This section contains OHANA Play Café financial information and analysis, based in the following assumptions:
• OHANA Play Café will be using funding of three investors.
• The Sales will increase 10% every year. Details about the Sales Forecast calculation will be explained in section 7.2.
• There will be an increase of 10% in Inventory every year.
• Equipment will be depreciated using the straight-line method. See Appendix F.
• Salaries expenses will increase 10% beginning the third year. See Appendix D for salaries expenses break down.
• Tax retention is based on Salvadoran Law. There are two taxes, a 13% sales tax and a 25% income tax.
7.1. Startup Expenses
OHANA Play Café will need an initial investment of $47,528.14 USD. This investment will cover by three main investors, two family members -$20,000 USD each- and myself. Details are explained in Table IV. See Appendix C for further details about each component.
Table 4. OHANA Play Café. Startup Initial Investment
Initial Investment Summary Amount in USD
Cash $7,000.00
Equipment and furniture $9,224.00
Inventory $4,956.00
Total Initial Investment $47,528.14
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OHANA Play Café will provide a mix of services and products to our customers. Therefore, our sales forecast will be based in consumption per costumer, rather than units sold. As we aim to be a place where our customers feel comfortable and within a family, our goal is to build a loyal customer’s base. Our efforts will be driven to win customer´s loyalty. We expect customers to adopt OHANA Play Café as part of their agenda, rather than “a once a year stop”, OHANA is their entertainment and family top choice destination. To seize our expected customer´s base, we will use as a reference the number of social media followers that our current competitors have. Although social media followers doesn´t equal actual customers, it does provides an estimate of potential customers. The followers a people who show interested in these business. The following table has a detail of followers per competitor in Instagram and Facebook.
Table 5. List of Social Media Followers as of May 2019.
We´ll assume that on the first year of business, OHANA Play Café customer base will be the 30% of the average number of followers in Instagram. We choose Instagram since this App is being less time in the market and is more widely used among millennials. Many people regardless their age have a Facebook account –elder generations-, and so the number of followers in Facebook could also include people who recommend the service, rather than users.
In addition, since our main communication channel will be through social media, we can measure the increase of our customer´s base through our number of followers. The success in marketing through social medial is transforming followers into customers. Therefore, rather than focus only in posting pictures and information, we´ll create value from the Instagram tools such as bio, posts and stories. Then will redirect the attention to our target audience and how OHANA Play Café is adding value to their life.
Competitor Instagram Facebook
“La Luna de Mateo” 4779 17,208
“Fun House Café” 5635 22,028
“La Petit Maison Kindercafe” no official account 10616
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In accordance, for our sales forecast analysis we´ve considered the following assumptions:
Table 6. OHANA Play Café. Projected Annual Number of Visits per Customer
• Customer base in first year equals to 30% of average of our competitor´s Instagram followers.
• Sales goal. Expected growth of customer base of 10% every year.
• Minimum consumption per customer $9 USD. (Includes one kid´s entrance fee and minimum table consumption of $4 USD).
• Expected number of visits a year per customer 14.83 (at least once a month).
• We will rent our venue once a month for celebrations.
We estimate the number of visits a year per customer with the help of PERT, a project management tool that considers three scenarios optimistic, realistic and pessimists, for then calculate an average weight. Table VI shows our predictions for each scenario.
With our sales forecast assumptions, we can project estimated revenues per sales on a period of five years. This sale forecast will be the base for the later financial analysis. Table VII contains the sales forecast projection from 2020 to 2024.
Table 7. OHANA Play Café. Projected Annual Forecast from 2020 to 2024.
Years 2020 2021 2022 2023 2024
Customers Base 1562 1718.2 1890.02 2079 2287
Visits per year 14.83 14.83 14.83 14.83 14.83
Consumption $9.00 $9.00 $9.00 $9.00 $9.00
Sales forecast $208,480.14 $229,328.15 $252,260.97 $277,487.07 $305,235.77 Rent Venue $2,400.00 $2,400.00 $2,400.00 $2,400.00 $2,400.00 Expected
revenue
$210,880.14 $231,728.15 $254,660.97 $279,887.07 $307,635.77 Expected number of visits per
customer in one year
Best case scenario Most likely Worst case scenario
Forecasting 24 15 5
Weight 1 4 1
Total 14. 83
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7.3. Projected Initial Balance Sheet
Table 8. OHANA Play Café. Initial Balance Sheet
Assets Liabilities and Equity
Current Assets $38,304.14 Liabilities $27,405.14
Cash $36,057.14
Accounts
Payable $27,405.14
Inventory $1,652.00
Supplies $595.00
Non-current Assets $9,224.00 Equity $20,123.00
Equipment and Furniture $9,224.00
Shareholder
Equity $20,123.00
TOTAL ASSETS $47,528.14 TOTAL LIABILITY AND EQUITY $47,528.14
OHANA Play Café
Initial Balance Sheet As 01 January 2020
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7.4. Pro Forma Income Statement
Table 9. OHANA Play Café. Estimated Income Statement
2020 2021 2022 2023 2024
Sales $210,880.14 $231,728.15 $254,660.97 $279,887.07 $307,635.77
Sales after tax discount (13%)
$183,465.72 $201,603.49 $221,555.04 $243,501.75 $267,643.12
Cost of Goods Sold $19,824.00 $21,806.40 $23,987.04 $26,385.74 $29,024.32
Gross Profit $163,641.72 $179,797.09 $197,568.00 $217,116.00 $238,618.80
Salaries expenses $46,553.02 $46,553.02 $51,208.32 $51,208.32 $51,208.32
Utilities expenses $1,716.00 $1,716.00 $1,716.00 $1,716.00 $1,716.00
Rent expense $15,600.00 $15,600.00 $15,600.00 $15,600.00 $15,600.00
Advertising $400.00 $400.00 $400.00 $400.00 $400.00
Security expense $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00
Other operation-expenses $300.00 $300.00 $300.00 $300.00 $300.00
Start-up expenses $3,153.00 $0.00 $0.00 $0.00 $0.00
Depreciation $2,241.32 $2,241.32 $1,526.32 $1,181.66 $1,181.66
Income before income tax $89,478.39 $108,786.76 $122,617.37 $142,510.03 $164,012.83
Income tax (25%) $22,369.60 $27,196.69 $30,654.34 $35,627.51 $41,003.21
Net income $67,108.79 $81,590.07 $91,963.03 $106,882.52 $123,009.62
OHANA Play Café
Annual Estimated Income Statement from 2020 to 2024
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7.5. Pro Forma Cash Flows
Table 10. OHANA Play Café. Estimated Cash flows
2020 2021 2022 2023 2024
Cash flow from operating activities
Cash collected from customers $210,880.14 $231,728.15 $254,660.97 $279,887.07 $307,635.77
Depreciation $2,241.32 $2,241.32 $1,526.32 $1,181.66 $1,181.66
Cash paid for
Purchasing inventory ($19,824.00) ($21,806.40) ($23,987.04) ($26,385.74) ($29,024.32) Operating and admin expenses ($71,922.02) ($68,769.02) ($73,424.32) ($73,424.32) ($73,424.32)
Tax ($49,784.01) ($57,321.35) ($63,760.27) ($72,012.83) ($80,995.86)
Net cash from operating activities $71,591.43 $86,072.71 $95,015.67 $109,245.84 $125,372.94
Cash flow from investing activities
Cash paid for equipment and furniture ($9,224.00) Net cash from investing activities ($9,224.00)
Cash flows from financing activities
Dividends Paid ($4,079.50) ($4,598.15) ($5,344.13) ($6,150.48)
Net cash from financing activities ($4,079.50) ($4,598.15) ($5,344.13) ($6,150.48)
Net increase/decrease in cash and equivalents $62,367.43 $81,993.21 $90,417.51 $103,901.71 $119,222.46 Cash and Equivalents, Beginning of Period $7,000.00 $69,367.43 $151,360.64 $241,778.15 $345,679.86 Cash and Equivalents, End of Period $69,367.43 $151,360.64 $241,778.15 $345,679.86 $464,902.32
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7.6. Profitability Analysis
With the help of the NPV, we´ve calculated the present value of the projected earnings forecast to determine the profitability of OHANA Play Café. Table XI shows a positive NPV of $$324,962.32 from OHANA´s free cash flows with a discount rate of 12%47. According to El Salvador´s stock market agency, the most negotiating bonds in the last month issued by the Government of El Salvador were EUROSV2035 with a return rate of 7.88%. We use this as a base for our discount rate considering the investment in the bonds is less risky and with a lower return.
Table 11. OHANA Play Café. NPV Analysis.
Unlevered Net Income -2364.75 69473.54 81590.07 91963.03 106882.52 123009.62
Free Cash Flow
47 The 12% discount rate is an assumption taking the governments bonds return rate. There is no sufficient data to access the market discount rate for a similar inversion.
Year 0 1 2 3 4 5
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7.6.1. Sensitivity Analysis
We´ve explained our assumptions for our financial analysis regarding sales forecasting and cost. Yet, to evaluate profitability is important to verified the impact in the change of an assumption in a better or worst case scenario. We´ve selected 4 scenarios three related with Sales and one with Cost of Goods Sold. Table XII shows the new NPV in four different situations, changing only one assumption, while the rest of the data remains constant.
Table 12. OHANA Play Café. Sensitivity Analysis.
Criteria Scenario Assumption NPV
Customer Base Pessimist 521 (10% of average Instagram followers) ($65,526.26)
Annual visits per customer Optimist 15 $331,679.63
Annual visits per customer Pessimist 8 $55,084.59
Cost of Goods Sold Pessimist Increase 25% $305,330.57
This table shows that OHANA´s key of success relies in their customer base, as we´ll gain their loyalty and visit us more frequently our revenues will continue to grow. Notice the gap change in NPV from 8 to 15 visits per year, which can be obtained by promoting activities that attract our customers. As for cost of goods sold, even with an increase of 25% we can still generate a profit. Therefore OHANA´s key of success relies in our customer´s loyalty and base, that will be enhanced by our focus in customer service.