Issues for example could occur if business in one coffee shop is unexpected good for the day. However, because this business was unanticipated, the shop may encounter difficulties with appropriate inventory. Due to the proximity to the store, goods and inventory could easily be transferred to satisfy unexpected demand. This is particular useful in the early stages of business as inventory control is critical to profitability and return on assets.
In addition, having the store in the same demographic marketing area will allow the owners to further build the brand and competitive advantages over peers in the industry. Due in part to the commodity like nature of coffee, brand allows the owners to charge premium prices. This occurs with many coffee shops such as Starbucks, or Dunkin Donuts. Their coffee in many instances is similar to competitors. However, due to the brand, and what it represents to the consumer, both locations are able to charge premium prices. By having the coffee shop near the original location, the owners and managers can continue to build the brand which ultimately will resonate with consumers. This will drive brand loyalty, heighten margins and increase profitability over the long-term.
Outline a Plan for Securing Debt Financing
Raising capital through debt is often compared to raising capital through equity. The major difference is that equity requires you to give up partial ownership of your company. Debt capital however, will allow the original owners of the coffee shop to maintain their ownership claims to the business.
A major negative with debt capital is that the owners will be funding from banks or other lenders. These institutions often look for low risk investments, something that many start-up businesses can not offer. As such it is important for the coffee shop to establish itself as a viable and thriving entity. For one, this will the company to access additional capital to expand operations, build stores, and the overall brand. In addition, being a viable option could potentially lower interest payments, saving the company valuable dollars. As such, the plan to securing debt financing will hinge primarily on the companies ability to operate profitably in a very competitive environment. Profitable operations make debt financing easier as oppose to lagging and struggling profitability. The plan will highlight the ability of the company to payback its obligations in a timely manner as not to cause undue harm to the financial institution.
In addition the plan will consist of time series ratios that display key metrics of business performance. Such ratios will give the funding institution key information as to the future growth of the business. Ratios such as return on assets, debt to equity, inventory turnover, quick ratio, and the acid test ratio provide extensive insights into the operation of the business. In particular the quick ratio will be very important in securing debt financing as it provides evidence as to the short-term nature of the business. The quick ratio measures short-term assets against short-term liabilities and is a good indicator of financial strength. In the event of a downturn, financing institutions want to know if the business will survive. Having the assets and liquidity necessary to navigate strong downturns is essential to obtaining debt financing. As such, the plan will allow the banks to easily determine the merit of the business. Many businesses in the startup stages of development often will have difficult times financing through debt because they cannot meet the immediate interest expenses. In other words, if you have no income because your product or service isn't finished yet, it is less likely for you to be funded by a bank. Paying monthly interest on a loan can be very difficult for businesses without established revenue streams. As such the coffee shop must prove it can obtain recurring and viable revenue through its brand or service quality. Financial statements will be essential in this regard. Of particular interest will be the income statement and the cash flow statement which both can show the bank how strong the earning potential of the business is. Most banks ask for your old financial statements dating back at least three years. These documents allow the bank to evaluate how risky the business is and if you'll be able to make the monthly payments. Depending on your business' current position, this will either help ensure a loan if you have healthy revenue streams, or make funding through debt more difficult. As such the plan will provide the banks with proof of the viability of the overall business.
1. Swarming the shelves: How shops can exploit people's herd mentality to increase sales." The Economist. 2006-11-11. p. 79-90.