RETAIL BAKERY - 'A2' LTD
A small retail bakery in a London suburb turning over about £200k. Whilst showing a small profit last year, the forward-thinking proprietor, despite sales more than 7% up, forecasted a current year loss.
Against this background how could he gauge if borrowing £50,000 to refurbish the premises would prove worthwhile? At his age (in particular) he had to make sure the decision he made was the right one. Gut-instinct led him neither one way nor the other which told him that the decision probably wasn't clear-cut. But tossing a coin was definitely not the right approach. So he asked us to take a look.
Perhaps interestingly, we did not quantify this in terms of complex Discounted Cash Flow, Cost of Capital assumptions and expected impact on net cash flows etc. To do so would simply have presented the proprietor with information in terms he could not possibly relate to or make ready sense of. So instead, we evaluated the proposal in far more straightforward terms.
The net result? Were he to make the investment, sales would need to rise by more than 20% just to break-even.
Did he do it? As best we know, he did not. 20% struck him as a little too ambitious.
What does this case demonstrate?
Entrepreneurs typically feel comfortable thinking in terms of sales, margins & overheads rather than nebilous Net Present Values or Internal Rates of Return which too many financial people get wrapped up in these days in situations where there is simply no need to do so.
Working With You - How We Charge