Overview Robert Rainsford is a twenty-eight-year-old facing a major turning poin
ID: 399821 • Letter: O
Question
Overview
Robert Rainsford is a twenty-eight-year-old facing a major turning point in his life. He has found himself unemployed for the first time since he was fifteen years old. Robert holds a BS degree in marketing from the University of Rhode Island. After graduation, a firm that specialized in developing web presences for other companies hired him. He worked for that firm for the last seven years in New York City. Robert rose rapidly through the company’s ranks, eventually becoming one of the firm’s vice presidents. Unfortunately, during the last recession, the firm suffered significant losses and engaged in extensive downsizing, so Robert lost his job. He spent months looking for a comparable position, yet even with an excellent resume, nothing seemed to be on the horizon. Not wanting to exhaust his savings and finding it impossible to maintain a low-cost residence in New York City, he returned to his hometown in Fairfield, Connecticut, a suburban community not too far from the New York state border.
He found a small apartment near his parents. As a stopgap measure, he went back to work with his father, who is the owner of a restaurant—Frank’s All-American BarBeQue. His father, Frank, started the restaurant in 1972. It is a midsize restaurant—with about eighty seats— that Frank has built up into a relatively successful and locally well-known enterprise. The restaurant has been at its present location since the early 1980s. It shares a parking lot with several other stores in the small mall where it is located. The restaurant places an emphasis on featuring the food and had a highly simplified decor, where tables are covered with butcher paper rather than linen tablecloths. Robert’s father has won many awards at regional and national barbecue cook-offs, which is unusual for a business in New England. He has won for both his barbecue food and his sauces. The restaurant has been repeatedly written up in the local and New York papers for the quality of its food and the four special Frank’s All- American BarBeQue sauces. The four sauces correspond to America’s four styles of barbecue—Texan, Memphis, Kansas City, and Carolina. In the last few years, Frank had sold small lots of these sauces in the local supermarket.
As a teenager, Robert, along with his older sister Susan, worked in his father’s restaurant. During summer vacations while attending college, he continued to work in the restaurant. Robert had never anticipated working full-time in the family business, even though he knew his father had hoped that he would do so. By the time he returned to his hometown, his father had accepted that neither Robert nor Susan would be interested in taking over the family business. In fact, Frank had started to think about selling the business and retiring. However, Robert concluded that his situation called for what he saw as desperate measures.
Initially, Robert thought his employment at his father’s business was a temporary measure while he continued his job search. Interestingly, within the first few weeks he returned to the business, he felt that he could bring his expertise in marketing—particularly his web marketing focus—to his father’s business. Robert became very enthusiastic about the possibility of fully participating in the family business. He thought about either expanding the size of the restaurant, adding a takeout option, or creating other locations outside his hometown. Robert looked at the possibility of securing a much larger site within his hometown to expand the restaurant’s operations. He began to scout surrounding communities for possible locations. He also began to map out a program to effectively use the web to market Frank’s All-American BarBeQue sauce and, in fact, to build it up to a whole new level of operational sophistication in marketing.
Robert recognized that the restaurant was as much of a child to his father as he and his sister were. He knew that if he were to approach his father with his ideas concerning expanding Frank’s All-American BarBeQue, he would have to think very carefully about the options and proposals he would present to his father. Frank’s All-American BarBeQue was one of many restaurants in Fairfield, but it is the only one that specializes in barbecue. Given the turnover in restaurants, it was amazing that Frank had been able to not only survive but also prosper. Robert recognized that his father was obviously doing something right. As a teenager, he would always hear his father saying the restaurant’s success was based on “giving people great simple food at a reasonable price in a place where they feel comfortable.” He wanted to make sure that the proposals he would present to his father would not destroy Frank’s recipe for success.
Question 9: Locate the average values of these values for the restaurant industry and comment on how well or poorly Frank’s All-American BarBeQue appears to be doing with respect to the industry.
Explanation / Answer
Current ratio:
Current ratio = Current asset/Current liabilities
2011
2012
2013
2014
2015
Current Asset
I
$1,523,636
$2,566,983
$3,909,241
$5,375,249
$6,995,341
Current liabilities II
$344,745
$294,338
$306,350
$323,120
$343,926
Current ratio III=I/II
4.42
8.72
12.76
16.64
20.34
Current ratio indicates about the liquidity position of the company. The above calculation clearly indicates about the significant increase in the liquidity position of the company. There is continuous increase in current ratio over the given period of time. But the increase in this ratio is dramatic every year. From the trend one can conclude that they are expected to be highly liquid. Current ratio indicates about the proportion of current assets in terms of current liabilities. In case of year 2011 the current ratio is 4.42 it indicates that 4.42 times the amount of current liabilities is the value of current assets.
Net profit margin:
Net profit margin = Net profit/ Sales
2011
2012
2013
2014
2015
Net profit
I
$879,427
$1,181,354
$1,330,246
$1,449,237
$1,599,285
Sales
II
$4,191,683
$4,585,163
$4,904,564
$5,253,740
$5,636,277
Net profit margin
III=I/II
20.98%
25.76%
27.12%
27.58%
28.37%
Net profit margin of the company is improving. There is increasing trend in the net profit margin of the company. Increase is on continuous basis. Growth during the year 2012 was tremendous but with times the percentage of increase in the profitability slower down especially between 2013 and 2014.
Company is expected to earn higher profit every year with continuous growth on year on year basis. Thus, overall profitability of the company is positive.
For 2013 the profit margin is 27.12% it indicates that company will be in a position to earn 27.12% of profit from the sales generated. In other words, about 27.12% of sales will be converted into profit which is available for the shareholders and for any re-investment.
Average Variable cost = 45 %
Fixed cost = $56,313
Break-even = Fixed cost/(1 – Variable cost%)
= $56,313/(1 – 0.45)
= $102,387.27
The break even dollars indicates about the amount of sales to be generated in dollar so that the profit will be equivalent to $0. In other words when sales are equivalent to $102,387.27 profitability of the company will be nullified.
Industrial comparison:
Net profit margin of the industry is 13.7% (MSN Money, 2014) currently, but the estimated profit is too high for the company, even the average is 25.97% which is far ahead than industry’s average. Thus, company is expected to generate greater profit than industry which will be viewed positive by the investor as they can earn higher returns from their investment.
Current ratio of the industry is 1.38 (MSN Money, 2014) for the restaurant industry. The 2011 estimated current ratio is at 4.42 and in 2015 it is expected to be 20.34. These ratio values do not look realistic when compared to the industry. After looking into ratio, the pro-forma balance sheet of the company does not seem to be appropriate.
Thus, the pro-forma financial statement is not prepared appropriately by the company, there are some short-comings which have to be identified and there must be some changes made in order to be realistic.
2011
2012
2013
2014
2015
Current Asset
I
$1,523,636
$2,566,983
$3,909,241
$5,375,249
$6,995,341
Current liabilities II
$344,745
$294,338
$306,350
$323,120
$343,926
Current ratio III=I/II
4.42
8.72
12.76
16.64
20.34
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