CASE STUDY

BUTTERFLIES
This case was prepared by Ruth Bender, Reader in Corporate Financial Strategy, Cranfield School of Management, Cranfield University, Cranfield, Bedford MK43 0AL, England.

Lisa and Mark, the third generation of the Gilbert family, had successfully taken the family business from one small caf in Appleton to a profitable multi-site restaurant business. Realising in the late 70s that healthy eating was a trend with staying power, they had changed both the name and nature of Gilberts, their grandfathers corner cafe, transforming it into Butterflies, a restaurant specialising in light and healthy food. Butterflies had grown from strength to strength. The first location was such a success that Lisa and Mark were encouraged to open a second ... and then a third ... until today they had five such restaurants within a 30 mile radius of Appleton. People loved the fine food and the beautiful surroundings, and customers came from a wide area to experience the delights of Butterflies. The twins were discussing their potential sixth restaurant. Lisa Well I think that the Oakley site would be a great place for the new Butterflies. It's a really good location, the right size buildings, loads of parking space, and best of all we already own it outright. What's your problem?

Mark No problem with any of that. I'm just concerned that we might be missing something. Sure, we know that we can make money if we open a Butterflies, but perhaps we should look at the alternatives we could always just sell the property and do something else with the money. Let's face it we should be able to get at least 300,000 for it if we put it on the market tomorrow. Lisa Yes, but I'd much rather set up a new Butterflies there. We get a lot of customers from out Oakley way this is a chance to capitalise on their goodwill. Remember that market research work I commissioned about this in February?

Mark I should think so it cost us 3000.

Copyright Cranfield School of Management, September 2012. All rights reserved.

Lisa

Money well spent though. It showed that there is definite potential for a Butterflies out at Oakley lots of our customers thought it was a good idea, and lots of new people too.

Mark Okay then lets look at the figures. What are we talking about? Lisa Well I reckon that a restaurant that size should take about 500,000 a year; although in the first year wed probably only do

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75% of that due to the start up. But with our basic cost of food running at only about 40% of sales, that gives us a gross profit of some 300,000 a year - and I reckon that about 90% of that would be customers who arent eating at the other Butterflies restaurants already, so thats got to be worth going for! Mark Yes, but wed have to knock overheads off that. What are we looking at there? Chefs, waiters, kitchen staff, heat and light, rates, cleaning, laundry, those fresh flowers you insist we always have ... have you got any numbers? Of course Ive got numbers! I reckon that wed have fixed costs of about 160,0 00 a year, plus depreciation of 15,000. That includes the cost of a manager to run it. I think we could persuade Mike Barnett to do that. Mike Barnett? Isnt he due to retire this year? Yes, in June, just when we plan to open Oakley. But Im sure hed stay on a bit longer, and we could just bring in his replacement a couple of months early to enable him to leave the Allerton site in April to work at the new location. I reckon we could persuade him to defer his retirement bonus for one more year and set up Oakley for us. And hed do it for 18,000 a year - which is the same, as wed have to pay any other manager, but Mikes experience would make it much easier. Then at the end of his extra year we pay him his 1,000 retirement bonus ... Perhaps youd better make that 1,500 if hes doing us such a favour. ... okay, 1,500, and then we bring in someone new. Still at 18,000 though. How am I doing so far? Fine. Now tell me how much well have to spend on setting it up. Well, probably about 100,000 for decoration and equipment. Ouch! Yes, but dont panic - that includes 20,000 for the cost of kitchen equipment transferred out of the Childwall site. Remember we need to get some better stuff for there because business has grown so quickly? I figured that rather than sell it off for a tiny amount ... Wed probably get 5,000 for it! Dont interrupt! Yes, rather than sell it off like we did last time, why not use the old equipment in the new restaurant? Its perfectly serviceable. And it cost us 20,000 last year, so why not use it? Great idea. I suppose that we can also use the Oakley site to help cover our central overheads: our offices, your salary and mine, accountants fees, and all that stuff. What does that work out to ... wed charge it about 15,000 a year I suppose?

Lisa

Mark Lisa

Mark Lisa

Mark Lisa Mark Lisa

Mark Lisa

Mark

Finance & Accounting Group

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Lisa

Yes, it must cover its fair share of the costs, so that sounds reasonable. And theres a couple of other points wed need to consider - financing all of the basic inventories - all that working capital stuff that dad used to keep on about. What shall we say inventories run at about 5% of sales? Sounds about right to me. Lets run the numbers.

Mark

Required Please run the numbers for Mark and Lisa. 1. Prepare a cash flow forecast for the appropriate period. Assume that the restaurant will be run for six years, at the end of which the building could be sold for 300,000 but the equipment will have no value at all. Also assume that tax will be calculated at 30% of profits ignoring depreciation, and that there are no tax allowances available on any of the equipment. Tax is paid in the year after the profit is made. Note that Mark and Lisa require a return of at least 14%. Should they go ahead with the Oakley expansion?

2.

Finance & Accounting Group

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