Can this be done

[TeaRoom]

We have seen a Tea Room that looks too good to be true

It is a 12 year lease costing £29,950
Rent is £12,000 a year
Rates £1,900 a year
Approx takings £800-£1000 a week
The business presently is open Monday-Saturday 10am-4pm so there is scope for longer hours (would this affect tax etc?)

On those figures could it pay and what other outgoings would we have to consider a month/year?
It says (on the details) gross profit in the region on 75%. There would have to be at least one "full time" and one "part time" member of staff (this will be a family business- myself, my mum and possibly my brother)

We cannot see how this can work, are we missing something? It would be a shame to let this pass without at least looking into it. Or should we just cut our losses now and not even be considering a business?

[Ian J]

If the business is currently turning over an average of £900 per week with an average gross margin of 75% it should generate £21,200 per year after rent and rates but before all other overheads including consumables, insurance and most important of all, wages

[MarkD]

To be sure you are not missing anything you should show the accounts to an accountant and ask for an opinion. Hope this helps...

[inbakumar]

Tearoom,

Here are some of my thoughts:

(1) The goodwill costs is £29500 for twelve years which means you have to write-off £2500 each year

(2) If we assume a weekly turnover of £900 and the gross margin of 75% then the annualised gross profits are as follows:

Turnover (900 * 52 weeks) = £46800
Cost of sales (900*25%*52) = £11700
Gross profits = £35100

(3) Estimated overheads (excluding interest charges and wages):

Rent = £12000
Rates = £1900
Repairs & maintenance = £1200
Light & heat = £1800
Goodwill write-off = £2500
Marketing = £500
Insurance = £300
Sundry = £100

Total = £20300

(4) Estimated profits = £35100 - £20300 = £14800

(5) Estimated working hours:

Full-time person (6 hrs * 6 days * 52) = 1872 hrs
Part-time person (3 hrs * 6 days *52) = 936 hrs

Total = 2808

(6) Estimated profits per hour (14800 divided by 2808) = £5.27

(7) The estimated profits above also excludes the development potentional of the business.

Hope the above gives you some additional points to consider. However, it is important that you get copies of the last three years accounts from the vendor and analyse them with the help of a qualified accountant.

Regards,

[peterjhale]

Excellent analysis Joel

Tearoom - you'll always get costs that are unforeseen (so the profits are a good realistic figure but are unlikely to be higher unless you extend the hours as you have suggested -- so long as the demand is there)

Now - earning £5 per hour is the same as minimum wage also - you'll need to weight up the excitement and entrepreneurialship of running your own business against the hassle and low wages you'll receive.

Good luck and let us know how you get on.

[Wolf]

I must admit when I saw Joel's analysis it was an eye-opener. How often we convince ourselves we are doing OK when the real situation is we are standing still in real terms.

Inbakumar, Peter is right. £5 per hour for all that hard work and commitment is hardly going to put a smile on your face?

[Ian J]

Originally Posted by peterjhale

Tearoom - you'll always get costs that are unforeseen

Consumables were fairly significant during my restaurant days too. When I did my quick costing I used the lower end of the sales range that Tearoom presented on the basis that vendors tend to be optimist about sales and forget the bad weeks when it's sbowing and people don't go out much.

Looking on the brighter side, the majority of your costs are fixed so if you can increase sales - 75% of that increase will go straight onto the bottom line but unfortunately the reverse is also true and a slide in sales would have quite serious effects on profits.

The major fixed cost is the amortization of the lease premium but you may find room for manouvre there if either you can negotiate the price downwards or else you can persuade the landlord to grant you a new longer lease.

I assume that fixtures & fittings are all included in the lease premium ?

[Cougar]

The other financial area to consider if you are attracted to move forward with this business and the P&L figures stack up for you, is cash flow.

As part of your review and forecasts it would be wise to look at the timing of when you think you will get cash in and when you have to pay it out. Lots of businesses that are profitable get into difficulties because they do not have the cash available to fund the day to day operations of the business.

It is quite possible for any business to be profitable but to go bust due to liquidity difficulties. This is because a profit and loss account looks at a business performance over say a month, or a quarter or a year but takes no account of when money actually moves in and out of the business during the period.

Cash flow is all down to timing. You would need to look at when bills/outgoings will fall due for payment and what your estimate is of the cash you will have taken from customers to pay these. Will it be enough to cover what you need to pay out?

There are experienced people on this forum who can advise on this in more detail than me but there are ways to help cash flow but in order to manage it and/or improve it you need a first outline forecast of what it might look like.