th

9 Palace Coffee Bar

Business Plan

P. O. Box 11965-00400
Nairobi
Tel: 0723- 498 368
E-mail: 9thpalacecoffee@gmail.com

PRESENTED BY: TIMOTHY K. MAHEA

REG NO: D61/70146/2008
COURSE CODE: DSM 508
UNIVERSITY OF NAIROBI
17th April 2009
TABLE OF CONTENTS
1.0 Executive Summary ...................................................................................................... 2
1.1 Objectives ......................................................................................................... 3
1.2 Vision Statement ............................................................................................... 3
1.3 Mission Statement............................................................................................. 3
1.4 Keys to Success................................................................................................. 4
2.0 Company Summary ...................................................................................................... 4
2.1 Company Ownership ........................................................................................ 4
2.2 Start-up Summary ............................................................................................. 4
2.3 Company Locations and Facilities .................................................................... 6
3.0 Products......................................................................................................................... 6
3.1 Product Description .......................................................................................... 6
3.2 Competitive Comparison .................................................................................. 7
3.3 Sales Literature ................................................................................................. 8
3.4 Sourcing ............................................................................................................ 8
3.5 Technology ....................................................................................................... 8
3.6 Future Products ................................................................................................. 9
4.0 Market Analysis Summary ........................................................................................... 9
4.1 Market Segmentation ...................................................................................... 10
4.2 Target Market Segment Strategy .................................................................... 10
4.2.1 Market Trends .................................................................................. 10
4.2.2 Market Growth ................................................................................. 11
4.2.3 Market Needs ................................................................................... 11
4.3 Industry Analysis ............................................................................................ 11
4.3.1 Distribution Patterns ........................................................................ 12
4.3.2 Competition and Buying Patterns .................................................... 12
5.0 Strategy and Implementation Summary...................................................................... 12
5.1 Strategy Pyramid ............................................................................................. 13
5.2 Value Proposition............................................................................................ 13
5.3 Competitive Edge............................................................................................ 14
5.4 Marketing Strategy.......................................................................................... 14

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 5.4.1 Promotion Strategy .......................................................................... 14
5.4.2 Distribution Strategy ........................................................................ 15
5.4.3 Positioning Statement ...................................................................... 15
5.4.4 Pricing Strategy ................................................................................ 15
5.5 Sales Strategy .................................................................................................. 15
6.0 Management Summary ............................................................................................... 16
6.1 Management Team.......................................................................................... 16
6.2 Personnel Plan ................................................................................................. 16
7.0 Financial Plan.............................................................................................................. 17
7.1 Important Assumptions ................................................................................... 17
7.2 Key Financial Indicators ................................................................................. 18
7.3 Break-even Analysis ....................................................................................... 19
7.4 Projected Profit and Loss ................................................................................ 19
7.5 Projected Cash Flow ....................................................................................... 22
7.6 Projected Balance Sheet .................................................................................. 24
7.7 Business Ratios ............................................................................................... 25

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1.0 Executive Summary
9th Palace Coffee Bar is a specialty beverage and snack retailer. 9th Palace Coffee Bar
uses a system that is new to the beverage and food service industry to provide hot and
cold beverages in a convenient and time-efficient way. 9th Palace Coffee Bar provides its
customers the ability for take-away order (from a trained Barista) their choice of a
custom-blended espresso drink, freshly brewed coffee, or other beverage. 9th Palace
Coffee Bar is offering a high-quality option to the fast-food, convenient location, secure
parking and a business environment.

9th Palace Coffee Bar offers its patrons the finest hot and cold beverages, specializing in
specialty coffees, blended teas, and other custom drinks. In addition, 9th Palace Coffee
Bar will offer soft drinks, fresh-baked pastries, snacks and other confections. Seasonally,
9th Palace Coffee Bar will add beverages such as hot apple cider, hot chocolate, frozen
coffees, and more depending on the weather.

9th Palace Coffee Bar will focus on three markets:

The Daily Shoppers - someone coming to the shopping mall for the normal routine
purchases and are in hurry to get home.
The Holiday Makers and Weekend shoppers- someone who is in a restricted
environment that does not allow him make daily purchases and therefore make large
purchases over the weekend.
Business Executives - individual wanting to strike deals outside their offices and want to
have a drink.

9th Palace Coffee Bar will penetrate the daily shoppers, holiday makers and weekend
shoppers and business executives’ markets, by deploying branches around the city centre
in Nairobi in the most logical and accessible locations. In addition to providing a quality
product and an extensive menu of delicious items, to ensure customer awareness and
loyalty, as well as good publicity coverage and media support.

2
9th Palace Coffee Bar financial picture is quite promising. Since 9th Palace Coffee Bar is
operating a cash business, the initial cost is significantly less than many start-ups these
days. The process is labor intensive and 9th Palace Coffee Bar recognizes that a higher
level of talent is required. The financial investment in its employees will be one of the
greatest differentiators between it and 9th Palace Coffee Bar competition. For the purpose
of this pro-forma plan, the capital expenditures of facilities and equipment are financed.
There will be minimum inventory on hand so as to keep the product fresh and to take
advantage of price drops, when and if they should occur.

9th Palace Coffee Bar anticipates the initial combination of investments and long term
financing of Kshs 500,000 to carry it without the need for any additional equity or debt
investment, beyond the purchase of equipment or facilities. This will mean growing a bit
more slowly than might be otherwise possible, but it will be a solid, financially-sound
growth based on customer request and product demand.

1.1 Objectives
The 9th Palace Coffee Bar has established three main objectives to pursue in the
next three years:
1. Establish five branches in busy shopping malls or business centres in
Nairobi.
2. Achieve a net after-tax profit above 20% of sales.
3. Achieve 25% penetration in the market within Nairobi.

1.2 Vision Statement

To become an internationally acclaimed coffee bar in the country and in the
world.

1.3 Mission Statement

To provide highest level of customer satisfaction through offering the finest
quality beverage and high quality refreshments in the most efficient time.

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1.4 Keys to Success
There are three main keys to success in this business:-
1. Ability to access high quality tea and coffee due to effective partnership
with blenders.
2. The greatest locations - visibility, high traffic pattern, convenient access.
3. The best products - freshest coffee beans, cleanest equipment, premium
serving containers, consistent flavor.
4. The friendliest servers - cheerful, skilled, professional, articulate.
5. The finest reputation - word-of-mouth advertising, and promotions
through involvement in charitable events

2.0 Company Summary

9th Palace Coffee Bar is a specialty beverage and snack retailer. It makes use of a system
that is new to the beverage and food service industry in Kenya, to provide hot and cold
beverages in a convenient and time-efficient way. Customers are also provided with first
class snacks presentation using fruit themes. 9th Palace Coffee Bar provides its customers
the ability to drive up and order of their choice from a custom blended espresso drink,
freshly brewed coffee, or other beverage and get served within a short period of time. The
locations are convenient for shoppers, holiday makers and business executives, where an
executive lounge will be made available for them.

2.1 Company Ownership

9th Palace Coffee Bar will be created as a private limited company based in
Nairobi, and will be privately owned by its principle operator.

2.2 Start-up Summary

Total start-up requirements (including legal costs, logo design, stationery, assets
and related expenses) total to Kshs 13.6 Million. The start-up costs are to be
financed partially by the direct owner investment of Kshs 13 Million and

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 financing in the amount of Kshs 600,000. The details are included in the
following table:-
Table: Start-up

Requirements Kshs
Start-up Expenses
Legal and Accounting 160,000
Office Supplies (stationery, etc) 40,000
Collateral Materials (brochures, cards, etc.) 320,000
Consultants/Permits 400,000
Insurance 240,000
Rent/Lease 600,000
Space design/contractor 160,000
Sales and Marketing (advertising, direct mail, etc) 200,000
Expensed equipment 40,000
Other 20,000
Total Start-up Expenses 2,180,000

Start-up Assets Needed

Cash Balance on Starting Date 3,120,000
Start-up Inventory 320,000
Total Current Assets 3,440,000
Long-term Assets 8,000,000
Total Assets 11,420,000
Total Requirements 13,600,000

Funding
Investment
Investor 1 13,000,000
Other 0
Total Investment 13,000,000

Current Liabilities
Current Borrowing 100,000
Other Current Liabilities 0
Current Liabilities 100,000

Long-term Liabilities 500,000

Total Liabilities 600,000

Loss at Start-up (2,180,000)

Total Capital 3,440,000
Total Capital and Liabilities 11,420,000

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2.3 Company Locations and Facilities
9th Palace Coffee Bar will open its first facility on Koinange Street opposite
Consolidated Bank in Dubai Shopping Mall (now under construction). Five more
facilities will be located throughout the metropolitan area over the next three
years. The first facility along Koinange Street will serve as the flagship facility
due to its up market convenient location.

The demographic and physical requirements for 9th Palace Coffee Bar location
are:

¾ Ability to capture potential customers from surrounding premises

¾ High Traffic of vehicles during rush hour.
¾ Visible from roadway and pavements.
¾ Established retail shops in the area.
¾ Secure and convenient parking.
¾ Closeness to institutions of higher learning, prominent businesses or
recreational areas

3.0 Products
9th Palace Coffee Bar provides its customers with the finest hot and cold beverages,
specializing in specialty coffees and custom blended teas. In addition, 9th Palace Coffee
Bar will offer select domestic soft drinks, sodas, fresh-baked pastries, snacks and other
confections. Seasonally, 9th Palace Coffee Bar will add beverages such as hot apple cider,
hot chocolate, frozen coffees, and more.

3.1 Product Description

9th Palace Coffee Bar provides its customers with the ability to custom order a
coffee beverage that will be blended to their exact specifications. Each of 9th
Palace Coffee Bar Baristas will be trained in the fine art of brewing, blending, and
serving the highest quality hot and cold beverages, with exceptional attention to

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 detail. Besides coffees, 9th Palace Coffee Bar will offer teas, domestic sodas,
frozen coffee beverages, seasonal specialty drinks, pastries, snacks and other
baked goods. Also, through participation in events, 9th Palace Coffee Bar will
offer premium items such as coffee mugs, T-shirts and sweatshirts, ball caps, and
many more.

3.2 Competitive Comparison

9th Palace Coffee Bar considers itself to be a player in the retail coffee house
industry. However, it knows that competition for its products range from soft
drinks to milk shakes to adult beverages.

9th Palace Coffee Bar primary competition will come from four sources:
i. Java House who are conveniently located
ii. Savanna Coffee House owned and operated by Sasini Tea.
iii. Dorman’s Coffee Houses’ owned and operated by Dorman’s Coffee.
iv. Tea Spot owned and operated by Kenya Tea Development Agency
(KTDA).

Two things will make 9th Palace Coffee Bar stand out from all its competitors:

¾ 9th Palace Coffee Bar will be providing products in the most convenient
and efficient way available--either as take away or for in-house
consumption. Also, 9th Palace Coffee Bar will look out for areas with
convenient and secure parking. This separates 9th Palace Coffee Bar from
the competition in that its customers won't worry about their parking
place, all they will need to do is to handover their keys to our parking
marshal who will park it in a marked area then inform the patron. 9th
Palace Coffee Bar customers can also drive or walk up, order their
beverage, receive and pay for the beverage, and drive off.

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 ¾ The second differentiator is 9th Palace Coffee Bar focus on being located
in busy business centres where there is likely high traffic of clients and
deal sealing. Learning institutions also provide us with the customers who
eventually become patrons.

3.3 Sales Literature

This business will begin with a general business brochure establishing products
offered. This brochure will be developed as part of the start-up expenses and
distributed to large businesses, retail shops in the shopping mall, supermarkets,
recreational areas like clubs, stores, and the coffee and tea Agencies.

Literature will be very important in creation awareness about the existence of the
facility. This will help in attracting high profile clients who will help in building a
strong image, right from the start point.

3.4 Sourcing
9th Palace Coffee Bar will purchase most of the coffee berries from the Coffee
Factory in Nyeri which has the perfect product because of the climate. 9th Palace
Coffee Bar also will seek to have wholesale purchasing agreements for other
products with Major Brands like, Finlays Tea, Proctor & Allan, Coca-Cola, Out of
Africa, and Winnie’s Pure Health.

Some of the shopping malls targeted are either owned or operated by Nakumatt
Holdings. This will help 9th Palace Coffee Bar get the advantage of ridding with a
prominent firm.

3.5 Technology
9th Palace Coffee Bar delivery system is based on its technology. 9th Palace
Coffee Bar is using state-of-the-art, order registry and accounting system that also

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 helps in rewarding the customers with points every time they spend. Eventually
they are given the opportunity to claim a reward based on the points awarded.

9th Palace Coffee Bar will have facilities that are designed using the state-of-the-
art interior design with superb lighting and sitting comfort. the lighting will be
electronically controlled according to the day light available.

3.6 Future Products

As seasons change, 9th Palace Coffee Bar will be offering products that will
enhance sales and satisfy its customers' desires. During first quarter of the year
when it’s normally hot, 9th Palace Coffee Bar will subsidize lower hot beverage
sales with frozen coffee drinks, as well as soft drinks, and other cold beverages.
9th Palace Coffee Bar will also have special beverages during holiday seasons,
such as porridge during the Christmas season and Hot Apple Cider during the
cold months.

9th Palace Coffee Bar primary desire will be to listen to its customers to ascertain
what they are looking for most, and provide it.

4.0 Market Analysis Summary

9th Palace Coffee Bar will focus on three markets:
i. The Daily Shoppers - someone coming to the shopping mall for the normal
routine purchases and are in hurry to get home.
ii. The Holiday Makers and Weekend shoppers- someone who is in a
restricted environment that does not allow him make daily purchases and
therefore make large purchases over the weekend.
iii. Business Executives - individual wanting to strike deals outside their offices
and want to have a drink.

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4.1 Market Segmentation
9th Palace Coffee Bar will focus on three different market segments: Daily
Shoppers, Holiday Makers, and Business Executives. To access both of these
markets, 9th Palace Coffee Bar has two different systems it intends to use:

Concentrate on the high profile clients because they are high spenders. Also, 9th
Palace Coffee Bar will be a suitable alternative to the students in the Institutions
of higher learning, who are tethered to a campus environment, and would prefer
some short time outing from time to time.

Similarly, there are well over 500,000 people in the city centre area in white collar
employment, as well as visitors, vacationers, and others. It can also be assumed
that these potential clients do not make only one purchase in a day, but in many
cases, two and even three beverage purchases.

4.2 Target Market Segment Strategy

9th Palace Coffee Bar target market is the mobile individual who has more money
than time, and excellent taste in a choice of beverage, but no time to linger in a
cafe. By locating the convenient, attractive facility located in visible areas, this
unique and abundant consumer will seek the fulfillment of his/her needs.

4.2.1 Market Trends

In the last decade, people have become seriously concerned with the products
they consume. Therefore, people are now avoiding fast food items because of
body disorders resulting from that. This has seen the growth of coffee houses but
from a quick observation, most of them are not in very suitable locations.

People are also very much interested in being treated in a special way as opposed
to the classification of consumers in one pool. The health concerns have totally
changed their eating habits.

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 Consumers have been complaining of the introduction of beverage dispensers at
convenience stores that spit out overly-sweet, poorly blended cappuccinos in
flavors such as French vanilla or mocha, and consumers are paying alot for these
sub-standard beverages.

4.2.2 Market Growth

According to industry statistics, the consumption of coffee and flavored coffee
products is growing rapidly. The largest national brand for retail coffee outlets
achieved Kshs 200 Million in sales in 2007 with 8 retail outlets. They are
anticipating opening 5 more outlets in the next five years and increasing revenues
to over Kshs 2 Billion. That is the coffee consumer market. The segment of that
market we are targeting contains an untapped potential. 9th Palace Coffee Bar has
a significant daily target for its products. Those numbers are likely to grow by
16% annually.

4.2.3 Market Needs

Kenya is a very mobile society. With the introduction of the automobile, we
became a nation that thrived on the further freedom of going where we wanted
when we wanted. It has only gotten worse. The use of technology has made use
lazy and we now prefer most of the things we usually did, done for us.

Our market is made up of consumers who have busy schedules, a desire for
quality, and disposable income. As much as they would like the opportunity to sit
in an upscale coffee house and sip a uniquely blended coffee beverage and read
the morning paper, they don't have the time. However, they still have the desire
for the uniquely blended beverage as they hurry through their busy lives.

4.3 Industry Analysis

The coffee and tea industry has grown by tremendously over the past five years.
There have been more entrants in the coffee and tea industry with there being two

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 coffee houses in Moi Avenue, Six along Mama Ngina, two along Loita Street and
Two Along Koinange Street. Only two are internationally recognized.

4.3.1 Distribution Patterns

The cafe experience comes from the Italian origins of espresso. The customer
comes in to a beautifully decorated facility, surrounded by wondrous aromas and
finds himself involved in a sensory experience that, more often than not, masks an
average product at a premium price.

4.3.2 Competition and Buying Patterns

There are two general competitors in 9th Palace Coffee Bar. They are the national
specialty beverage chains, such as Java House and Dorman’s, local coffee houses
or cafes with an established clientele and a quality product, fast food restaurants,
and convenience stores. There is a dramatic distinction among the patrons of each
of these outlets.

Patrons of the local cafes are looking for the "experience" of the coffee house.
They want the ability to "design" their coffee, smell the fresh pastry, listen to the
soothing Italian music, and read the local paper or visit with an acquaintance.
It is a relaxing, slow paced environment.

Patrons of the fast food restaurants or the convenience stores are just the opposite.
They have no time for idle chatter and are willing to over-pay for whatever
beverage the machine can spit out, as long as it's quick. They pay for their gas and
they are back on the road to work. Although they have the desire and good taste to
know good from bad, time is more valuable to them.

5.0 Strategy and Implementation Summary

9th Palace Coffee Bar will penetrate the consumer markets by ensuring they get
convenient and accessible locations. 9th Palace Coffee Bar has identified its market as
busy, mobile people whose time is already at a premium, but desire a refreshing, high

12
quality beverage or baked item while commuting to or from work or school. In addition
to providing a quality product and an extensive menu of delicious items, to ensure
customer awareness and loyalty, as well as positive public and media support.

5.1 Strategy Pyramid

9th Palace Coffee Bar strategy is to show people that 9th Palace Coffee Bar has an
excellent product, convenient accessibility, and with a community benefit. To
execute on this strategy, 9th Palace Coffee Bar is ensuring that it is located at
convenient easily accessible locations throughout the city centre. 9th Palace
Coffee Bar is pricing its product competitively and training the production staff to
be among the best Baristas in the country.
In so doing, 9th Palace Coffee Bar have:
i. Provided a customer with a quality product at a competitive price.
ii. Provided the customer with a more convenient method for obtaining their
desired product.

5.2 Value Proposition

The shopping mall facilities provide a substantial value proposition in that the
customer does not have to find a parking place, exit the vehicle, stand in line to
order, wait for the beverages ahead of him to be produced, pay a premium price
for average product, find a place to sit, clean up the previous patron's mess, then
enjoy their coffee ... assuming they have sufficient time to linger over the cup.
9th Palace Coffee Bar is also providing a significant community value to
patronizing 9th Palace Coffee Bar. For every purchase a customer makes from us,
9th Palace Coffee Bar will donate up to 7.5% of the sale to the marginalized
within the country.

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5.3 Competitive Edge
9th Palace Coffee Bar competitive edge is simple. 9th Palace Coffee Bar provides a
high quality product at a competitive price in a well designed comfortable
environment.

5.4 Marketing Strategy

9th Palace Coffee Bar will locate its facilities along high traffic commuter routes
and close to shopping facilities in order to catch customers going to or from work,
or while they are out for lunch, or on a shopping expedition. The shopping mall
need to be those that attract high income spenders. 9th Palace Coffee Bar will be
implementing a low cost advertising promotion campaign which could involve
drive-time radio, but not much more.
9th Palace Coffee Bar will rely on building relationships with schools, charities
and corporations to provide significant free publicity because of its community
support program.

5.4.1 Promotion Strategy

The long-range goal is to gain enough visibility to leverage the product
line into other regions and generate inquiries from potential inventors. To
do that, 9th Palace Coffee Bar needs:
Public relations services at Kshs 80,000 per month for the next year
intended to generate awareness of editors and product information
insertions, reviews, etc.
It is anticipated that the school fundraising program will generate a fair
amount of publicity on its own and will, perhaps, minimize--or even
eliminate--the need for a publicist.
Advertising is estimated at Kshs 80,000 per month concentrating on drive
time radio. 9th Palace Coffee Bar will experiment with different stations,
keeping careful track of results. However, in the start-up phase, 9th Palace
Coffee Bar needs to let people know where to look for the facilities.

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5.4.2 Distribution Strategy
9th Palace Coffee Bar will locate within shopping mall facilities, in high
traffic areas of the city where it knows working commuters will be
passing.
9th Palace Coffee Bar will also make arrangements with learning
institutions for their orders at a negotiated rate.

5.4.3 Positioning Statement

For busy, mobile people whose time is already at a premium, but desire a
refreshing, high quality beverage or baked item while commuting to or
from work or school.

5.4.4 Pricing Strategy

9th Palace Coffee Bar pricing will be comparable to the competition, but
with the value-added feature of immediate, drive-thru service and
convenience.

5.5 Sales Strategy

There will be several sales strategies put into place, including posting specials on
high-profit items at the entrance window. The Baristas will also hand out free
drink coupons to those who have purchased a certain number of cups or
something similar. 9th Palace Coffee Bar will also develop window sales
techniques such as the Baristas asking if the customer would like a fresh-baked
item with their coffee.

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6.0 Management Summary
9th Palace Coffee Bar is a relatively flat organization. Overhead for management will be
kept to a minimum and all senior managers will be "hands-on" workers. There is no
intention of having a top-heavy organization that drains profits and complicates
decisions. At the zenith of this three-year plan, there will be four "Executive" positions:
chief operating officer, chief financial officer, chief information officer, and director of
marketing.
There will be other mid-management positions, which will arise as more branches are
established.

6.1 Management Team

9th Palace Coffee Bar has selected Mr. Ben Muchemi to perform the duties of
chief operating officer. Ben has a highly entrepreneurial spirit and has already
started a company from scratch (Interscope Tech.) that ran in the black within
three months of inception, and paid off all initial debt within six months. He has
experience in strategic management and marketing.

I will also play a key role in finance and marketing. I have worked as a Marketing
manager for ten years and am also the treasurer of Waumini Sacco.

6.2 Personnel Plan

As the personnel plan shows, we expect to invest in a good team, fairly
compensated. We think the planned staff is in good proportion to the size of the
coffee house and projected revenues.
Table: Personnel

Personnel Plan 2001 2002 2003

KShs KShs KShs
Manager 60,000 65,000 70,000
Hostess 42,000 45,000 50,000
Chef 54,000 60,000 65,000
Cleaning 30,000 35,000 40,000
Waiters 72,000 100,000 130,000

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 Others 24,000 52,000 55,000
Total People 8 10 12
Total Payroll 282,000 357,000 410,000

7.0 Financial Plan

9th Palace Coffee Bar financial picture is quite promising. Since 9th Palace Coffee Bar is
operating a cash business, the initial cost is significantly less than many start-ups these
days. The process is labour intensive and 9th Palace Coffee Bar recognizes that a higher
level of talent is required. The financial investment in its employees will be one of the
greatest differentiators between it and 9th Palace Coffee Bar competition.

For the purpose of this pro-forma plan, the facilities and equipment are financed. These
items are capital expenditures and will be available for financing. There will be a
minimum of inventory on hand so as to keep the product fresh and to take advantage of
price drops, when and if they should occur. 9th Palace Coffee Bar anticipates the initial
combination of investments and long-term financing to carry it without the need for any
additional equity or debt investment, beyond the purchase of equipment or facilities. This
will mean growing a bit more slowly than might be otherwise possible, but it will be a
solid, financially sound growth based on customer request and product demand.

7.1 Important Assumptions

The financial plan depends on important assumptions, most of which are shown in
the following table. The key underlying assumptions are:
i. 9th Palace Coffee Bar assumes a slow-growth economy, without major
recession.
ii. 9th Palace Coffee Bar assumes of course that there are no unforeseen
changes in public health perceptions of its general products.
iii. 9th Palace Coffee Bar assumes access to equity capital and financing
sufficient to maintain its financial plan as shown in the tables.

Table: General Assumptions

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 General Assumptions FY1 FY2 FY3
Plan Month 1 2 3
Current Interest Rate 10% 10% 10%
Long-term Interest Rate 8% 8% 8%
Tax Rate 16% 16% 16%
Other 0% 0% 0%

7.2 Key Financial Indicators

The following chart shows changes in key financial indicators: sales, gross
margin, operating expenses, collection days, and inventory turnover. The growth
in sales exceeds 250% each year. 9th Palace Coffee Bar expects to keep gross
margin above the 38% projected for the first year, but it doesn't anticipate
anything higher than 46%, since our payroll expenses will increase substantially
as it grows into new areas and faces new competition.
The projections for inventory turnover show that 9th Palace Coffee Bar will
maintain a relatively stable amount of inventory in its headquarters warehouse so
that it has no less than two weeks of inventory on hand, but no more than three
weeks, in order to keep products fresh. The only time it would consider holding
larger stores of inventory is if there was some catastrophic event that could cause
a dramatic rise in the price of its coffees or teas.

90
80
70
60
50 SALES
40 GROSS MARGIN
30 PAYROLL EXPENSE
20
10
0
FY1 FY2 FY3

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7.3 Break-even Analysis
To arrive at the average monthly fixed costs, 9th Palace Coffee Bar calculated the
fixed costs for the shopping mall rent. Using the average price per unit, less the
average cost per unit, divided into the fixed costs of operation, 9th Palace Coffee
Bar concludes that we will need to sell at least the number of units shown in the
following table and chart to reach break-even each month.

7.4 Projected Profit and Loss

9th Palace Coffee Bar is expecting some dramatic growth in the next three years,
reaching healthy sales and Gross Profit Margin by the end of the first year.
Expenses during the first year will, however leave a Net After-tax loss. This loss
will provide 9th Palace Coffee Bar with a tax loss carry-forward for the second
year.

Table: Break-even Analysis

Break-even Analysis Kshs
Monthly Units Break-even 15,817
Monthly Revenue Break-even 29,580
Assumptions:
Average Per-Unit Revenue Average Per- 1.87 0.64
Unit Variable Cost
Estimated Monthly Fixed Cost 19,457

Aside from production costs of 60%, which include actual production of product
and commissions for sales efforts, the single largest expenditures in the first year
are in the general and administrative area (G & A), totaling 23% of sales. G & A
includes expenses for rents, equipment leases, utilities, and the payroll burden for
all employees.
Sales increase by nearly 400% in the second year, due to the addition of two more
Drivethrus and two more branches. Although operating expenses double in the
second year, 9th Palace Coffee Bar will be able to realize a Net After-tax profit.

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 In that same year, 9th Palace Coffee Bar will make substantial charitable
contributions.

The third year is when 9th Palace Coffee Bar has the opportunity to break into
markets outside the metropolitan area. 9th Palace Coffee Bar will see nine
additional Drive-thru facilities open in the third year, which will drive sales
increase in production costs, and help improve Gross Profit Margin. Several
expenses take substantial jumps this year--advertising increases and donations
increase as well--and 9th Palace Coffee Bar will be adding several key
management team members. These increases, as well as those for increased
equipment leases and rents, raise our operating expenses, leaving a respectable
Net After-tax profit. The single largest expense sector in the third year, outside of
production, is still G & A costs, but it is down from 23% in the first year and
18.5% in the second year to just 15.02%.

3,000,000
2,500,000
2,000,000
1,500,000 GROSS MARGIN
YEARLY
1,000,000
500,000

0
FY1 FY2 FY3

Table: Projected Profit and Loss

FY 1 FY 2 FY 3
Pro Forma Profit and Loss Kshs Kshs Kshs
‘000’ ‘000’ ‘000’
Sales 2,558,04 4,348,90
3 0 8,022,950
Direct Cost of Sales Production Payroll Sales 790,977 1,132,35 2,783,010
Commissions 144,874 0 1,425,250
1,416 646,050 90,344
35,234

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Total Cost of Sales Gross Margin Gross 337,267 1,413,63 3,298,604
Margin % 220,776 4 2,724,346
39.56% 935,267 45.23%
Operating Expenses 39.82%

Sales and Marketing Expenses

Sales and Marketing Payroll 0 22,000 185,000
Advertising/Promotion Website Travel 18,000 36,000 72,000
Donations 1,000 15,000 22,000
4,000 7,500 15,000
3,332 70,467 180,689
Total Sales and Marketing Expenses 26,332 150,967 474,689

Sales and Marketing % 4.72% 6.43% 7.88%

General and Administrative Expenses

General and Administrative Payroll 31,500 106,000 156,000
Sales and Marketing and Other Expenses 0 0 0
Depreciation 21,785 92,910 196,095
Leased Offices and Equipment 0 6,000 18,000
Utilities 9,640 19,800 41,100
Insurance 12,570 32,620 63,910
Rent 16,800 50,400 126,000
Payroll Taxes 36,356 126,908 303,638
Other General and Administrative Expenses 0 0 0
Total General and Administrative Expenses 128,651 434,638 904,743

General and Administrative % 23.05% 18.50% 15.02%

Other Expenses:
Other Payroll 66,000 72,000 258,000
Consultants 0 0 0
Legal/Accounting/Consultants 12,500 24,000 36,000
Total Other Expenses 78,500 96,000 294,000

Other % 14.07% 4.09% 4.88%

Total Operating Expenses 233,483 681,605 1,673,431
1,050,915
Profit Before Interest and Taxes (12,707) 253,662 1,247,010
EBITDA 9,078 346,572 77,102
Interest Expense 16,165 36,639 0
Taxes Incurred 0 0

Net Profit (28,872) 217,023 973,812

Net Profit/Sales -5.17% 9.24% 16.17%

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7.5 Projected Cash Flow
Cash flow will have to be carefully monitored, as in any business, but 9th Palace
Coffee Bar is also the beneficiary of operating a cash business. After the initial
investment and start-up costs are covered, the business will become relatively
self-sustaining. With the exception of seasonal dips, which 9th Palace Coffee Bar
has attempted to account for, through changes in the menu items.
Assuming an initial investment and financing, which would include operating
capital, 9th Palace Coffee Bar anticipates no cash flow shortfalls for the first year
or beyond. March and May are the greatest cash drains, since 9th Palace Coffee
Bar will be experiencing the cost of second drive thru and mobile unit start-up.
Again, 9th Palace Coffee Bar sees heavier than normal drains of cash in
December and January, as there will be certain accounts payable coming due.

Table: Projected Cash Flow

FY 2 FY 3
Projected Cash Flow FY 1
Kshs Kshs
Kshs ‘000’
‘000’ ‘000’
Cash Received
Cash from Operations
Cash Sales 558,043 2,348,900 6,022,950
Subtotal Cash from Operations 558,043 2,348,900 6,022,90

Additional Cash Received

Sales Tax, VAT, HST/GST 0 0 0
Received 0 0 0
New Current Borrowing 0 0 0
New Other Liabilities (interest-free) 181,463 253,970 729,992
New Long-term Liabilities 0 0 0
Sales of Other Current Assets 0 0 0
Sales of Long-term Assets 0 0 0
New Investment Received
Subtotal Cash Received 739,506 2,602,870 6,752,942

Expenditures FY 1 FY 2 FY 3

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Expenditures from Operations 242,374 846,050 2,024,250
Cash Spending Bill Payments 273,191 1,236,069 2,880,058
Subtotal Spent on Operations 515,565 2,082,119 4,904,308

Additional Cash Spent

Sales Tax, VAT, HST/GST Paid 0 0 0
Out Principal Repayment of Current 1,500 2,000 5,000
Borrowing Other Liabilities 0 0 0
Principal Repayment Long-term 26,469 27,000 50,000
Liabilities Principal Repayment 0 0 0
Purchase Other Current Assets 191,850 429,700 1,356,993
Purchase Long-term Assets 0 0 0
Dividends
Subtotal Cash Spent 735,384 2,540,819 6,316,301

Net Cash Flow 4,122 62,051 436,641

Cash Balance 29,622 91,674 528,315

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7.6 Projected Balance Sheet
9th Palace Coffee Bar projected balance sheet shows an increase in net worth in
the next year after operation, at which point it expects to be making 11.96% after-
tax profit on sales. With the present financial projections, 9th Palace Coffee Bar
expects to build a company with strong profit potential, and a solid balance sheet
that will be asset heavy and flush with cash at the end of the third year. 9th Palace
Coffee Bar has no intention of paying out dividends before the end of the third
year, using the excess cash for continued growth.

Table: Projected Balance Sheet

Projected Balance Sheet FY 2 FY 3

FY 1
Kshs Kshs
Kshs ‘000’
Assets ‘000’ ‘000’
Current Assets
Cash 29,622 91,674 528,315
Inventory 35,159 134,826 328,252
Other Current Assets 0 0 0
Total Current Assets 64,781 226,499 856,567

Long-term Assets
Long-term Assets 323,250 752,950 2,109,943
Accumulated Depreciation 21,785 114,695 310,790
Total Long-term Assets 301,465 638,255 1,799,153
Total Assets 366,246 864,754 2,655,720

Liabilities and Capital FY 1 FY 2 FY 3

Current Liabilities
Accounts Payable Current 49,724 106,240 248,402
Borrowing Other Current 7,500 5,500 500
Liabilities 0 0 0
Subtotal Current 57,224 111,740 248,902
Liabilities
286,394 513,364 1,193,356
Long-term Liabilities
Total Liabilities 343,618 625,104 1,442,258

Paid-in Capital 225,270 225,270 225,270

Retained Earnings (173,770) (202,642) 14,381
Earnings (28,872) 217,023 973,812

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 Total Capital 22,628 239,651 1,213,463
Total Liabilities and 366,246 864,754 2,655,720
Capital
Net Worth 22,628 239,651 1,213,463

7.7 Business Ratios

Standard business ratios are included in the following table. The ratios show a
plan for balanced, healthy growth. 9th Palace Coffee Bar position within the
industry is typical for a heavy growth startup company. Comparing the ratios in
the third year with the industry, this pro-forma plan appears to be within an
acceptable difference margin.
9th Palace Coffee Bar return on net worth and net worth number differ from the
Industry Profile due to the lack of overhead when compared to a typical walk-in
cafe.

Table: Ratios

Ratio Analysis

Industr
FY 1 FY 2 FY 3 y
Profile
Sales Growth 0.00% 320.92% 156.42% 7.60%
Percent of Total Assets
Inventory 9.60% 15.59% 12.36% 3.60%
Other Current Assets 0.00% 0.00% 0.00% 35.60%
Total Current Assets 17.69% 26.19% 32.25% 43.70%
Long-term Assets 82.31% 73.81% 67.75% 56.30%
Total Assets 100.00% 100.00% 100.00% 100.00
%
Current Liabilities 15.62% 12.92% 9.37% 32.70%
Long-term Liabilities 78.20% 59.37% 44.94% 28.50%
Total Liabilities 93.82% 72.29% 54.31% 61.20%
Net Worth 6.18% 27.71% 45.69% 38.80%
Percent of Sales
100.00
Sales 100.00% 100.00% 100.00%
%
Gross Margin 39.56% 39.82% 45.23% 60.50%

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Selling, General & 44.74% 30.63% 29.15% 39.80%
Administrative Expenses
Advertising Expenses 3.23% 1.53% 1.20% 3.20%
Profit Before Interest and -2.28% 10.80% 17.45% 0.70%
Taxes
Main Ratios
Current 1.13 2.03 3.44 0.98
Quick 0.52 0.82 2.12 0.65
Total Debt to Total Assets 93.82% 72.29% 54.31% 61.20%
Pre-tax Return on Net Worth -127.60% 90.56% 80.25% 1.70%
Pre-tax Return on Assets -7.88% 25.10% 36.67% 4.30%
Additional Ratios FY 1 FY 2 FY 3
Net Profit Margin -5.17% 9.24% 16.17% n.a
Return on Equity -127.60% 90.56% 80.25% n.a
Activity Ratios
Inventory Turnover 7.02 8.62 7.70 n.a
Accounts Payable Turnover 6.49 12.17 12.17 n.a
Payment Days 27 22 21 n.a
Total Asset Turnover 1.52 2.72 2.27 n.a
Debt Ratios
Debt to Net Worth 15.19 2.61 1.19 n.a
Current Liab. to Liab. 0.17 0.18 0.17 n.a
Liquidity Ratios
Net Working Capital 7,557,000 14,760,00 27,666,00
n.a
0
Interest Coverage -0.79 6.92 13.63 n.a
Additional Ratios
Assets to Sales 0.66 0.37 0.44 n.a
Current Debt/Total Assets 16% 13% 9% n.a
Acid Test 0.52 0.82 2.12 n.a
Sales/Net Worth 24.66 9.80 4.96 n.a
Dividend Payout 0.00 0.00 0.00 n.a

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