Sterling Institute Of Management Studies

Submitted by: Pranita Ambavane (62) Pradnya Hinge Shreelekha Pillai Nishita Shivkar Rani Asthana (69) (78) (88) (107)

Reema Khandelwal (111)

Subject: Analysis of Financial Management Topic: Financial Planning And Budget Forecasting

Submitted to: Prof. Rakhi Shrivastav Date: 23.09.2011

FINANCIAL PLANNING AND BUDGET FORECASTING Financial planning is a continuous process of directing and allocating financial resources to meet strategic goals and objectives. The output from financial planning takes the form of budgets. The most widely used form of budgets is Pro Forma or Budgeted Financial Statements. The foundation for Budgeted Financial Statements is Detail Budgets. Detail Budgets include sales forecasts, production forecasts, and other estimates in support of the Financial Plan. Collectively, all of these budgets are referred to as the Master Budget. Financial planning can be categorized into planning for operations and planning for financing. Operating people focus on sales and production while financial planners are interested in how to finance the operations. Therefore, we can have an Operating Plan and a Financial Plan. Financial planning states: The amount of capital required Forecast the extent to which these requirement s are met out through internal funds The proportion of debt /equity in the total capital and its forms Develop the best plans to obtain the required external plans Policies bearing on the administration of capital Formulate programmes to provide the most effective profit-volume-cost relationship Analyze the financial results of operations Report the facts to top management and make recommendations on future operations

There are two types of plans:- long term plan and short term plan. Strategic planning is a formal process for establishing goals and objectives over the long run. Strategic planning involves developing a mission statement that captures why the organization exists and plans for how the organization will thrive in the future. Strategic objectives and corresponding goals are developed based on a very thorough assessment of the organization and the external environment. Finally, strategic plans are implemented by developing an Operating or Action Plan. Within this Operating Plan, we will include a complete set of financial plans or budgets. Financial Plans (Budgets) Operating Plan Strategic Plan In order to estimate sales, a company has to look at past sales histories and various factors that influence sales. For example, marketing research may reveal that future sales are expected to stabilize. Maybe a company cannot meet growing sales because of limited production capacities or maybe there will be a general economic slow down resulting in falling sales. Therefore, a company need to look at several factors in arriving at our sales forecast.

Based on the detail budgets we have prepared a company can finalize its budgets in the form of a Budgeted Income Statement. A few new line items are added to account for non-operating items, such as income received on investments and financing costs. The Finance and Tax Departments will assist in estimating items like financing expenses and income tax expenses. The Budgeted Income Statement will pull together all revenue and expense estimates from its previously prepared detail budgets. The Budgeted Balance Sheet will provide a company with an estimate of how much external financing is required to support our estimated sales. The main link between the Income Statement and the Balance Sheet is Retained Earnings. Therefore, preparation of the Budgeted Balance Sheet starts with an estimate of the ending balance for Retained Earnings. In order to estimate ending Retained Earnings, a company needs to project future dividends based on current dividend policies and what management expects to pay in the next planning period. The Cash Budget is an estimate of future cash inflows and outflows. Cash Budgets are often included with the Budgeted Balance Sheet. However, it should be noted that Cash Budgets are not widely used as a general forecasting tool since they are specific to one account, namely cash. Instead, Cash Budgets are often used by Cash Managers and Treasury personnel for managing cash. A company also needs to have a clear understanding of past financial performance to help predict future financial performance. Extending past trends and adjusting for what is expected is a common approach to preparing a forecast. However, a company can improve forecasting by using several techniques. The first step is recognize certain fundamentals about forecasting: 1. Forecasting relies on past relationships and existing historical information. If these relationships change, forecasting becomes increasingly inaccurate. 2. Since forecasting can be inaccurate due to uncertainty, a company should consider developing several forecast under different scenarios. A company can assign probabilities to each scenario and arrive at our expected forecast. 3. The longer the planning period, the more inaccurate the forecast. If a company need to increase reliability in forecasting, then they should consider a shorter planning period. The planning period depends upon how often existing plans need to be evaluated. This will depend upon stability in sales, business risk, financial conditions, etc. 4. Forecasting of large inter-related items is more accurate than forecasting a specific itemized amount. When a large group of items are forecast together, errors within the group tend to cancel out. For example, an overall economic forecast will be more accurate than an industry specific forecast.

Need For Forecasting Reduces the areas of uncertainty related to costs, sales, profits, production, pricing, capital investment. It provides basic and necessary information for setting up of objectives of firm and for preparation of its financial plans. It includes projection of both controllable and non controllable variables that are used in the development of budget. It projects fund requirement and utilization of funds in advance. It provides the information needed for expansion plans of business and future growth of the organization.

Techniques of Financial Forecasting 1. Days Sales Method 2. Percentage of sales Method 3. Simple Linear Regression Method 4. Multiple regression method 5. Projected Funds Flow Statement 6. Projected cash Flow Statement 7. Projected / Proforma Profit and Loss Account 8. Projected/ Proforma Balance Sheet

The Cash Budget A cash budget is a document which shows the expected cash inflows and outflows for a chosen time period (say, 6 or 9 months). The benefits of the cash budget are: It provides an estimate of the ending cash balance in each month It provides estimates and sources of the cash inflows and outflows provides a basis of comparison against which managers can be evaluated

Parts of the Cash Budget In a simple cash budget, there are three parts: The Worksheet Area The Inflows and Outflows The calculation of the ending cash balance Essentially, a cash budget starts with the beginning cash balance, adds expected cash inflows, and subtracts any expected cash outflows. The result is the expected ending cash balance.

Sales Forecast Sales forecasts are common and essential tools used for business planning, marketing, and general management decision making. A sales forecast is a projection of the expected customer demand for products or services at a specific company, for a specific time horizon, and with certain underlying assumptions. A special term in studying sales and market forecasts is the word "potential." This refers to the highest possible level of purchasing, whether at the company level or at the industry or market level. In practice, full potential is almost never reached, so actual sales are typically somewhat less than potential. Hence, forecasts of potential must be distinguished from forecasts that attempt to predict sales realized. Forecasting involves more uncertainties than most other management activities. For instance, while management exerts a good deal of control over expenditures, it has little ability to direct the buying habits of its customers. Thus, even while sales trends depend on the vagaries of the marketplace, management must make a reasonable estimate of what the future holds in order to plan corporate affairs effectively.

The process managers or analysts go through to create a sales forecast is similar to this: 1. Determine the purposes of the forecast (e.g., for purchasing, strategic planning, etc.). 2. Divide the company's products into homogeneous (or at least relevant) categories. 3. Determine the major factors affecting the sales of each product group and their relative importance. 4. Choose one or more forecasting methods based on the kind of data available and the sophistication needed in the forecast. 5. Gather all necessary data. 6. Analyze the data. 7. Check and cross-check any adjustments to the data (e.g., price indexing or seasonal adjustments). 8. Make assumptions regarding any effects of the various factors that can't be measured or forecast. 9. Convert deductions and assumptions into specific product and territorial forecasts and quotas. 10. Apply forecasts to company operations. 11. Periodically review performance and revise forecasts.

Methods of sales forecasting Qualitative Methods

Qualitative Forecasts consider the range of factors which inuence the demand. These factors are then ranked in order of importance and each of them in turn is analyzed to reveal future trends. Qualitative methods of forecasting are: consumer expectations, sales force composite, jury of executive opinion and Delphi technique. Qualitative Methods

Objective methods are those that use well-specied processes to analyze the data. Ideally, they have been specied so well that other researchers can replicate them and obtain the same forecasts.

Case on Financial Planning and Budgeting of ETHNIC FOOD RESTAURANT

Company Summary The Design Zara Restaurant & Lounge is unique to Midtown Atlanta. The restaurant features 3 venues in one (a concept called Multi-Branding'): A Tapas Lounge, Cosmopolitan Bar, and Full Service Dining. This concept offers customers variety, offering multiple dining and entertainment options within a single establishment. The spatial and menu divisions will broaden our appeal and provide our customers with a different experience on each visit. The atmosphere caters to a young but mature adult crowd. This is not a family dining establishment. Total space requirements are 3,000 square feet. In total, the restaurant will provide seating for 110 patrons. Where possible, consideration will be given to incorporate a dining patio. Zoning, parking, and accessibility issues will be reviewed as key criteria. We will draw on our Advisory Board as part of the site selection and lease negotiation.

The Menu Zara is focused on servicing Atlanta's growing demand for an ethnic eating experience. For lack of a better term we are launching a multi-ethnic' cuisine restaurant - a restaurant concept that responds to Atlanta's need for selection and choice. Zara is a complimentary mingling of international cuisine on a single menu. The Midtown demographics fit this concept perfectly. Zara Restaurant & Lounge will have a dedicated website. It will be the virtual business card and portfolio for the company, simple, contemporary and well designed. Our site will offer our menus, prices, reviews and happenings at Zara.

Executive Summary Our initial statement to Investors and Financial Lenders, this restaurant/ethnic food business plan, is a candid disclosure of the Zara Restaurant & Lounge business proposal - our intent is to set realistic business expectations, and eliminate any questions about the profitability of this business venture. The total capital requirement to launch Zara Restaurant & Lounge is $740,000, of which $643,000 is allocated to start-up capital, and $97,000 as business operations cash reserve. This Plan is being submitted in order to secure a Business loan for $430,000. The loan will be used towards Equipment purchase, Design, Construction, and Operational Start-Up expenses. Owners, Mr. Alex Hunte and Mr. Peter Smith are investing $110,000 in personal capital. Private Investors, who will be part owners with a non-managerial interest in the business, will contribute the remaining $200,000. As owners, our commitment is to take personal accountability for all financial debt. We have taken the necessary precautions to ensure the business is fully capitalized, and have addressed all financial shortfalls to ensure a successful business start-up. Under a realistic scenario, the company should have over $84,000 in cash balance the third year. Even with the worst-case sales scenario, we reach a Net Worth break even at the end of Year 5. On a linear projection, the entire financial debt will be retired by Year 7.

Objectives Zara Restaurant & Lounge's objectives for the first three years of operation include: Keeping food costs at less than 35% of revenue. Improving our Gross Margin from 65.41% in Year 1 to 67.10 in Year 2. These are attainable targets; our stretch' is to attain 70.73% by Year 3. Keeping employee labor cost between 37-39% of total sales. Remaining a small, unique restaurant with eclectic food and service. Averaging sales between $1,200,000 - 1,500,000 per year. Promoting and expanding the Zara restaurant concept as a unique Midtown destination restaurant. Expanding our marketing and advertising in Atlanta and in the neighboring suburbs to increase our customer base. Achieving a profitable investment return for investors for Years 2 - 6.

Start-up Summary We are currently negotiating a restaurant space of 3,000 sq. ft. in Midtown Atlanta, Georgia, and will open Zara in October of this year. Our start-up costs are mostly expensed equipment, furniture, painting, reconstruction, rent, start-up labor, liquor license, and legal and consulting costs associated with opening our restaurant. At the start of business, $97,000 will be allocated for business operations reserve. This is a solid start-up forecast based on our market analysis and our knowledge and experience in the industry. We will purchase the following $73,311 worth of current assets during start-up : Fixtures and Lighting: $32,250 Bar Equipment: $26,183 Sound and Televisions: $8,378 Office Equipment (2 Computers, Fax, Printer, Safe): $6,500 Long-term Assets in the amount of $65,000 include all kitchen equipment. We have budgeted for the services for a premier Restaurant Consultant familiar with the Atlanta Market. This is especially key during the site selection and start-up stage. This

company will have an integral role in validating the final restaurant location and personnel selection, and participate on the Zara Advisory Board. The two owners are personally committing $110,000 of capital, plus a $300,000 SBA 7(A) loan guaranty. In addition, we have obtained a $130,000 grant from the city towards restoration of our historical building, as part of the city's Midtown revitalization program, contingent upon locating in the proposed space. We are seeking $200,000 of equity investment to fully fund Zara's startup costs.

Start-up Funding

Start-up Expenses to Fund Start-up Assets to Fund Total Funding Required Assets Non-cash Assets from Start-up Cash Requirements from Start-up Additional Cash Raised Cash Balance on Starting Date Total Assets

$427,209 $262,910 $690,119

$165,811 $97,099 $49,881 $146,980 $312,791

Liabilities Current Borrowing Long-term Liabilities Accounts Payable (Outstanding Bills) Other Current Liabilities (interest-free) Total Liabilities $0 $300,000 $0 $0 $300,000

Capital

Planned Investment

Zander Hunte

$60,000

Peter Smith

$50,000

Investor 1

$40,000

Investor 2

$40,000

Investor 3

$40,000

Investor 4

$40,000

Investor 5

$40,000

Midtown Revitalization Grant

$130,000

Additional Investment Requirement

$0

Total Planned Investment

$440,000

Loss at Start-up (Start-up Expenses)

($427,209)

Total Capital

$12,791

Total Capital and Liabilities

$312,791

Total Funding

$740,000

In order to develop budgets, a company needs to start with a forecast of what drives much of our financial activity; namely sales. Therefore, the first forecast we will prepare is the Sales Forecast. Sales Strategy Our strategy is simple: we intend to succeed by giving our customers a combination of delicious and interesting food in an appealing environment, with excellent customer service, whether on their first visit or their hundredth. Our marketing strategies are designed to get critics and initial customers into our doors. Our sales strategies must take the next step and encourage customers to become repeat customers, and to tell all their friends and acquaintances about the great experiences they just had at Zara. New restaurants often make one of two mistakes: they are unprepared or underprepared for opening, and initial poor service, speed, or quality discourages customers from returning, or they spend all of their efforts at opening, and are unable to maintain the initial quality customers expect on return visits, decreasing word of mouth advertising and leading to poor revenues. Zara's sales strategy requires consistently high quality food, service, speed, and atmosphere. We can accomplish this by: Hiring employees who genuinely enjoy their jobs and appreciate Zara's unique offerings Continually assessing the quality of all aspects mentioned above, and immediately addressing any problems Interacting with our customers personally, so they know that their feedback goes directly to the owners Evaluating food choices for popularity, and keeping favorites on the menu as we rotate seasonal foods and specials

Financial Plan Zara Restaurant & Lounge financial model is based on a business concept to "Plan for the Worst, but Manage for the Best." We have approached the financial plan as follows: The First Year projections anticipates a below average sales volume, below average seat turn, and above average food/beverage cost. This position will help us ensure sufficient financial planning to accommodate a reasonable ramp-up period, and business success, also ensuring that we do not enter this venture under-capitalized.

Financial Pro Forma In addition to the $110,000 of owner investment and $130,000 in grant monies, Zara is seeking $300,000 in long-term loans and $200,000 in investment for renovations, furniture, kitchen equipment, liquor license, food & restaurant supplies, legal fees, working capital, marketing and personnel. The Financial Plan includes: Investment Opportunities Important Assumptions Sales Forecast (5.3.1, above) Risk Analysis & Mitigation Plan Profit and Loss Statement Balance Sheet

Investment Opportunities The Zara Investment Program allocates equity position of 20% for a total of $200,000 in investor capital. The Investment structure is as follows: Investment Opportunity Total Investor Funding Opportunity: $200,000 Minimum Investment Amount $15,000 3-5 Years

Investment Term (Investor Selection)

Total Equity Offering (1% per $15,000 Investment) 20% Max

Starting Year 2 Silver: Projected Annual IRR on Investment of $15,000 - $49,000 10% Gold: Projected Annual IRR on Investment of $50,000 - $99,000 11% Platinum: Projected Annual IRR on Investment of $100,000 or more 12% + Residuals

Investor Payback Program Each Investor will receive equity shares as a part owner, with a non-managerial interest in the Restaurant. Based on financial estimates, the maximum annual IRR is 12%. Over and above the interest and principal repayment, Investors contributing $100,000 or more will receive residuals for the life of the business as a bonus incentive. As with our investors, our primary goal is to earn real profits and not Paper Profits'. As such we will focus on expediting returns to investors where possible. Our existing payback structure will begin paying dividend every quarter, starting in Year 2 of business operations. Investors will receive quarterly interest and annual principal reduction payments over the full term of the investment. Payback to Financial and Private investors will take priority over any profit shares to the owners, Alex Hunte and Peter Smith.

Important Assumptions The financial plan depends on important assumptions, most of which are reflected in the financial statements that follow. We have been cautious with our projections, and incorporate a mitigation for all manageable risks. The key underlying assumptions are: Economy Slow Economic Recovery. We anticipate a slow-growth economy, recovering from an economic recession. Business Growth Annual Growth Rate Percentage. We anticipate modest growth over the coming years. The financials account for the following growth projections: Year 2: 6% Year 3: 5% Year 4: 4% Year 5: 4%

Weekly Sales Variance. Saturday will typically be our best sales for the week. The sales volume for all other days is represented as a percentage relative to Saturday. Therefore our weekly sales will vary as follows: Monday: 55% Thursday: 95% Tuesday: 60% Friday: 90% Wednesday: 75% Saturday: 100%

Seasonal Sales Variance. In Atlanta, October through the late season is the most productive sales period, while the summer months tend to be the slowest restaurant period. This trend is reflected in the financials though a seasonal variance as follows (where October is targeted to be our most successful sales month): June: 70% July: 75% October: 100% November: 95% February: 95% March: 85% April: 90%

August: 80% December: 95% September: 85%

January: 85% May: 90%

Industry & Start-Up Fiscal Year-1 Ramp-up. Our experience in the industry confirms a longer ramp-up stage for restaurants over other retail/service businesses. Our Annual Sales Growth is based on attaining the following seating capacity percentage per dining period: Year 1: After-Hours = 53%, Lunch = 70%, Dinner = 88% Year 2: After-Hours = 70%, Lunch = 82%, Dinner = 100% (implied wait period) Year 3: After-Hours = 80%, Lunch = 87%, Dinner = 100% (implied wait period)

Six-Month Start-Up Stage. As a new restaurant entry to the Midtown market, the ramp-up in customer draw is expected to extend over 6 months. This is reflected in a higher than average monthly sales variance shown as follows (Worst-case / Expected-case): Month 1: 32% / 51% Month 2: 41% / 58% Month 3: 52% / 66% Month 4: 64% / 75% Month 5: 80% / 90% Month 6: 90% / 92%

Market Analysis findings are static. We assume that there are no unforeseen changes in findings outlined in the Market Analysis.

Pricing & Cost Control Competitive Pricing Model. Revenue calculations are based upon competitive price comparisons and established menu values in the current marketplace. The following are baseline assumptions on Average Check Totals, and Average Seat Turns: Daily average for lunch spending is $10.50 per person, dinner at $27.50 per person; and $17.50 per person for After-Hours dining (All check totals include Beverages, but not Bar). Seat Turn averages are modestly estimated at: Year 1: After-Hours = 0.7, Lunch = 1.0, Dinner = 1.0 Year 2: After-Hours = 0.7, Lunch = 1.0, Dinner = 1.0 Year 3: After-Hours = 1.0, Lunch = 1.0, Dinner = 1.25

Cost Control. Cost of goods sold have been calculated as a percentage of sales and will be monitored on a daily basis in order to keep Cost of Food within the range of 31 - 33%, Bar Costs within 28 - 31%, and Cost of Beverages (Non Alcohol) below 9%. With a focus on Cost Control, we anticipate 6 months to fine tune the restaurant operations and manage our costs within the defined tolerance range. Inventory turnover and Accounts Payable. Accounts receivable turnover is calculated to be 0 days, as payment is rendered with service. Inventory is turned on a 7 day cycle as inventory is used daily within all categories, and accounts payable are projected to be 30 days.

Sales Forecast The following sales graph is based on first year start-up estimates only. We anticipate that the business will not be at full operating capacity until the sixth month of operations. This is due to the competitive nature of the market and existing customer loyalty. All factors governing our sales progress are outlined below in the Important Assumptions section.

MONTHLY SALES

The above sales graph is based on first year start-up estimates only. The company anticipate that the business will not be at full operating capacity until the sixth month of operations. This is due to the competitive nature of the market and existing customer loyalty. The sales forecast of restaurant is based on Slow Economic Recovery. Hence, they anticipate a slow-growth economy, recovering from an economic recession and hence the growth of business is slow in the initial period. In the above chart, in the month of June, July, the sales forecast is less because of the new business. But in the following months the business starts to gain sales because of their various strategies. The month of October, November, December is the most productive sales period because of being festive months. This trend is reflected in the financials plan.

SALES BY YEAR

Sales forecasts for years 3 through 5 are very conservative, compared to industry standard growth rates. The company expects to experience a steady growth throughout our first year even though it is a new business enterprise. As the restaurent becomes more familiar to the

public, they can expect to gain more market share and would like to see progressive growth as we head into the following year. In the following year, as the business becomes established and well-known, the sales will increase as it will gain more new customers. As seen in the above chart, the total sales food will increase due to various :- Promotional Campaign, Advertising and Promotion, Publicity Strategy, various marketing programs, recreational facilities, etc. This will help in increasing customer base and in turn increases sales revenue. Similarly, this strategy will help to increase the total sales. A key source of revenue for the restaurant will be alcohol and bar sales. They are estimating that the total bar sales will also increase in the following years. They are also anticipating at least 10% of our annual sales will be generated directly from our publicity. They anticipate modest growth over the coming years. The financials accounts for the financial growth potentials:Year 1-6% Year 5-4%

Sales Forecast

Sales Forecast FY 2006 Sales Total Food Sales $853,595 $959,047 $1,006,999 $1,047,279 $1,089,170 FY 2007 FY 2008 FY 2009 FY 2010

Total Sales $220,174 Bar/Beverages Other Total Sales $0 $1,073,769

$252,041 $0 $1,211,088

$272,204 $0 $1,279,204

$293,981 $0 $1,341,260

$317,499 $0 $1,406,670

Direct Cost of FY 2006 Sales Total Cost of $298,758 Sales: Food Total Cost of Sales: $72,657 Bar/Beverages Other $0

FY 2007

FY 2008

FY 2009

FY 2010

$322,240

$329,289

$336,048

$342,762

$76,167

$77,687

$79,228

$80,835

$0

$0

$0

$0

Subtotal Direct Cost of $371,416 Sales

$398,407

$406,976

$415,276

$423,597

The restaurant wants to keeping food costs at less than 35% of revenue. The total sales food an the bar sales as increased. They want to keep average sales between $1,200,000 1,500,000 per year. They also want to keep employee labour cost between 37-39% of total sales.

Their focus is to reduce the cost of goods sold to meet our profit margin goals by managing the following crucial elements of cost: Purchasing, Receiving, Storage, Issuing Inventory, Rough Preparation, Service Preparation, Portioning, Order Taking, Cash Receipts, Bank Deposits and Accounts Payable. Cost of goods sold have been calculated as a percentage of sales and will be monitored on a daily basis in order to keep Cost of Food within the range of 31 - 33%, Bar Costs within 28 31%, and Cost of Beverages (Non Alcohol) below 9%. With a focus on Cost Control, they anticipate 6 months to fine tune the restaurant operations and manage our costs within the defined tolerance range.

Risk Analysis/Mitigation 1. How do we allow an adequate startup period and capital to launch the concept and grow our customer base in a competitive sector? Our financial plan is budgeted to support the Worst-Case business scenario. We addressed the financial risk as follows: We looked at our monthly break-even. We calculated worst-case monthly financial shortfall based on the ramp-up sales percentages outlined in our financial assumptions. We budgeted operational shortfall in an operational contingency budget that we will utilize if the need arises. 2. How do we ensure we have addressed all resource gaps, and have the right industry knowledge? Owners Alex Hunte and Peter Smith have a combined 20 years of Restaurant Management, Operations and Business Management Experience. The Financial Plan incorporates a budget for an Atlanta Restaurant Consulting group. Their services are budgeted for the business start-up analysis, rollout, and on retainer for 4 months of business operations. The selected firm has experience with over 72 Restaurant launches, specializing in the Atlanta Market. We will be recruiting a seasoned chef (national search) whose style is in accord with the Restaurant concept and our market segment. We will be offering an equity interest to our select Chef to maintain the industry knowledge. Our Accounting service will be contracted to a firm specializing in Restaurant accounting. 3. The current Economic slowdown and recovery state was a key consideration in our restaurant concept. How do we manage a successful restaurant in current market conditions?

Our original effort was to open a restaurant twice the proposed size. As we are in the midst of an economic recovery, we have scaled back the size to reduce business overhead, startup requirements, and business operating capital. Another mitigation has been our overall Restaurant concept. We have the menu priced at a mid-tier level with no entre over $20. In addition, we have an extended Tapas and Appetizer selection priced between $3.50 - $9.50, allowing budget dining in a distinguished restaurant. 4. How do we confirm that our Funding Requirement is sufficient? Peter Smith has an extensive background in restaurant startup. He is currently an International Consultant for various restaurant ventures, and we will use his expertise in past projects as a comparative basis. We have leveraged our membership with the National Restaurant Association to look at industry averages for this market segment for Restaurant startup and Operations. Additionally, we included a contingency buffer in the financial estimates to account for any potential cost variance. We have worked with our Restaurant Consulting firm to validate our cost estimates to their industry knowledge. 5. How do we know we have selected the right location for this concept? Again we will draw on the Consulting group that has the expertise in site selection and lease negotiation. In all, there are no guarantees with location, but we took a very objective approach with our concept. Instead of going in with a predefined business concept, we let the Market Analysis define the need. Based on the results, the Zara Restaurant concept was formed specific to Midtown Atlanta. Site selection was based on space, visibility, and functionality; the city grant award confirmed our decision. 6. What if there is an additional need for Business Capital after the Restaurant has exhausted its 6-month buffer? Our intent is to be a self-sufficient business far in advance of the 6-month probation period. But as we are considering all contingencies, we have looked at this risk. We have accounted for an operational contingency budget that will be used to supplement any slow periods. Our next step would be to approach our private investors for capital by extending their return on investment. We would also look to the partners' capital reserves as another source of funds.

General Assumptions Year 1 Plan Month Current Interest Rate Long-term Interest Rate Tax Rate Other 1 6.00% 7.00% 30.00% 0 Year 2 2 6.00% 7.00% 30.00% 0 Year 3 3 6.00% 7.00% 30.00% 0 Year 4 4 6.00% 7.00% 30.00% 0 Year 5 5 6.00% 7.00% 30.00% 0

Profit and Loss Statement The most important assumption in the Projected Profit and Loss statement is the gross margin. We show an adjustment increase in Year 2 as we exit our start-up phase of the business and move into our expected annual sales forecast. This transition shows the restaurant managing through its start-up period, and gaining efficiency and customer loyalty. In summary, the restaurant will develop its customer base and reputation and the growth will pick up more rapidly towards the second and third years of business. Month-by-month assumptions for Profit and Loss are included in the appendices.

Pro Forma Profit and Loss Year 1 Sales Direct Cost of Sales Other Total Cost of Sales Gross Margin Gross Margin % Expenses Payroll Marketing/Promotion Depreciation Leased Equipment Accounting/Payroll Processing Legal Retainer Fees Business Licenses & Permits Credit Card Expense Bank Fees Music & Entertainment $399,588 $18,656 $6,500 $12,000 $6,600 $2,400 $6,000 $18,576 $1,200 $3,744 $400,788 $22,000 $6,500 $12,000 $6,600 $2,400 $6,000 $19,983 $1,200 $3,744 $5,008 $9,000 $26,496 $1,800 $429,828 $25,000 $6,500 $12,000 $6,600 $2,400 $6,000 $21,107 $1,200 $3,744 $6,008 $9,000 $27,821 $1,800 $431,128 $15,000 $6,500 $12,000 $6,600 $2,400 $6,000 $22,131 $1,200 $3,744 $6,008 $9,000 $28,933 $1,800 $432,728 $15,000 $6,500 $12,000 $6,600 $2,400 $6,000 $23,210 $1,200 $3,744 $6,008 $9,000 $30,091 $1,800 $371,416 $0 $371,416 $702,353 65.41% Year 2 $398,407 $0 $398,407 $812,681 67.10% Year 3 $406,976 $0 $406,976 $872,228 68.19% Year 4 $415,276 $0 $415,276 $925,984 69.04% Year 5 $423,597 $0 $423,597 $983,072 69.89% $1,073,769 $1,211,088 $1,279,204 $1,341,260 $1,406,670

Training / Employee Retention Programs $0 Repairs & Maintenance $9,000 Utility Services (Gas/Electric/Water/Sewer) $24,996 Telephone/Communication Expense $1,800

Insurance: Fire/Theft/Liability/Liquor/Produc t $20,400 Restaurant (Lease) Occupancy Cost $75,000 Taxes & $0 $4,800 $11,760

$21,624 $77,250

$22,705 $79,568

$23,613 $81,955

$24,558 $84,413

Payroll (FICA/FUTA/SUTA) Employee Benefits

$0 $4,800 $12,466 $9,500 $3,640

$0 $4,800 $13,089 $9,500 $3,640

$0 $4,800 $13,612 $9,500 $3,640

$0 $4,800 $14,157 $9,500 $3,640

Exterminator/Trash Removal Dishware/Uniforms/Cleaning Supplies/Decor

Printing/Paper/Postage/Subscripti ons $9,156 Facility (Exterior Cleaning/Grease $3,333

Trap/Hood/Windows,etc.) R&D Meals General Business Comps Owner Comps $2,200 $12,400 $2,124 $2,400 $22,850 $2,124 $4,200 $684,372 $128,309 $134,809 $15,984 $33,698 $78,628 6.49% $2,400 $23,125 $2,124 $4,200 $724,158 $148,070 $154,570 $12,640 $40,629 $94,801 7.41% $2,400 $23,125 $2,124 $4,200 $721,414 $204,571 $211,071 $9,296 $58,582 $136,692 10.19% $2,400 $23,125 $2,124 $4,200 $729,198 $253,875 $260,375 $5,952 $74,377 $173,546 12.34%

Other Expenses (ComAreaMaint, etc.) $4,200 Total Operating Expenses Profit Before Interest and Taxes EBITDA Interest Expense Taxes Incurred Net Profit Net Profit/Sales $656,433 $45,920 $52,420 $19,189 $8,020 $18,712 1.74%

Balance Sheet Statement The projected Balance Sheet is quite solid. We do not anticipate difficulty meeting our debt obligations based on achieving the specific goals outlined in this plan. On a linear projection, Zara Restaurant & Lounge has a positive Net Worth beginning in Year 3. The Balance Sheet is a snap shot of the business at any point in time. In the case ofa business startup, it is often the starting balance sheet. A balance sheet is made up of three parts. Assets: Things a business owns Liabilities: Debts a business owes Equity: The owners investment and re-investment in the business Everything that the business owns (its assets) must bepaid for; free of debt owing. Therefore we get the following formula: Assets = Liabilities + Equity This is extremely important as it gives the reader a picture of how the business is being financed through the owners money (equity) or through the creditors money (liabilities). In a business start-up you should look at the assets required to get the business started and then ask yourself how you will finance that start-up. If one do not have the money to invest into the business, one will have to borrow the remainder. Start-up Costs: The start-up balance sheet is simple if you know how to make and sort a list. One need to make two lists to get started. Current Assets: These are assets (things your business owns) which will be used up within the first year of doing business. Typically they include cash, inventory and pre-paid expenses (such as pre-paid insurance). Although Accounts Receivable is another example of a current asset, there are no accounts receivables in a business start-up. Capital Assets: These are items you purchase with the intention of keeping them and using them to run the business. For example, if you purchase a vehicle to use in the business, it is a capital asset. If you purchase a vehicle to re-sell it, however, then that vehicle is inventory. Sources of debt financing in a business start-up. They are: Supplier Credit: Sometimes a supplier will provide credit to their customers. Usually this is for inventory, however some suppliers will provide longer term financing for equipment or automobiles. Either way it is considered as a loan to the company. Supplier credit is not always afforded to a new business, so you may need to finance your starting inventory with bank debt or equity. Bank Term Loan: A bank term loan is usually used for financing the capital assets of the business. It can sometimes be used to finance part of a business start-up or business acquisition. The loan is repaid over a period of time, and the interest rate may be fixed or floating. Pro Forma Balance Sheet Year 1 Assets Current Assets Year 2 Year 3 Year 4 Year 5

Cash Inventory Other Current Assets Total Current Assets Long-term Assets Long-term Assets Accumulated Depreciation Total Long-term Assets Total Assets Liabilities and Capital Current Liabilities Accounts Payable Current Borrowing Other Current Liabilities Subtotal Current Liabilities Long-term Liabilities Total Liabilities Paid-in Capital Retained Earnings Earnings Total Capital Total Liabilities and Capital Net Worth

$172,276 $37,839 $73,311 $283,426 $65,000 $6,500 $58,500 $341,926 Year 1 $58,194 $0 $0 $58,194 $252,228 $310,422 $440,000 ($427,209) $18,712 $31,504 $341,926 $31,504

$189,815 $39,175 $73,311 $302,300 $65,000 $13,000 $52,000 $354,300 Year 2 $59,713 $0 $0 $59,713 $204,456 $264,169 $440,000 ($428,496) $78,628 $90,131 $354,300 $90,131

$236,095 $38,109 $73,311 $347,514 $65,000 $19,500 $45,500 $393,014 Year 3 $61,398 $0 $0 $61,398 $156,684 $218,082 $440,000

$322,479 $38,843 $73,311 $434,633 $65,000 $26,000 $39,000 $473,633 Year 4 $63,097 $0 $0 $63,097 $108,912 $172,009 $440,000

$441,206 $39,608 $73,311 $554,125 $65,000 $32,500 $32,500 $586,625 Year 5 $65,315 $0 $0 $65,315 $61,140 $126,455 $440,000

($153,37 ($359,869) ($275,068) 5) $94,801 $174,932 $393,014 $174,932 $136,692 $301,625 $473,633 $301,625 $173,546 $460,171 $586,625 $460,171

Expansion Strategy In addressing this question we look at the Exit Strategy as a definition of our business vision and goals, as well as a contingency in the event the business is unsuccessful. We have addressed this question at several levels: Expansion as a Business Goal We have set multiple financial goals to grow the success of the Zara concept, and compound the profit return for Zara Investors.

Expansion (Option 1): Our overall goal to maintain Zara as a unique and eclectic concept. Based on projections, the business has captured market share by the end of the first year. In addition Year 2 brings an increased sales and profit margin to sustain the addition of a fulltime General Manager. By second quarter of Year 2, the owners will look to launch a second restaurant concept. This is not a chain, but another unique restaurant concept with strong growth potential. Expansion will be considered with our Financial backers and Investor partners. Expansion (Option 2): Throughout our business plan we have stayed focus that Zara would be successful as a larger venue, with greater sales capacity and revenue potential. Our objective with the site selection and lease negotiation is to have the opportunity to expand the restaurant as a logical growth and profit plan. Private Sale: We are in the business of making money. At the close of Year 3, we see Zara as meeting 80.4% of its optimum sales potential with the current seating and space allocation. At this stage the business debt is reduced, profit margins are increasing, and Zara has established market share. We will look at the private sale of the majority interest via A) Leveraged Buyout, or B) A larger Restaurant consortium. In both cases, our interest is in delivering healthy profits to our Investors and Financial backers. Sales and profit margins will be based on the restaurant valuation in Year 3. Financial Solvency: The financial projections indicate that exit will be achievable over 3 years for the operating capital line of credit. Under a realistic scenario the Company should have over $70,000 in cash in the bank after income taxes the second year. The entire financial debt would be retired by Year 7.