Managerial Accounting
The business is a small shop that is going to be set up for the London 2012 Olympic Games. The shop will be focused on providing personalized hair cuts. The focus will be on hair designs to support athletes, countries or causes. The target market will be people of African descent from all around the world, because of the ease of making such designs and the cultural acceptance of such practice -- although we will of course not discriminate in our clientele. This custom Olympic hair will be a unique product for the Games, having not been seen since Atlanta, but will be comparable to the hair styling that can be found in Brixton and other Afro-Caribbean parts of Britain. We are designing a survey that will estimate the costs of such cuts, and attempt to estimate the cost of the "Olympic premium" that will be possible, based on recent Olympic experiences. The survey design can be found in Appendix a.
The survey was administered only to Afro-Caribbean males in London. While 23% responded that they have had a custom haircut in the past, 55% responded that they would consider one during the Olympics, with a slightly higher number of respondents answering that they would do so for charity than in support of an athlete or country. While no demographic statistics were kept, three Americans/Canadians were in the survey (from their accents) and all were enthusiastic about gaining a custom haircut. This is important because visitors are more likely to take advantage of a temporary store than are Londoners as they do not have access to their regular barber.
The price points for a regular haircut range from a low of £4 to £30, with a median of £10. For a custom design haircut the range was from £20 to £60, with a median of £32. These figures indicate that while some are willing to spend a substantial amount of money on a haircut, most do not. Prices are not expected to be out of the normal range during the Olympics, if only because there is substantial competition in Greater London for this service. Although our shop is expected to have a better location, close to the track and field stadium, it is not expected that we will be able to price too much over market.
While the survey results indicated a slight preference for this to be a charitable venture, those figures were not sufficient to justify that course of action for marketing. It is believed that the interest level in this service will be very high, as it is a unique service, and there are not expected to be competitors within the range of the Olympic venues. However, there may be some competitors emerging in other parts of London once the trend has been noticed by the media. As such, we will need to keep prices reasonable in order to attract business consistently throughout the Games. We intend to make the haircut a once in a lifetime experience, and to do this we will focus on creating a festive atmosphere in the shop, and bring together fans from around the world to unite in celebration of sport. The shop will not be officially licensed for by the Olympic Committee, so the marketing will need to focus on sport and individual countries and athletes, rather than the Games themselves. We may also avoid using the Olympic rings and other trademarks in our designs if our legal team feels that is too risky.
The one caveat to the survey is that the survey was conducted in London, whereas many of our clients are expected to be from outside of London, as only 45% of those surveyed indicated a willingness to use another barber other than their regular one. Foreigners, from the United States, the Caribbean and Africa however, will not have their regular barbers and are therefore more likely to be willing to trust ours. For practical purposes, it was impossible to conduct a survey of foreigners to support this application.
In order to finance this venture, start-up funding will be required from the bank to set up the shop and conduct initial marketing. This funding will be paid back with revenues that are generated during the Olympic Games. There will be six barbers, each working ten hours per day. They will be able to do 2 haircuts per hour, with an average charge above the median at £35 per cut. They will be at capacity during the two-week run of the Olympics and at 75% capacity during the week before the Games. Revenues during set up and take down will be non-existent. The barbers will make £15 per cut, so roughly £30 per hour. The manager's salary will be £500 per week, with rent being a further £400 per week. All of the equipment will be rented, but this needs to be paid up-front.
Cash Flow Statement
1
2
3
4
5
6
Set-Up Costs
-2000
-1000
0
0
0
0
Rent
-400
-400
-400
-400
-400
-400
Supplies
0
-1500
-1500
-1500
-500
0
Salaries
-500
-500
-5225
-6800
-6800
-500
Revenue
0
0
11025
14700
14700
0
Take-down Costs
0
0
0
0
0
-1000
Cash Flow
-2900
-3400
-1900
Total
In total, the venture will need the first three weeks' worth of costs, aside from the barber's salaries. This total will be £8700, which is the amount that we will need to borrow from the bank. This amount will be paid back at the end of the Olympics.
The primary cost categories are the set-up costs, the operating costs and the take-down costs. The equipment will be leased and this cost must be paid at the outset, during the set up phase. Most of the set-up will be undertaken by the owner and the manager, and will consist of the installation of equipment, and the licensing of the business. Supplies will be purchased in advance of usage. The barbers will be paid on a per-cut basis, so their pay will not be covered in advance. If they work overtime, the shop should be able to generate additional revenues. It is not expected that there will be any revenues after the Olympics, as experience at previous Olympics shows that fans leave the city quickly and are not as willing to spend on souvenirs.
The request therefore is for a line of credit that will total £8700, in order to cover the costs of the first three weeks of operations, at which point the shop is expected to begin generating revenues. For the three weeks when revenues are generated, the shop will be able to finance all of its operations. Marketing costs are going to be generated mainly through publicity -- social media and conventional media in particular. There is a plan in place to make these hairstyles one of the trends of the Games, and our shop being the specialist. This will hopefully involve some high profile athletes, although they will not be signed as endorsers as this would erode our profit margins.
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