2000 words finance

1

Managing Financial Resources (0832428) Birmingham Business School

Coursework Assignment

Word Count: 2,000 words (including titles, references and footnotes, but excluding

bibliography, calculations and cover page) Due date: 14th May 2021 at 12 noon

Submit your assignment electronically via Canvas

Required: Produce a four-parts report (part A, B, C & D) which address tasks 1 – 4. Please note that the essay marking rubric is available on Canvas.

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Assignment

Managing Financial resources

YALLA MOMOS: EXPANSION DILEMMAS OF A SMALL BUSINESS

Refer to the case study : Yalla Momos expansion dilemmas of a small business (pdf, page 1-5 only) and answer the below requirements. THE DILEMMA

PART A : CVP ANALYSIS

Goel wanted to set up one more branch, despite the fact that sales at the Bur Dubai kiosk and the Dubai

International city branch were not as strong as those at the Karama branch. Goel was worried about the

net revenue and felt that he should take a more structured approach to expansion. He was wondering if

he should concentrate on the current business or open an additional restaurant? What if things will not

turn out as he is expecting?

His competitors were engaged in aggressive marketing and Goel knew he had to make a quick decision.

The Dubai market was expanding, but the volatile nature of growth and the sheer number of competitors

might eat into his profits. With these fears in mind, he knew that the present decision was going to be

critical to the continued success of his business.

Task 1

Would expansion be beneficial to Goel? Respond to Goel’s dilemma by supporting your argument with

Cost-volume profit analysis.

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YALLA MOMOS INCOME STATEMENT FOR THE YEAR ENDING 2015 (IN AED)

Particulars

Amount

in AED

Net Revenue 504,000

Cost of Food sales 151,200

Gross Profit 352,800

Operating Expenses

Rent 68,000

Salaries 54,000

Administrative costs 23,000

Depreciation 30,200

Utilities 13,000

Miscellaneous expenses 15,800

Advertisement costs 0

Operating Profit 148,800

Interest 13,000

Net Profit 135,800

Note: AED = United Arab Emirates (Emirati) Dirham; US$1 = AED3.67 on April 30, 2016.

Source: Created by the authors based on company data.

YALLA MOMOS PROJECTIONS WITH AND WITHOUT EXPANSION (2016) (IN AED)

Amounts shown in AED Without Expansion With Expansion

Sales price per unit 20.00 20.00

Sales volume per period (units) 27,720 36,360.00

Raw material cost 6.00 6.00

Rent 75,000.00 88,000.00

Salaries 61,400.00 75,000.00

Administrative costs 26,000.00 34,000.00

Depreciation 34,720.00 38,360.00

Utilities 14,000.00 19,000.00

Miscellaneous expenses 17,060.00 19,180.00

Advertisement cost 8,000.00 12,000.00

Interest 13,000

16,000

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Part B & C BUDGETING AND BEYOND BUDGETING

Goel has identified a niche in healthy vegan food and customers concerned about the impact of

restaurants on the environment. He is contemplating whether to add vegan menu to the Yalla Momos

restaurant brand or start a new restaurant brand called Dinefest to provide vegan and low-cost healthy-

eating options. He thinks he has a good chance of becoming a market leader if he introduces low gourmet

membership fees and a ‘no-frills’ service concept and highlights the environmentally friendly attributes of

the Dinefest.

He estimates that Dinefest can generate AED 1.3 million in 2017 to AED 3.5 million in 2019 in sales

revenue. He estimates that the number of restaurants he operates will also increase between 2 and 5

restaurants within the period. He will increase the number of restaurants through a mixture of organic

growth and acquisition of existing restaurant groups.

Dinefest’s business model will offer a no-contract gourmet membership, i.e. there is no fixed membership

period. Dinefest will use eco-friendly cookware and equipment based on ceramic technology to prevent

food from sticking to them. This non-stick technology will provide a better alternative to Teflon, which has

been traditionally used in some cookware but tends to break down in high cooking temperatures. Other

eco-friendly cookware products will be sourced from recyclable materials and designed to heat food

faster.

In order to offer low Gourmet membership fees, their model will be based on a no-frills concept, meaning

that he will restrict the restaurant to cuisines prepared with organic ingredients sourced locally. There will

be no buffets and no café or bars that you would expect to find in traditional restaurants.

The low-cost model that will be used by Dinefest will be dependent on advanced technology. Prospective

Gourmet members can join using a simple online process that can be completed in minutes. Members

can also manage their accounts, view cooking class timetables and book cooking lessons online.

The use of technology results in an efficient staffing model with, for example, no need for dedicated in-

restaurant sales and marketing teams.

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GOURMET MEMBERSHIP

Dinetfest Gourmet membership will be on a no-contract basis, i.e. it will not involve a fixed membership

period, and members are free to cancel their membership at any time without penalty. There will be two

types of membership: basic gourmet membership, where the member can access two chosen restaurants

and premium membership where the member can access restaurants nationwide. Both types of

membership require payment of a monthly fee. It will be possible to access restaurants daily by booking

online or by telephone. Membership fees vary depending mainly on the location of the restaurants.

Occasional marketing campaigns will be run, offering discounted membership to all new members.

Student members will also receive a discount, and kids below the age of five can eat for a fixed price yet

to be determined. Each gourmet member will be provided with a club card which will be used to get the

privileges meant for members. Premium members will have access to free cooking classes and healthy

living dieting guides. They can also arrange for individual coaching from a master chef without an

additional fee.

STAFFING

A typical restaurant will have five employees (three chefs and two waiters), a manager and an assistant

manager, who manage the restaurant. Other staff will work at the head office in various functions

including IT, HR, Finance and Marketing. Restaurant staff will be complemented by some ad hoc waiters

that will be hired on a zero-hours contract where they are not guaranteed to be offered work in any one

week. The ad hoc waiters will be paid the minimum hourly wage rate but will able to supplement their

income with tips that they will receive from benevolent customers. All waiters will be trained to be

courteous, polite and respectful to the customers. They will be trained to be diligent in their duty and to

uphold the motto: “the customer is a king”, and they will be expected to attend additional training

sessions related to health and safety. Goel will empower restaurant managers to run their sites

independently, but he will determine the membership fees.

MARKETING

The marketing team’s main activities are market research; the promotion and advertising of new and

existing restaurants; raising brand awareness and advising on pricing strategies. The Marketing team will

work closely with the IT and Properties department. Marketing efforts will be directed at both existing

members, to try to ensure member retention and the recruitment of new members. The marketing team

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will use the website to provide members with details of cooking classes being operated each week and

any other news or member offers. The managers will also use the customer database to communicate

electronically with members using email and text messages. Regular marketing campaigns will ensure that

the awareness of the Dinefest brand is high.

FINANCE

The financial information system will be developed to produce monthly management accounts and half-

yearly and annual statutory accounts. It also will generate daily and weekly sales revenue and membership

number information for management to monitor actual results against budgets. The Finance team will

also carry out ad-hoc projects, including investment appraisal and investigations, along with ongoing

decision support. Some areas, including all internal audit work, will be delivered by external experts.

Budgets will be produced annually using incremental budgeting for sales and cost items. All budgets will

be broken down into monthly periods, with the exception of the sales budget, which is broken down into

weekly periods.

Budget information 2019

Gourmet Membership Fee Budget 2017

City Suburbs Total

Number of Restaurants 3 2 5

Average number of members per restaurant

Premium 365 305 670

Basic 115 104 219

Total 480 409 889

Average membership fee per month (AED)

Premium 50.00 45.00 95.00

Basic 25.00 20.00 45.00

Total membership fees per year (AED 000)

Premium 18,250 13,725 31,975

Basic 2,875 2,080 4,955

Total 21,125 15,805 36,930

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Task 2

Explain which of the costs will be relevant if he decides to establish Dinefest as a separate restaurant

brand. Explain any other factors that Goel should take into consideration before deciding whether to go

ahead with Dinefest.

Task 3

Explain how the application of beyond budgeting could benefit Goel.

Sales Budget 2019

Number of Restaurants 5

Average number of members per restaurants 889

Total sales revenue (AED 000) 36, 930

Per member AED

Number of members per restaurant

Total AED 000

Yearly membership fees Premium 47.50 670 31,825

Yearlymembership fees Basic 22.50 219 4,927.50

Total sales revenue from membership 36,752.50

Operating Profit Budget 2019

Total Per Restaurant

AED 000 AED 000 AED 000 AED 000

Sales revenue 36,752.50 7,350.50

Operating expenses

Restaurant operating costs (15,920) (3,184)

Lease costs (1,500) (300)

Staff costs (8,822) (1,764.4)

Head office costs (3,065) (613)

Depreciation (2,650) (530)

Amortisation (1,215) (243)

(33172) (6,634.4)

Operating profit 3,580.50 716.1

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PART D INVESTMENT APPRAISAL METHODS

Continuing with the surge to expand and continuous look out for new ventures, below proposals are now

available for consideration by the company. The Marketing manager suggested that if the company can

sell its own Momos sauce bottles or ready-made Momos shell kit, it could be sold for three years, but not

after that. The company did some market research and gathered the basic cash flows information. The

cost of the market research information was £15,000.

On the basis of this research, cash flows are expected to be as follows:

Figures in ‘000 AED

Momos sauce bottles 2018 2019 2020

Cash in flows 700 700 825

Momos shell kit 2018 2019 2020

Cash in flows 720 720 1,905

The cost of the new equipment will be £1,555,000 for Momos sauce bottles. This will be spent by the

end of December 2017.

The cost of the new equipment will be £2,155,000 for Momos shell kit. This will be spent by the end of

December 2017.

Depreciation of all fixed assets on the straight-line basis of 3 years’ useful life.

The company usually requires a payback period of less than 2 years.

The cost of capital is 10%. The following information is also available:

After 1 year After 2 years After 3 years

Discount factors 10% 0.909 0.826 0.751

The net present value of the product lines at a discount rate of 25% have been calculated as £124,600

(negative) for Momos sauce bottles and £142,840 (negative) for Momo shell kit.

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Task 4

Present your arguments to Goel concerning acceptance (or not) of each project. Funds are available for

only one product line. Your arguments should use the results from your calculations in (a) and a

consideration of the advantages and disadvantages of each method of investment appraisal.