Finance Analyzing

Issy Cake 1

Issy has been baking cupcakes and other desserts for years. Over that time she has

developed a word-of-mouth reputation for some of the finest desserts in the area. She

currently runs a wedding and event business out of her house. She averages about 1200

pieces per week. The volume has become such that her parents want her “out of the house”.

Issy has been thinking about a retail location for years, but has always shied away from it

because of the expense. Nor does Issy have any formal business training. But now she must

do something. You need to help her. Here is the information that she has come up with so

far:

• A good retail location, of sufficient size, in a high traffic area will cost $2100

per month. She has to pay the first and last months’ rent up front.

• It will cost her $120,000 to build out the kitchen and the display/sales/eating

area.

• She plans on another $10,000 in start up expenses for fees, licenses, and

deposits, etc.

• She plans on doing most of the work herself, but will need to hire at least one

other FTE employee. She budgets total wages and wage overhead, including

herself, at $8200 per month.

• Additional operating expenses will come in around $800 per month.

• She knows she can’t build her business without advertising, so she plans on

spending $3000 a month for each of the first 3 months and then dropping

back to $1000 per month.

• She knows that the first month alone she should be able to increase sales

over the current volume (4.3x1200pcs = 5160) by 25% since that is volume

of business she currently declines due to lack of space. She then figures that

with her advertising she should be able to increase sales by another 15% in

each of months two and three. After that sales would increase by 10% in

each of months four through nine. Months 10, 11, and 12 would each see a

5% increase over the previous month, after which time she envisions sales

leveling off.

• She would need to add an additional $1200 a month in labor to handle the

volume starting in month 5.

• Her average piece would retail for $2.00. She knows that the cost of

ingredients is less than 12% for all pieces. She has never actually figured

how much labor goes into each piece.

• Issy, over the last few years, has managed to save $50,000 and is planning on

putting it all into her new venture. She plans on borrowing the rest, but

doesn’t know how much she will need, nor has she figured the loan into her

expenses/cash flow.

Issy needs you to do three things: 1. Tell her how much more money she needs, 2. Build in

her loan payments (8% interest, 7 year amortization), 3. Tell her whether this business is

worth pursuing (what are the returns).