000)

15,727

51,513

48,239

64,732

86,742 219,333

Net Present Value of Equity Investment 176,326

Internal Rate of Return on Equity Investment 94.4%

External Rate of Return on Equity Investment

2008 2009 2010 2011 2012 2013

Equity Investment (40,000)


48,239

64,732 86,742

Salvage Value - - - - - 107,894

Total to Equity Investor (40,000) - -

42,240

48,239

64,732 194,637

External Rate of Return on Equity Investment 55.8%


48

2.2 second cup plan

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