Small Business Turnaround Plan: Analysis And Recommendations

Financial Analysis

This report examines and analyses a small sized business involved in the business, which is a small restaurant located in Northern Melbourne. The company has recently released its half-yearly financial report, and it has been witnessed that the company has incurred a loss.

The owners of the business are not happy about incurring losses and have hired us to turn around the business to ensure the business achieves profitability in the second half the financial year.

This report contains a brief turnaround plan for the business which examines the reason of losses incurred, prepares a plan to increase revenues and reduce cost and sets a target for the managers and the management of the business to achieve to become profitable in the second half of the financial year.

Find below the company’s income statement for the first half of the financial year.

• The company has earned revenues of AU$ 250,000 in the first half of the year.
• The restaurant is situated near a student hostel facility which houses over 1200 students, but most students do not avail the services of the restaurant due to a no student discount policy.
• The Restaurant does not provide delivery services presently
• The company’s Gross margin is 56%, which is low for any business in the restaurant industry. The industry standard for Gross Margin is around 70% in the restaurant industry in Australia (Burns and Dewhurst, 2016).
• The reason for low gross margins is due to the high cost of goods sold. This is because of faulty procurement practice of the restaurant manager who is buying meat and produce from supermarkets instead of local markets, which can provide
• The company has a high salaries and wages expenses, which stands at about at 48% of the revenues, whereas the industry standards for the same is near 30% (Van der Wagen and White, 2018).
• The high salaries and wages expenses are due to a large proportion of unauthorized over-time, especially during non-peak hours when the restaurant can function with minimal staff.

As mentioned in the above table, the following targets need to be achieved to become profitable in the second-half of the financial year.

• Sales need to be increased by almost 50%. This is possible as almost 1200 students live nearby who dine out frequently. By offering a 10-15% students discount, the restaurant can witness a large inflow of students eating at the restaurant or ordering for take-outs.
• The restaurant will need to start a delivery service which is very popular among the students who also order a lot of food from near by restaurants on a regular.
• The gross margins need to be improved and bought about the industry standards. This requires and complete overhaul in the procurement policy. Instead of buying in bulk from supermarkets, the restaurant needs to buy fresh produce from their local meat and vegetable vendors on a daily basis (Sekaran and Bougie, 2016). This will ensure less wastage and produce and meat going bad. Also, meat and produce can be bought at a much economical rate as compared to packed produced and meat purchased in the supermarkets.
• The company needs to increase its advertising and promotion expenses to attract the students living nearby in the student accommodations and hostels. These students dine out, order take-aways and order delivery on a frequent basis.
• The company needs to reduce its salaries and wages expenses down to industry standards of 30% (Burns, 2016). To achieve this, all over time need to be authorized by the restaurant manager, no over-time to be allowed during non-peak hours and better shift-management practices are required.
• Also, the restaurant needs to reduce one asst. manager and 1 cook and 2 waiters as the restaurant is over-staffed currently. These employees will be retained or released based on their performance reviews.
• Utility expenses can be bought down marginally by ensuring no wastage of water and electricity in the restaurant.
• The rent shall remain unchanged and cannot be reduced.

Towards monitoring of expenses and revenues, the manager needs to follow the below mentioned monthly budget. All revenues and expenses for the previous month need to be recorded and accounted for by 5^th of every month.

Towards properly recording all revenues and expenses, the following steps need to be undertaken

All sales and purchase Invoices need to be properly recorded and maintain towards computation of revenues and expenses and timely audit of the same (Carroll and Buchholtz, 2014). This will enable the restaurant manager to ensure that the restaurant is operating as per the budget allocated and expenses do not go out of control.

The restaurant manager needs to inform the accountant and the restaurant owner in case of any invoice or payment which might be under dispute. For example, a supplier supplied on 10kg of meat and raised an invoice for 15 kgs. Such discrepancies need to be informed to the vendor in writing immediately while keeping the accountant and the owner informed about the said discrepancies (Davis et al., 2018).

The business needs to undergo a few changes as mentioned below.

• Change in procurement policy – All meat, produce, vegetables etc. need to be purchased from local suppliers fresh and on a daily basis instead of buying the same from super market in bulk. This move will help in reducing the cost of goods sold on account of buying cheaper meat and produce and reducing wastage, spoilage etc. as these are perishable items (Hua and Lee, 2014)
• Introduction of the Student discount policy to encourage more students residing in the nearby student hostels and accommodations dine-in and order from the restaurant.
• Reduction of excess staff to enable reduction in salaries and wages expenses..
• Adaptation of better shift management practices by ensuring the restaurant operates on minimal staff during non-peak hours, over-times are strictly regulated and controlled by the restaurant manager to enable reduction in salaries and wages expenses (Jung et al., 2016).

The restaurant management needs to be involves in the above mentioned activities which are vital for increasing revenues, decreasing cost and enhancing profitability.

Conclusion

As witnessed in the above report, the restaurant is incurring losses due to faulty management policies, which can be easily rectified and the restaurant can witness a turnaround in a short span of time, provided all the suggestions and budgets are strictly implemented, monitored and followed.

References

Burns, P. (2016). Entrepreneurship and small business. Palgrave Macmillan Limited.

Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan International Higher Education.

Carroll, A., & Buchholtz, A. (2014). Business and society: Ethics, sustainability, and stakeholder management. Nelson Education.

Davis, B., Lockwood, A., Alcott, P., & Pantelidis, I. S. (2018). Food and beverage management. Routledge.

Hua, N., & Lee, S. (2014). Benchmarking firm capabilities for sustained financial performance in the US restaurant industry. International Journal of Hospitality Management, 36, 137-144.

Jung, S., Lee, S., & Dalbor, M. (2016). The negative synergistic effect of internationalization and corporate social responsibility on US restaurant firms’ value performance. International Journal of Contemporary Hospitality Management, 28(8), 1759-1777.

Sekaran, U., & Bougie, R. (2016). Research methods for business: A skill building approach. John Wiley & Sons.

Van der Wagen, L., & White, L. (2018). Event management: For tourism, cultural, business and sporting events. Cengage AU.

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