You Were Hired in May 2000 As a Business Consultant to Far Horizon, Inc

Business Core Case Study

Far Horizon Case Information

Consulting Project: The Far Horizon

You were hired in May 2006 as a business consultant to The Far Horizon. Your original assignment was to help the owner improve the profitability of the Wind Watcher Restaurant and the Idle Hour Bar/Lounge. The business was experiencing negative cash flows, and the owner asked for your recommendations on ways to generate positive cash flows. You reviewed the business operations, consulted with the on-site manager and other employees, and interviewed a number of customers. You then provided several business recommendations, including replacement of the original manager with a more experienced person. You worked with the owner over the past month to implement the recommendations.

The owner of The Far Horizon was pleased with your work and has now asked you to consult on an additional project. Here is what he told you:

Now that the restaurant and bar/lounge operations have improved, I would like to move forward with my plans to create a convention center. As you know, I plan to convert the bowling alley into the convention center. I’ve estimated the renovation cost at $337,861, and the convention center will probably generate a loss during its first six months of operations. Although the restaurant and bar cash flows will cover part of the cost, I will need additional financing.

Here’s a copy of the business plan that I discussed with potential outside investors. They told me they also want something called a marketing plan. I’m not sure how that’s different than the business plan, but I’d like you to help me identify what needs to be in the marketing plan.

Although I’m sure that the convention center will provide the greatest profit potential for The Far Horizon, the outside investors are concerned about the cash flow situation for the restaurant and bar/lounge. They want me to show them a budget with positive cash flows from those operations to help support the convention center during its start-up.

I’ve already told the outside investors that the restaurant and bar/lounge cash flows were negative for the first few months of operations because of start-up costs, but they still want to see financial statements through June 30, 2006. They want the numbers prepared using Generally Accepted Accounting Principles, but they don’t need the usual financial statement footnotes. They also want to see a budget for the restaurant and bar/lounge for the next twelve months (July 1, 2006 through June 30, 2007). I’m sure the budget will demonstrate the positive cash flows that I expect from these operations over the next year.

I’d like you to prepare both the financial statements and the budget. I’ve asked the manager to provide you with a summary of the financial transactions that occurred through June. You have already estimated the profit impact of your previous recommendations, so you can build those into the budget.

Oh—one more thing. The outside investors told me that they would like 49% ownership in The Far Horizon if they decide to invest. The business is currently a sole proprietorship, so I’ll need to change the form of business if I give anyone else an ownership interest. What are the different forms of business that I should consider?

The Far Horizon

Summary of Financial Transactions Through June 30, 2006

The owner of Far Horizon has selected July 1 through June 30 as the company’s fiscal year. The bookkeeper of the Wind Watcher Restaurant and Idle Hour Bar/Lounge gave you the following summary of cash receipts and disbursements through June 30, 2006. In order to simplify the problem as you work with the transaction data, you should ignore Internal Revenue Service regulations on asset depreciation and amortization of start-up costs.

Receipts:

1. Cash contributions from owner of $190,000 received on January 5.
2. Restaurant and bar receipts of $199,200 from March 1 through June 30.

Disbursements:

1. Down payment for purchase of land and buildings, $180,000. (The total purchase price on January 10th was $240,000, of which $60,000 was financed with a mortgage on the property.)
2. Mortgage payments of $526 each on February 1st, March 1st, April 1st, May 1st, and June 1st. The interest rate on the mortgage is 7% and is to be paid from January 1.
3. Manager’s salary of $3,000 per month paid on the last day of each month beginning in March.
4. Hourly worker wages of $54,080 from March 1 through June 30.
5. Taxes and benefits for the manager and hourly workers of $16,720 from March 1 through June 30. Taxes and benefits are considered labor costs.
6. Advertising and promotion costs of $400 paid on April 20 and $400 paid on June 20th.
7. Miscellaneous taxes (real estate, liquor license, etc.) of $1,500 paid on May 15.
8. Marketing research of $3,000 paid on March 10.
9. Bookkeeping fees of $500 per month paid on the last day of each month beginning in February.
10. Legal fees of $5,000 paid on February 10.
11. Business consultant fees of $1,000 per month paid on the last day of each month beginning in May.
12. A one-year fire, theft, and liability insurance policy was purchased for $2,400 on March 1st.

13. Food and supplies from March 1 through June 30 of $97,986.

Additional Accounting Entries Needed:

After reviewing the above information, you made several notes about additional accounting entries that need to be made:

1. Because the last mortgage payment was made on June 1st, one month of interest needs to be accrued as of June 30th.
2. A loan amortization schedule must be prepared to determine how much of the principle balance of the mortgage was current versus noncurrent for the June 30th balance sheet.
3. The bookkeeper told you that two checks had been mailed but had not yet cleared the bank as of June 30th; one in the amount of $800 for employee taxes and benefits; and the other $1,355 for food and supplies. Cash balance should be adjusted to be identical to the balance on the June 30 bank statement.
4. The manager estimated the cost of the June 30 inventory of food, liquor and supplies as $2000.
5. Eight months of the one-year insurance policy had not yet expired (i.e., was prepaid) as of June 30th.
6. Of the total purchase price for the property, $40,000 was allocated to land, $100,000 to the supper club, and $100,000 to the bowling alley. Beginning with operations on March 1st, the cost of the supper club will be depreciated using straight-line depreciation over 25 years (zero salvage value). The bowling alley will not be depreciated until it is converted to the convention center.

The Far Horizon

Financial Statement Templates

The Far Horizon

Consultant’s Report to the Owner, June 1, 2006

Wind Watcher Restaurant and the Idle Hour Bar/Lounge

Recommendations to Improve Operating Profits

Over the past month, I reviewed the operations of the Wind Watcher Restaurant and the Idle Hour Bar/Lounge. My review included consultations with the on-site manager and other employees, as well as interviews with customers. Based on this review, I have developed a number of recommendations to improve the profitability of your business.

Replace the On-Site Manager. My most important recommendation is for you to replace the restaurant and bar manager. Below are several recommendations to improve the efficiency of the restaurant and bar operations. A more experienced manager will be more able to implement those recommendations and, thus, more able to improve your profits. Furthermore, you can hire a more experienced manager at the same salary and benefits as the current manager and improve your profits at no additional cost.

Reduce Hourly Worker Idle Time. Your hourly workers have too much idle time. Their work schedules should be more flexible, and the on-site manager should increase or decrease their hours based on the level of business. By reducing worker idle time, you can improve the restaurant and bar operating margin.

Redesign Restaurant Menu. The food menu includes too many items, causing you to carry a large food inventory. At the same time, the menu lacks innovation. It will be difficult to attract more business—or increase revenues—unless you offer novel menu options, particular at dinnertime. Your restaurant menu was carried over from the previous owner, and it includes several items that require special food purchases but do not generate significant sales. The menu should be re-designed to improve the quality of food options and also be more cost effective. You might also consider offering daily specials, chosen to take advantage of reasonably priced food items available at the market.

Aggressively Promote Sales Growth. Because of the high fixed costs of operating the restaurant and bar, you must focus on increased sales volumes to achieve significant profit improvements. Most of the sales efforts have been passive and focused on local customers—community newspaper advertisements, Chamber of Commerce activities, and so on. I can help you develop more aggressive strategies to increase sales revenue, focusing on both local (i.e., repeat) business and on tourist business. Increasing the latter market will be particularly important as you move into the convention center aspect of your development project.

Decrease Food and Supply Waste. The restaurant carries too much food inventory, causing too much food spoilage. This waste is caused partly by the wide range of food on your menu and partly by over-purchasing. As recommended above, you can reduce waste by redesigning the menu. In addition, your manager and cook should improve their planning of food purchases and increase use of the freezer, as appropriate, to reduce food spoilage.

Ensure That All Liquor Bar Sales Are Recognized. The profit margin for your bar sales is too low. Since your sales prices seem reasonable, the low profit margin suggests that not all of the bar’s sales are recorded. This could be caused by theft or by sloppy performance of sales procedures by the bar and/or restaurant staff. I can help you investigate this problem and institute new control procedures to assure full sales recognition.

Overall Benefits. By implementing the above recommendations, I estimate that you can achieve the following improvements in operations during the next year:

• Increase average monthly sales by 25% as compared to the average monthly sales for the previous four-month period March 1 through June 30.
• Reduce labor costs to 40% of sales
• Reduce food, supplies, and utility costs to 45% of sales
• Reduce general and administrative costs to 6% of sales (although marketing costs will increase next year, total costs will decline because last year included several start-up expenses)

It has been a pleasure working with you. Please let me know if you have questions about the recommendations or if I can assist you further.

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