Crave Cupcakes
and Cookies
Business Plan 2011
Prepared by:
Nikia Fleischhacker
Denille Heron
Stephanie Nagle
Tricia Paquette
Crave Cupcakes and Cookies 2011
Table of Contents
1.0 Executive Summary
................................................................................ 3
2.0 Introduction
................................................................................ 5
2.1 Mission Statement
................................................................................ 5
2.2 Goals and objectives
................................................................................ 5
3.0 The Operations Plan
................................................................................ 6
3.1 Legal Structure
................................................................................ 6
3.2 Board of Advisors
................................................................................ 6
3.3 Organizational Structure
................................................................................ 7
3.4 Site Plan
................................................................................ 8
3.5 Floor and Work Plan
................................................................................ 8
3.6 The Average Business Day
.............................................................................. 11
3.7 The Average Business Week
.............................................................................. 12
3.8 The Average Business Month
.............................................................................. 13
3.9 The Average Business Year
.............................................................................. 13
3.10 Supply Analysis
.............................................................................. 13
3.11 Capacity Limits and Capital Budget
.............................................................................. 14
3.12 Cost of Sales
.............................................................................. 14
3.13 Operational Expenses
.............................................................................. 15
3.14 Working Capital Planning
.............................................................................. 17
4.0 The Human Resources Plan
.............................................................................. 18
5.0 The Marketing Plan
.............................................................................. 19
5.1 Past Performance
.............................................................................. 19
5.2 The Market
.............................................................................. 19
5.3 Competition
.............................................................................. 20
5.4 Customers
.............................................................................. 21
5.5 Target Markets
.............................................................................. 22
5.6 Product and Service Features
.............................................................................. 22
5.7 The Opportunity
.............................................................................. 22
5.8 Sales and Profit Objectives
.............................................................................. 23
5.9 Channels of Distribution
.............................................................................. 23
5.10 Pricing Policy
.............................................................................. 24
5.11 Select Markets and Market Mix
.............................................................................. 25
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 1
Crave Cupcakes and Cookies 2011
5.12 Selling and Advertising
6.0 The Financial Plan
.............................................................................. 26
.............................................................................. 28
6.1 Financing Description
.............................................................................. 28
6.2 Required Rate of Return
.............................................................................. 29
6.3 Critical Success Variables
.............................................................................. 29
6.4 Best and Worst Case Scenarios with
Sensitivity Analysis
6.5 Break Even Analysis
.............................................................................. 30
.............................................................................. 30
6.6 Ratios
.............................................................................. 30
6.7 NPV and IRR
.............................................................................. 31
6.8 Overall Feasibility
.............................................................................. 31
7.0 References
.............................................................................. 32
List of Figures
1.1 Organizational Structure
................................................................................ 7
1.2 Floor and Work Plan
.............................................................................. 10
1.3 Competition Analysis
.............................................................................. 21
1.4 Price Comparison
.............................................................................. 24
List of Tables
1.1 Analysis of Daily Baking Needs
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
.............................................................................. 12
Page 2
Crave Cupcakes and Cookies 2011
1.0 Executive Summary
Crave sells cupcakes, mini cupcakes, and cookies which are baked fresh daily. The products are priced at
a premium because of their high quality, creative design, and the fact that there is no frozen inventory.
Also offered are cakes for special occasions such as weddings, which can consist of three, four, or five
tiers. These cakes are differentiated from competitors due to the fact that cupcakes can make up part of
the product.
Operations Plan
The ingredients will be purchased locally and fresh on average every two weeks. The business will be
capital intensive with one of the largest fixed expenses being salaries and wages. In addition, the margins
on each product are relatively low, which means that a high sales volume will be extremely important.
Therefore, obtaining customers will be the key to success for this business.
In addition, since the products will be baked fresh daily, inventory management will be important to
monitor in order to decrease the amount of spoilage costs to the company. It is also essential to ensure
Crave can meet demand on a daily basis so as to maximize the profit potential. This will be done by
constant evaluation of daily sales and baking levels.
Crave will be located on Broadway Avenue, a hip, trendy, and unique area of Saskatoon, which is
considered to be a complement to the brand and products that Crave creates.
Human Resources
The Crave team will consist of a store manager, bakery manager, two front end staff, and two bakers in
the first year. This will be increased in the fourth year to include another part time baker in order to keep
up with the increased production and expected sales. The bakers will report to the bakery manager who
will report to the store manager and the store manager will report to the founders, Carolyne and Jodi on a
continual basis.
Carolyne and Jodi, will both hold seats on the Board of Advisors. The sisters each have approximately
seven years of experience in the industry and have had success in expanding the original Crave store into
five different stores within Calgary and one in Edmonton.
The key individual on the Crave team for the Saskatoon store will be the store/operations manager. This
individual has been a member of the Crave team in Calgary for the past five years and knows the Crave
culture, production plans, business plans, and success tricks inside and out. This individual is ready to
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 3
Crave Cupcakes and Cookies 2011
make the move to Saskatoon and take charge of another Crave success story. With the managers’ strong
work ethic, creative and innovative product ideas, and excellent leadership and communication skills,
Crave believes that the Saskatoon store will be able to achieve break even sales by year two and a net
income before tax of nearly $44,000 in the fifth year.
Marketing Plan
Crave is targeting energetic, fun loving, care free women who love to indulge in sweet heaven. These
women will be individualistic with above average incomes and represent approximately 15,130 people
within Saskatoon and the surrounding area. Crave will also be marketing special occasions such as
weddings.
The offering to these target markets will be ‘creating delectable treats to satisfy the craving of the human
spirit’. Crave caters to individuals who are craving something sweet and want to make themselves feel
special or need a pick-me-up.
Crave has two direct competitors, The Cupcake Conspiracy and The Cupcake Corner, each offering
similar products. The Cupcake Conspiracy has an advantage with product features, given that it is a
peanut and tree nut free facility and provides gluten free cupcakes. This is an advantage given the
increased occurrences of peanut and gluten allergies. The Cupcake Conspiracy provides 100%
satisfaction guaranteed and offers online ordering, which provides a greater customer benefit. However,
Crave has advantages over the two competitors through its premium location, being on a corner lot of
Broadway Avenue, Saskatoon, as well as having a trendy, fun, and friendly store environment.
The marketing strategy is to focus on a successful grand opening, a partnership with the Business and
Professional Women in Saskatoon, as well as the Bridal Spectacular event at Teacher’s Credit Union
Place (TCU). The grand opening will focus on building awareness of Crave and its location. The
partnership with the Business and Professional Women in Saskatoon will build a network with women
who are in the target market. Finally, the Bridal Spectacular event at TCU will be to target the wedding
occasion market by showing brides and grooms the unique offerings of Crave. These three main
campaigns will be complemented by more generic forms of advertising, such as radio advertisements,
newspaper advertisements, and a billboard.
Financial plan
The financial statements are based upon the above information of the operations (cost of sales and fixed
costs), the human resources (wages and salaries), and the marketing plan that drives the sales. In the first
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 4
Crave Cupcakes and Cookies 2011
year of operations there will be a loss but, in the following years, Crave will realize profits. Also,
beginning in the first year, there will be positive net operating cash flows. However, there will be a net
cash outflow due to the additional loan payments. In the following years there will be net cash inflows.
Best and worst case scenarios are also calculated based on changing the sales volumes since the price is
fixed.
Using a return on equity of 25% and a 6% interest rate on the debt financing, the resulting net present
value (NPV) for Crave is $87,581. This dollar figure is over and above the initial investment, which
shows that the store is worth more than what it costs. It also interprets into a 36% internal rate of return
which is higher than the required return of 25%.
Crave believes that it will be a perfect addition to the growing city of Saskatoon.
2.0 Introduction
Crave Cupcakes & Cookies was established in Calgary in 2004 by two sisters, Carolyne and Jodi, who
each own the company equally. Learning the art of baking from their family, Crave continues to use
these family recipes in all products.
Crave sells cupcakes, mini cupcakes, and cookies which are baked fresh daily. The products are priced at
a premium because of their high quality, creative design, and the fact that there is no frozen inventory.
Crave also offers cakes for special occasions such as weddings, which can consist of three, four, or five
tiers. These cakes are differentiated from competitors due to the fact that cupcakes can make up part of
the product.
2.1 Mission Statement
Crave uses local and environmentally friendly ingredients to bake fresh specialty treats daily to satisfy the
craving of the human spirit.
Crave fulfills this mission statement by the continuous creation of uniquely designed treats such as
cupcakes, mini cupcakes, cookies, and cakes.
2.2 Goals/Objectives
The short term goal for Crave is to establish a firm position in its new market of Saskatoon, by
developing a brand image of a high quality product, as well as a trendy, fun and friendly store
environment.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 5
Crave Cupcakes and Cookies 2011
The goal for Crave in the medium term is to have net positive cash flows by the third year of operations,
in order to have the ability to sustain operations, while maintaining its brand image. Crave will do this by
controlling costs and implementing the marketing plan to achieve the sales targets.
The long term goal is to achieve a 6% profit by selling a product mix of 35% cupcakes, 39% mini
cupcakes, 26% cookies, and 0.02% cakes by the fifth year of operations, as well as to maintain the brand
image. This will be achieved through obtaining the necessary sales product volume and by controlling
costs.
These goals are to be reviewed continuously and updated as circumstances in the business and industry
change.
The business plan will achieve these goals and objectives by focusing on having the appropriate team in
place, continuously assessing the competition, providing a reference for Crave’s sustainable competitive
advantages as well as focusing on the target markets and how to provide value to these customers. In
addition, it provides a plan to manage inventory levels to keep costs down, as well as achieve the
production and sales targets necessary to provide the required returns.
3.0 The Operations Plan
3.1 Legal Structure
Crave Cupcakes and Cookies has already been incorporated and is a Canadian Controlled Private
Corporation with locations in Calgary and Edmonton. There are two equal shareholders of the
organization, Carolyne and Jodi who are also the co-founders. Incorporation was done for three main
reasons. First, Crave is able to enjoy the small business tax rate of fifteen percent, which provides an
advantage as less cash is needed as an outflow each year for taxes. In addition, the shareholders are only
taxed on their salary, if employed, or on dividends received from Crave, which provides flexibility in the
timing of payments. Shareholder tax rates will depend on the personal level of income. Second, by
incorporating the shareholders are not personally liable; therefore, only the company’s assets would be at
stake if Crave were to be sued. Third, by incorporating, Crave will have more access to financing.
3.2 Board of Advisors
Although Crave is a small business, it still has a Board of Advisors to oversee the company. Crave
presently has an accountant, a lawyer, and an individual who has experience within the food industry
sitting on the Board. The accountant is necessary as Crave needs an individual who is financially literate
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 6
Crave Cupcakes and Cookies 2011
and who can interpret the financial statement results. This individual helps guide the company in the right
direction. The lawyer provides Crave with legal advice. The third individual with industry experience is
essential as knowledge is provided regarding the ins and outs of the industry and how to operate in the
food industry. The owners and founders of Crave also hold seats on the Board of Advisors.
3.3 Organizational Structure
The organizational structure will be relatively flat (Figure 3.1). The two shareholders will remain in
Calgary, and will not be involved in the day to day operations of the business. Crave will hire an
operations/store manager who will oversee the entire operations of the business. Crave will also require a
separate bakery manager, who will oversee two to three bakers. Crave will also require two front end
staff, working three quarters time.
Owners
Operations
Manager
Bakery
Manager
Baker
Front end
staff
Baker
Figure 1.1 Organizational Structure
The operations manager will oversee the running of the store and report back to the owners on a monthly
basis, or as needed. Crave will transfer one of the Calgary managers to the Saskatoon location to run the
business. This person will already be experienced with Crave’s operations, processes, systems, and
culture, which will ensure that the new store has a capable manager to run a new and fresh Crave team.
The bakery manager will be responsible for the production of the goods. This includes ensuring that
enough products are on hand at any given point in time and to deal with purchase ordering. Inventory
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 7
Crave Cupcakes and Cookies 2011
management will also be crucial as waste is an avoidable cost of sales. The bakery manager participates
in baking, alongside the two general bakers. The front end staff members will be in charge of selling
goods, taking orders, answering the phone, ensuring the front of the store is tidy along with overall
customer satisfaction. An additional part time baker will be added in year four due to the increased
demand for Crave goods and therefore for the increased production.
Before opening day, the operations manager and the owners will ensure the bakers and front end staff are
thoroughly trained.
Crave will outsource all bookkeeping functions to Forbes Solutions, a local accounting, advising and
training firm. Forbes Solutions specializes in small to medium sized businesses and guarantees
accounting records that will be useful and important in making business decision making throughout the
year.
3.4 Site Plan
The site chosen for the future home of Crave Cupcakes is on Broadway Avenue. This location was chosen
as the Broadway Avenue culture parallels the image that Crave wishes to portray to potential customers.
Parking will be available along the street and deliveries will occur through the back alley. Crave’s store
will open directly onto Broadway Avenue. The other stores and services offered on Broadway Avenue are
unique, one-of-a-kind shops, which further embodies the products that Crave has to offer.
3.5 Floor and Work Plan
The store front has been set up quite simple. A customer will walk in and will directly face the customer
display counter. The custom display counter will show the current days selection of regular cupcakes,
mini cupcakes and cookies. The front end staff then takes the order and the customer pays for the order at
the time of purchase. No credit will be given. There is a table and set of chairs to make it appear more
welcoming which can be used as a waiting area if needed (i.e. for cake orders) or if the customer so
chooses they can sit and enjoy their treat in the store.
In the back there is an employee washroom and coffee room. The coffee room has a mini fridge,
microwave, coffee maker, sink, and a table with chairs. Also, there is a bulletin board for any
announcements, work schedules, or any other pertinent employee related information.
The layout of the back is set up to facilitate the work flow. The employees, more specifically the bakers,
would enter through the back receiving door and, during the winter, can hang their coats up. From here
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 8
Crave Cupcakes and Cookies 2011
they will wash their hands at the sinks and proceed to gather the ingredients, which is located directly
beside the sinks. They will then bring these to the preparation tables under which there are drawers where
the pans, utensils, bowls, etc. are located. The industrial size mixers are located against the wall and, if
needed, there is also a single range stove and microwave.
After the items are prepared they will go into the oven to bake and then be transferred onto the cooling
racks located right next to the oven. Once cooled, the items will proceed to the tables again where they
will be decorated. Finally, they will be transferred to the finished goods storage which is just on the other
side of the store front. This is convenient for the front end staff to replenish any item as needed.
During clean up there is a dishwasher for the large items but the double sink can also be used. When
using the double sinks, one will be used to wash the supplies and then the next one will contain bleach
water and then the supplies will dry in the drying racks.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 9
Crave Cupcakes and Cookies 2011
Figure 1.2 Floor and Work Plan
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 10
Crave Cupcakes and Cookies 2011
3.6 The Average Business Day
Crave Cupcakes will be open Tuesday through Sunday, every week, with the exception of national and
provincial holidays. Crave has chosen to be open throughout the entire weekend as Broadway Avenue has
increased traffic during the weekend due to many individuals working Monday to Friday. This provides
our target market with an opportunity to indulge while out shopping, running errands, or enjoying an
afternoon off and also allows the opportunity to grab dessert for an evening of entertaining friends and
family. The operating hours are also in line with the Crave stores in Calgary as well as with the main
competitors in Saskatoon. Being open on weekends is also important as many of the speciality orders will
be required for events that occur on the weekend. The business hours will be Tuesday to Saturday from
10:00 am to 6:00 pm and on Sunday from 12:00 pm to 6:00 pm. Crave has chosen to open at 10:00 am as
Crave does not provide breakfast foods, however, the time coincides well with morning coffee breaks.
Crave has chosen to close at 6:00 pm as it allows members of our target market to stop by the store on the
way home from work. As there are a finite number of goods produced each day, if the product is depleted
before 6:00 pm, Crave will close at that point.
The average day starts with the bakers arriving at four in the morning. The bakery manager has the keys
to the back entrance of the store and allows the other bakers entrance. The bakers set out the ingredients
and then commence preparation and baking. During the baking time, a second round of preparations is
done, and afterwards, cleaning commences. After the goods have baked they are set aside to cool, and
once cooled, are decorated. Upon final decoration they are carried out to the display counters at the front
of the store. The bakers are at the store from 4:00 am to 10:00 am, which provides enough time to prep,
bake, cool, decorate, and clean up from two to four rounds of baking.
The front end staff member arrives just before 10:00 am in order to open the front of the store. They help
to ensure that everything is tidy for customers and that the goods are set out in preparation for the first
round of customers. Throughout the day, the front end staff member will be responsible for dealing with
phone calls, working the till, serving walk in customers, and taking special orders. Special orders will
then be directed to the bakery manager to ensure that the order can be filled with current capacity levels
as well as meet the deadline. Front end staff are responsible for cleanup of the front areas after close.
At the end of the day, the front end staff are responsible for reconciling the till tape to the cash on hand
and credit/debit receipts. Once the reconciliation is done, the store manager reviews the work. The store
manager is responsible for deposits. Deposits are done on average every two days, depending on the
amount of cash received.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 11
Crave Cupcakes and Cookies 2011
Time
Duties
4:00 to 4:15 am
Bakers arrive
4:15 to 5:00 am
Measure and prepare first round
5:00 to 5:45 am
Baking of first round, Prepare and mix second
round
5:45 to 6:30 am
Cooling of the first round, baking of the second
round, prep of third round
6:30 to 7:15 am
Decorating of first round, cooling of second round
and baking of third round, prep of fourth round
7:15 to 8:00am
Decorating of second round, cooling of third round,
baking of fourth
8:00 to 8:45 am
Cooling of fourth and decorating of third round
8:45 to 9:30 am
Finish decorating of all rounds
9:30 to 10:00 am
Clean up, finalize goods and place in customer
display counter
Table 1.1 Analysis of Daily Baking Needs
During the first year of operation, Crave will have three production rounds. This is projected to increase
by a quarter round each year, and by year five there will be production of four baking rounds. In each
year, efficiencies will be improved and preparation and decoration times will decrease.
Forty five minutes has been given for each part of the cycle as it allows time for any unexpected
interruptions, and brief coffee breaks. Every year, efficiencies will be realized helping to shorten the time
necessary for each round and allowing for the production of additional cakes. When cake orders have
been placed, the bakery staff can start production after 8:00 am once the ovens are free of the day’s
normal production. In addition, the bakers work six hours a day, six days a week, resulting in 36 hours of
work. Thus there is four additional hours to complete the forty hour work week that can be utilized to
produce the cake orders.
3.7 The Average Business Week
On a bi-weekly basis the bakery manager is responsible for ordering the raw ingredients for baking. The
operations manager reviews sales information on a weekly basis to ensure nothing seems out of the
ordinary and to monitor waste levels.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 12
Crave Cupcakes and Cookies 2011
3.8 The Average Business Month
Each month, the operations manager will be in charge of scheduling shifts and dealing with vacation
requests while the bakery manager will be in charge of inventory levels. Monthly meetings will occur
with the operations manager, bakery manager, and bakery team. The meetings will discuss any changes in
trends between the sales volume of regular cupcakes, mini cupcakes, and cookies. The meeting will also
discuss all cake orders that have come through to ensure that the bakery staff has the time, capacity, and
necessary ingredients to make each specialty cake.
Also, on a monthly basis the financial information will be sent to the external bookkeeper in order to
update the records. Monthly statements will be prepared and sent to the management team providing
information on sales and waste.
3.9 The Average Business Year
On an annual basis, all information will have been supplied to the external bookkeeper for the fiscal
yearend trial balance. The yearend financials will then be sent to the company accounting firm who will
prepare the notice to reader and income tax return. The owners will have meetings with management to
discuss the overall yearly results, the trends that had occurred during the year, to discuss future trends,
and to also evaluate whether any of the capital assets require replacement. The operations manager will
also be responsible for performing evaluations of the employees.
3.10 Supply Analysis
Crave Cupcakes will sign a contract with Sysco Canada to provide all of the necessary ingredients
including sugar, flour, milk, etc. This will allow for bulk purchases to be made and, therefore, a discount
will likely be received. If certain ingredients are close to running out before the next shipment arrives
from Sysco, Crave will be able to purchase the ingredients from any local grocery store. Inventory
management of the ingredients is one of the risks that Crave will face, as Crave will need to ensure that
enough ingredients are on hand for required production levels on a daily, weekly and monthly basis, and
to fill special orders that may occur. However, at the same time spoilage levels have to be monitored so
that waste is kept at an acceptable level.
One of the special ingredients that makes Crave cupcakes a special indulgence is the use of butter cream
for the icing. Saskatoon has a local company; Saputo Fruits Ltd., whose services include the production of
creamery butter (Saputo Fruits Ltd.). Therefore, Crave will purchase its butter from this local supplier as
the company promotes local purchases whenever possible.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 13
Crave Cupcakes and Cookies 2011
There will be some risk of economic dependence on having Sysco as our main supplier, however this risk
is mitigated by the fact that they are one of the global leaders in distributing food products to restaurants
(Sysco Canada). Also many of the supplies purchased from Sysco are generic goods (flour, sugar) and, as
such, can be picked up at Costco or The Wholesale Club.
3.11 Capacity Limits and Capital Budget
Crave Cupcakes expects to produce four rounds of goods in the fifth year in the best case scenario
(Appendix XVI). Per Appendix VII, one round of baking utilizes both ovens with each oven holding five
baking sheets. Therefore, one round of baking under the best case scenario will produce approximately
four trays of twenty-four cupcakes, three trays of thirty-six mini cupcakes, and three sheets of twenty-four
cookies.
It is the baking time of the goods and the number of bakers that create the bottleneck at Crave. Table 1.1
indicates that the oven usage for four rounds of goods is done by 8:00 am. If Crave desires increased
production, then another baker will be required to increase capacity from four rounds. Another baker
could come in before 8:00am to start a fifth round of production.
Please refer to Appendix XII for the capital budget. All items purchased will be from Katom, a restaurant
equipment supplier. The capital budget includes both the capital equipment that Crave requires to start
operations as well as the leasehold improvements required to prepare the location for operation.
Refer to the capital budget under Appendix XII for the required capital equipment replacements.
3.12 Cost of Sales
All price and cost amounts in the financial plan are increased each year to reflect an approximate 2%
increase in inflation (Appendix II).
Purchases are calculated at an industry average of 44% of gross sales. Freight is calculated as 1% of
purchases since this additional cost is charged when the product shipments are received.
Closing inventory is calculated as a two weeks supply of purchases such as flour, sugar, milk, cream, etc.
The cold items will have to be used up within two weeks to remain fresh while the dry ingredients can be
bought in bulk and will have a longer shelf life, thus resulting in a two week average.
Spoilage (Appendix IX) is calculated by determining the number of trays for each item per day from the
sales forecast. The resulting amount is then rounded up to the nearest half tray which will determine the
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 14
Crave Cupcakes and Cookies 2011
number of items to cook in a day, and then is translated to an annual basis. The difference between the
amounts cooked and the forecasted sales is the unsold or spoiled items and the variable cost for each item
is applied to calculate the total expense.
In year three the formula changes slightly since the trays of minis and cookies are less than 0.1 over the
lowest half tray, it would be more detrimental to bake an extra half tray than to lose those sales.
Therefore, in this case the half tray is rounded down with the difference going to the cupcakes, which are
rounded up by one half trays.
3.13 Operations Expenses
All price and cost amounts in the financial plan are increased each year to reflect an approximate 2%
increase in inflation (Appendix X). This includes the purchase of new products in the later years.
The bakery will consist of a bakery manager who also participates in the production process along with
two other bakers when the store initially opens. Their starting wages will be consistent with that of
industry standards, with the manager earning $37,000 and the bakers $35,000 per year (Industry: Baker).
Three bakers will be sufficient during the first three years because they can each work on one offering:
cupcakes, mini cupcakes, or cookies. With any remaining time, if needed, they will also work on specialty
orders or cakes. A third part-time baker will be hired in the fourth year to keep up to the increasing sales.
The benefits will include the basic CPP, EI, holiday pay and workers’ compensation (Appendix VIII).
The starting salary for the store manager is $50,000 which is in line with the industry average (Industry:
Baker). There will be two front end staff working three quarter time, therefore 30 hours per week. This
will total 60 hours per week of front end staff while the store is only open 46 hours (10 – 6 Tuesday to
Saturday & 12 – 6 Sunday) allowing time for lunch break coverage and opening and closing duties. Their
wage is $10 per hour which is higher than minimum wage and they will also receive the basic benefits
(Appendix X).
Amortization is equal to Capital Cost Allowance (CCA). The majority of the items in the business will be
included in class 8 with a 20% amortization rate. The capital items will all be purchased new. In year four
a mixer and an oven will be replaced since these items are used continuously every day. The dishwasher
will be replaced in year four and the second mixer and oven in year five (Appendix XII).
The capital items included in leasehold improvements consist of fixtures for the building such as the
plumbing and electrical to set up the sinks, toilets, and additional voltages for the ovens and mixers. The
interior will also have to be painted with the Crave colors. Other permanent fixtures include the employee
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 15
Crave Cupcakes and Cookies 2011
bathroom such as the toilet and sink as well as the employee coffee room sink and cupboards. These
leasehold improvements are amortized over a ten year period since the lease would be five years with a
five year renewal period.
Other capital items that will be purchased and expensed in the year are kitchen supplies. These include
pots, pans, trays, spoons, etc. The initial outlay will be $5,000 with half of the supplies being replaced
every year, which will account for the item wearing out and the increased need due to growth in
production.
A computer will also be purchased in the first year. It will be included in class 52 and will be written off
100% in the first year. In year four a new computer will be bought in order to keep up with the company
growth needs and more advanced technology.
The repairs and maintenance expenses (Appendix X) are calculated as a percentage of the capital items
purchased in year one. In the first year the percentage used will be less than the next year, thereby
increasing the percentage used each year and therefore the expense. The theory behind this is that the
items are brand new in the first year so they should have few repair costs associated with them. In
addition, most products have at least a one year warranty so if any repairs do need to be done they should
be covered. By year two, since the items are used every day they will start to have wear and tear and will
need to be maintained to keep them working. The percentage is increased by 1% each year. This is
because there are many assets that will not require replacement within five years, but will require regular
repairs and maintenance.
Other expenses are calculated as follows for the first year:

Insurance - $500/month

Office - $100/month

Professional fees - $7500/year plus $2,000 for a notice to reader at year end

Property taxes - $8,000/ year

Rent - $2,500/month

Uniforms & linens (including washing) - $100/month

Utilities - $750/month

Other expenses (including gifts, entertainment, etc) - $1,000/year
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 16
Crave Cupcakes and Cookies 2011
Taxes will be calculated using the small business rate of 15%. There are losses in the first year therefore
no taxes will be paid. In the following years the loss carry forwards will be utilized bringing the taxable
income down to zero resulting in no taxes.
3.14 Working Capital Planning
Liquidity and cash flows are important as it helps to manage the working capital. Crave will aim to have a
liquidity ratio around 1.5, and at no less than 1. If excess cash accumulates it will be invested into both
short term and long term investments, which will have to be approved by the Board of Advisors. The
short investments are done in case cash flow is tight. There will be minimal accounts receivable since
sales are done by debit or credit card and cash. Cakes will require a deposit, which will be recorded as
unearned revenue. The remaining price of the cake will be collected when the cake is picked up.
Crave is projected to have a current ratio, which measures the ability of the current assets to cover current
liabilities, ranging from a low of 4.91 to a high of 5.40 (Appendix VI). This demonstrates that Crave will
not have liquidity issues over the five projected base case years.
The inventory will be managed closely through the experience of the baker manager and the knowledge
of the operations manager. Original inventory levels will be approximated off of the inventory levels
required by the Calgary and Edmonton stores and will be adjusted to the Saskatoon projected sales. There
will be at minimum two weeks’ worth of ingredients on hand at any given point. Some items, such as
flour and sugar which have no expiration date, will have at minimum one month’s worth supply. This
helps to prevent the amount of spoilage of inventory. Crave estimates an inventory turnover of
approximately 40 times per year indicating that inventory is held on average nine days before it is used
(Appendix VI).
Crave will contract credit terms of thirty days with its suppliers. The operations manager will do monthly
reviews of the accounts payable to ensure that they are being paid in a timely fashion and that Crave is
taking complete advantage of any additional credit terms offered. The ratio analysis indicates that Crave
will see an average days in payables of 17 days (Appendix VI). Crave’s cash conversion cycle is negative
in each year as calculated from the base case ratios.(Appendix VI) indicating that Crave receives the
inventory, produces the goods, sells the goods, and receives the cash for the goods all before payment is
required on the inventory originally received.
4.0 Human Resources Plan
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 17
Crave Cupcakes and Cookies 2011
Crave Cupcakes will have a store manager, bakery manager, bakers, and front end staff. The job
description for each is as follows:
Store Manager
-
Oversees all operations
Approves major expenditures (with discussion with the owners)
Creates work schedules
Must be financially literate – ability to read and interpret financial statements
Experience within the food industry
Leadership skills
Responsible for cash deposits
Collects financial information and provides to external book keeper
In charge of hiring and firing
Bakery Manager
-
Oversees inventory management and inventory purchasing
Prior kitchen experience
Leadership skills
Require food and safety course
Bakers
-
Passionate about food
Minimum one year experience of baking required
Must be creative
Require food and safety course
Front End Staff
-
Responsible for customer service and customer satisfaction
Must be an upbeat, energetic and friendly individual
Responsible for taking orders and answering telephones
Responsible for ensuring the front of the store is clean
Responsible for cleaning of the employee washroom
Require food and safety course
All of the Crave staff members will be required to have completed the food and safety course. Crave
expects the bakery team to have already completed this course as experience in the food industry is a
requirement for the position. If the front end staff members have not yet taken this course, Crave will pay
for these members to complete the training. In addition, if there are any baking seminars or management
seminars that the staff employees are interested in attending Crave will help out with the costs.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 18
Crave Cupcakes and Cookies 2011
In year four, Crave will hire an additional part-time baker as the production of goods will have increased
in response to increased demand.
Please refer to Appendix VIII and Appendix X for the complete look at the labour costs over the five year
projection.
5.0 Marketing Strategy
5.1 Past Performance
Crave has proven sales in five locations in Calgary, Alberta as well as one location in Edmonton, Alberta
selling specialty baked goods, such as cupcakes, mini cupcakes, cookies, and cakes at premium prices.
However, the company is now moving into a new market on Broadway Avenue in Saskatoon,
Saskatchewan. Crave has used premium pricing to offer a differentiated product, as well as developing a
brand of high quality and unique goods.
The competition in Saskatoon is high with direct competitors including The Cupcake Corner and Cupcake
Conspiracy, located on 8th Street and downtown Saskatoon respectively. Both stores also offer specialty
baked goods at premium prices. Other competitors in the area include Starbucks which offers specialty
desserts and drinks at high prices and Calories which offers specialty desserts such as cookies,
cheesecake, and squares at high prices. Also located on Broadway are Extra Foods and Nutana Bakery
which offer low priced, generic, baked goods.
5.2 The Market
The potential market is everyone living in Saskatoon and surrounding area, which includes approximately
230,000 individuals. Based on the latest available census from 2006, the number of females in Saskatoon
aged 20 to 54 is 54,035 (2006 Community Profiles). Of these, the number of single females with middle
to high income is 15,130, which represents 28% of the number of females in Saskatoon (2006
Community Profiles).
Social trends such as rising obesity rates and increased occurrences of diabetes could have a negative
impact on sales, since Crave does not offer health food products. However, with the offering of mini
cupcakes, the negative impact may be reduced since Crave offers smaller portion sizes.
Another social trend is the increased occurrences of peanut and gluten allergies. Crave does not offer
gluten or peanut free products, therefore, this social trend could decrease sales.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 19
Crave Cupcakes and Cookies 2011
Crave has already placed emphasis on using environmentally friendly products and packaging by using
recyclable and compostable plastic bags which is in line with the social emphasis placed on the
environment.
5.3 Competition
The major competitors include The Cupcake Corner and Cupcake Conspiracy which are located on 8th
Street and downtown Saskatoon, on the North side of the river.
As shown in Figure 1.3, the three competitors have been ranked against each other in terms of product
features, quality, variety, selling terms, and service.
Cupcake Conspiracy is rated the highest out of the three competitors on product features. This is due to
the fact that it offers gluten and peanut free products in addition to purchasing materials from local
suppliers. Crave is rated the next highest, because, though it does not have a gluten and peanut free
facility, it does purchase from local suppliers when possible. Cupcake Corner is rated lowest, because it
does not purchase from local suppliers, nor does it offer allergy free products.
Quality is a very subjective measure given the nature of the product produced by each of the competitors.
All three have a reputation for making delicious fresh baked goods. Therefore, in terms of quality of the
products, all three competitors have been rated equally.
Crave is rated highest in terms of variety as it offers thirteen different kinds of cupcakes, cookies, as well
as ice cream sandwiches in the summer time. Cupcake Corner is rated in the middle because it offers
seventeen different kinds of cupcakes, as well as mini cupcakes on demand. Cupcake Conspiracy is
ranked lowest since although it offers fourteen different kinds of cupcakes it doesn’t offer cookies and
mini cupcakes are not offered unless pre-ordered.
Cupcake Corner ranks highest on service because they offer delivery and set up services, as well as online
ordering and a 100% satisfaction guarantee on its products. Cupcake Conspiracy is the next best for
service because they do offer delivery; however, they do not offer online ordering. Crave comes in last
having no delivery or set up services for special events, nor do they have online ordering. Crave is in the
process of implementing an online ordering system.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 20
Crave Cupcakes and Cookies 2011
12
10
8
Cupcake Conspiracy
6
Cupcake Corner
4
Crave
2
0
Product Features
Quality
Variety
Service
Figure 1.3 Competition Analysis
In order to counteract the activities of competitors, Crave will need to improve customer service by
offering delivery and set up services for special events, such as weddings and business functions. It can
also differentiate itself through the customer experience it offers when an individual walks into the store.
For example, front line staff would be trained to greet customers in a friendly manner as well as taking
interest in the wants of the customer. In addition, Crave will also need to counteract Cupcake Corner by
offering online ordering for the ease of customers who have a busy lifestyle and don’t have time to come
down to the store for advanced bookings.
The industry saw growth rates of about 2% between 2001 and 2008. However, after 2008, the growth rate
has slowed to about 0.8% (SME Benchmarking). In addition, the market in Saskatchewan has
experienced increased competition as the number of specialty establishments compared to the number of
people is about 5:1, compared to in Alberta having a ratio of establishments to people of 4:1. In addition,
there are low barriers to entry in the market, as the technical expertise is low, and the product is easily
duplicated as the complexity is low. However, the cake recipes are one of a kind as they originate from
family recipes and therefore cannot be identically copied.
5.4 Customers
People that buy Crave’s products will be females with above average income and busy lifestyles. It will
be those people who feel like they deserve a treat after a hard week of work and need a ‘pick me up'.
These individuals will likely buy once or twice a month. The idea of customers coming in once a month
will be increased with the ‘Craving of the Month’ campaign. This will provide a new cupcake or treat to
entice customers to visit the store and purchase at least once a month.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 21
Crave Cupcakes and Cookies 2011
Other people that buy Crave’s products will be individuals and organizations who have a special event
such as a wedding, birthday, and anniversary, on Valentine’s Day, or for business meetings and who do
not have the time or resources to bake the quantity needed. These customers will buy less frequently,
likely once or twice a year, but in large quantities.
The customers will receive a unique product that will satisfy the craving of the human spirit.
5.5 Target Markets
The market, which is the most attractive in terms of future growth potential, will be single females with
middle to high income, which encompasses 15,130 people in Saskatoon. This target market allows for
premium pricing, and fits in with the fun, trendy lifestyle that Crave encompass. These women will have
the disposable income and will want to satisfy their sweet craving.
5.6 Product and Service Features
The main competitors have very similar ingredients in their products and very similar features. The
perception customers have of Crave’s product relative to the competition is very subjective. Some
customers may perceive Crave baked goods to be higher quality than the competitors, but others may not.
Since there is not a lot of opportunity to have sustainable differentiation in the product offering,
differentiation will need to be made through the customer service experience. This can be achieved
through the decoration and set up of the products for weddings and special events, as well as through the
daily serving of customers at the store.
Crave customers will perceive the service offering to be outstanding compared to the competition as it
will go above and beyond to make customers feel special and satisfied when they leave the store
compared to when they walked in.
Buyers in the target market are indicating that there is a need for gluten free and peanut free products.
However, Crave products feature real ingredients allowing for more differentiated products to be offered
without any ingredient restrictions. Also, Crave is not exposed to the possibility of legal liabilities that is
associated with allergen free products. Therefore, Crave will continue to provide its current offerings.
5.7 The Opportunity
The key aspect of the market opportunity is sales for special events, such as weddings. Special events
allow for more predictability in sales because the orders are made well in advance of the date of the
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 22
Crave Cupcakes and Cookies 2011
wedding (typically about 4 to 8 months). In addition, these special events provide the opportunity to get
the ‘Crave’ name out as the amount of people trying the products will be very high, thus increasing the
awareness of the business throughout Saskatoon and surrounding areas.
The volume of sales needed to cover the fixed costs when selling cakes is also a lot lower since the gross
margin on the cakes is higher than that of the cupcakes, mini cupcakes, and cookies. The only downside is
that special events, such as weddings, are not going to be repeat customers. Therefore, each year Crave
will need to find new wedding customers. This risk would be mitigated through attaching business cards
and contact information to the desserts at the weddings, or placing the business cards on the guest tables.
All of the guests would be receiving a ‘free’ taste of the cupcakes and the contact information to go buy
more.
Another key aspect of the market opportunity is through Crave’s new location on Broadway Avenue,
Saskatoon. Broadway Avenue attracts a high degree of walking traffic and also attracts individuals who
are in Crave’s target market since this avenue is very unique and trendy. Also, the location is a high
traffic area which allows for a great opportunity for word of mouth marketing. The store is visible and
easily accessible. As shown in the sales forecast, a large proportion of the yearly sales come from visits
that are due to word of mouth.
The complete sales forecast is attached as Appendix VII.
5.8 Sales and Profit Objectives
Crave’s objective is to achieve a 6% pre-tax profit on sales by selling a product mix of 34.79% regular
cupcakes, 39.09% mini cupcakes, 26.10% cookies and 0.02% cakes in the new location in Saskatoon
during the fifth year of production.
5.9 Channels of Distribution
Crave uses direct marketing as the channel of distribution, as does its competitors Cupcake Conspiracy
and Cupcake Corner, as they all sell the manufactured product of baked goods to the end customer
directly. This is the most relevant method since the product is baked fresh daily.
Being a distributor or a retailer would not reach the target market, as one of the main aspects of the
business is that the business produces fresh baking.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 23
Crave Cupcakes and Cookies 2011
5.10 Pricing Policy
Crave does not have a lot of control over the price of the materials to make the products. The sales price
of Crave products is currently slightly higher than the competitors for all products (cupcake singles,
cupcake half dozen, cupcake dozen, as well as mini cupcakes). Please refer to Figure 1.4.
The regular cupcakes are the same price as Cupcake Corner, but are $0.50 more than Cupcake
Conspiracy. When buying in half dozen quantities Crave is more expensive than Cupcake Corner by
$0.33 per cupcake, and $0.50 per cupcake compared to Cupcake Conspiracy. When buying in a dozen
quantity, Crave is more expensive than Cupcake Corner by $0.41 per cupcake and $0.58 per cupcake for
Cupcake Conspiracy.
The mini cupcakes are the same price as Cupcake Corner, and are $0.50 more than Cupcake Conspiracy.
For other items, such as cakes, the price varies depending on the design needed and the number of tiers on
the cake.
$3.50
$3.00
$2.50
$2.00
Cupcake Conspiracy
Cupcake Corner
$1.50
Crave
$1.00
$0.50
$Cupcake Regular Cupcake Half
Dozen
Cupcake Dozen Mini Cupcakes
Figure 1.4 Price Comparison
Overall, Crave is the most expensive out of its direct competitors; however, the pricing is still in a
comparable range.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 24
Crave Cupcakes and Cookies 2011
Since Crave is marketing its cupcakes as a premium product, it would not be in its best interest to offer
discounts regularly. However, as a way to get the Crave brand going in the Saskatoon market there would
be a ‘buy one get one free’ coupon planned for the Grand Opening. In addition, there is a discount
available for buying in larger quantities, as the more cupcakes bought, the cheaper the price per cupcake.
Discounts would not be given at the end of the day if there is extra stock. Any extra stock at the end of the
day would be given to the food bank, homeless shelters, as well as blood donation clinics. Crave does not
want to get a reputation for providing discounted food, as it may tarnish the reputation of the quality of
the cupcakes. In addition, Crave would not want people to avoid paying full price by only coming at the
end of the day.
The prices would be maintained over time, only increasing to cover increased costs due to inflation. The
Saskatoon store does not have much control over prices as they are advertised on the website and are
consistent with the other Alberta stores.
5.11 Select Markets and Product/Service Mix
The goal is to be a small factor in the market given that it would be targeting only 28% of the single,
female population of Saskatoon. The industry is highly competitive and Crave’s product offering is quite
specialized therefore we will only appeal to a small market size. In addition, to achieve the level of
customer service desired and promote an energetic, fun loving, trendy store environment the goal would
be to serve a smaller number of customers, but serve them better than the competition.
The product itself does not have advantages which competitors cannot easily duplicate or counter by way
of price cuts. For example, it would be fairly easy for Cupcake Conspiracy and Cupcake Corner to offer
more product offerings, such as cookies and ice cream sandwiches. Both of them would have the
equipment and resources to do so.
However, what Crave does have which would be difficult to duplicate is the unique location of Broadway
Avenue and the store environment. Broadway attracts trendy, individualistic people which are exactly in
line with the target market of Crave stores. There is also a lot of visibility and walking traffic provided
being on a corner lot of Broadway which increases the awareness of the business in Saskatoon and
surrounding areas.
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 25
Crave Cupcakes and Cookies 2011
5.12 Selling and Advertising
The objective of the selling and advertising program would be to first create awareness of Crave’s
offerings and the location. The second objective would be to create the brand that Crave ‘creates
delectable treats to satisfy the craving of the human spirit’.
The front line staff will be a key part of establishing the brand for Crave because they will set the tone for
the store environment that attracts Crave’s target market of ‘energetic, fun loving, care free women who
love to indulge in sweet heaven’.
The front line staff and managers will all need to be trained and knowledgeable about the products and
process of creating the treats as well as how to provide exceptional customer service.
The media used to achieve the selling and advertising goals would be based on three main campaigns:

Grand Opening

Partnership with BPW club (Business and Professional Women of Saskatoon)

Bridal Spectacular at TCU Place
The purpose of the grand opening will be to create awareness of the different offerings and the location.
The first one hundred customers who come into the store will receive a free cupcake. The remainder of
the customers that come in would receive a ‘buy one get one free’ cupcake coupon. This discount would
be the only time discounts would be given on the cupcakes, and its purpose would be to increase
awareness. The grand opening will be promoted through a color display advertisement in the StarPhoenix
as well as on a billboard on the corner of Idylwyld Drive and 20th street for seven days.
The partnership with BPW club is to provide a networking opportunity with women involved in the
community and provide word of mouth advertising of Crave. This club has monthly meetings with
approximately one hundred people at each meeting. The people at the meetings fit into Crave’s target
market, as they are individualistic business women between the ages of 20 and 65 and have above average
income. In addition to providing a networking opportunity and to spread word of mouth, Crave will also
supply treats at a BPW meeting to further increase awareness of the company. The networking with BPW
also fits in with the idea that individuals buying the cupcakes do not have the time to bake themselves,
given that the women in this club would be business and career oriented women.
Crave will also set up a booth at TCU Place at an event called the ‘Bridal Spectacular’ in Saskatoon. The
Bridal Spectacular is an event where different businesses set up booths and display their wedding product
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 26
Crave Cupcakes and Cookies 2011
and service offerings. Brides from Saskatoon and surrounding areas come with their bridesmaids and
parents to the event to sample products to use at their weddings as well as get new ideas. At this event,
Crave will set up a booth with a display of the creative wedding cakes that are available. In addition,
Crave will provide samples of the cupcake minis to the potential wedding cake customers. The brides will
then be able to take home business cards as well as estimated price quotes and a brochure as a reminder
for them to order at a later date. Brides will also be able to place an order at the Bridal Spectacular,
provided that they give a deposit on the cake.
Other advertising media to complement the three main campaigns will be through the following:

Color display advertising in the StarPhoenix newspaper

Annual birthday coupons for loyal customers

Farmer’s market involvement

Billboard on Idylwyld Drive and 20th Street

Radio advertising
The color display advertising in the StarPhoenix will be to promote the grand opening, but on an ongoing
basis it will be to advertise wedding cakes. As noted earlier, sales of wedding cakes will be a nonrecurring customer base however these sales increase the predictability of timing and cash flows because
the bride and groom would be pre-ordering. Therefore, it is important to continue the promotion of
wedding cake advertisements.
The annual birthday coupons will be for loyal customers that sign up to be on the Crave customer list.
These customers would be sent a coupon for a free cupcake on their birthday in the mail. This will be
aligned with the idea that the cupcakes are a treat and an indulgence. In addition, if a customer comes in
for a cupcake on their birthday other friends may accompany them, therefore, generating additional sales.
Involvement with the farmer’s market would be to generate awareness in the first year of operations. The
farmer’s market attracts the unique, trendy individuals of Saskatoon thereby fitting into Crave’s target
market. This will involve setting up a booth every Wednesday in the summer time months of July and
August to sell cupcakes. Only one summer of this would be done as its purpose is to generate awareness
and word of mouth at start-up.
The billboard will generate awareness for the grand opening as well as build a brand for Crave as it
provides contact with about 94,000 vehicles daily (Equity Billboards).
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 27
Crave Cupcakes and Cookies 2011
Radio advertising would involve one thirty second advertisement in the morning and one in the evening
on both FM and AM radio for seven days a year. The purpose is to maintain awareness and remind
listeners to visit Crave.
In general, all of the advertisements will involve using bright, fun colors and pictures such as Crave’s
signature blue and white polka dots as well as pictures of the creative and unique products. This will
attract the target market of the energetic, fun loving, and care free women. The advertisements will also
be designed to encourage these women to indulge and treat themselves.
The costs of the advertising campaigns described above are outlined in Appendix XI.
Advertising campaigns which would provide free advertising include the following:

Craving of the month campaign

Crave website

Facebook
The Craving of the month campaign features a new cupcake or treat every month and will be advertised
on the Crave website, Facebook, as well as e-mailed to the customers that are on the customer list. This
will entice customers to come in at least once a month to try out the monthly feature.
The Crave website shows the product offerings, Craving of the month, as well as prices. As the website is
already developed through the locations in Calgary and Edmonton, no additional costs would be
necessary.
Facebook will provide Crave the opportunity to develop a network of people in Saskatoon, as well as
feature the Craving of the month, location, and product features.
6.0 Financial Plan
6.1 Financing Description
Crave will use long term debt to finance the capital asset acquisitions and an operating line of credit has
been secured with a local bank. The operating line of credit rate is prime plus three percent and the loan
will be utilized if Crave is experiencing cash flow shortages.
A 6% interest rate was chosen as the interest rate on the long term debt as Crave is likely to be viewed as
a risky venture, especially since the banks in Saskatoon are not familiar with the business. To counter this
higher risk and keep a moderate interest rate, the start-up Crave can use the other stores in Calgary as
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 28
Crave Cupcakes and Cookies 2011
guarantors since they have established profits and cash flows. Refer to Appendices XIII, XIV, XV for the
loan amortization schedules relating to the original capital asset acquisitions, and additional acquisitions
in years four and five.
An amount of $100,000 will be sought as equity from an investor. This will ensure there is enough money
for other start up costs such as lease deposits, one month’s worth of inventory costs. This will result in a
debt to equity ratio of 1.15 in the first year (Appendix VI). Over the five years projection, the debt will be
paid down and Crave will start earning profits, thus increasing the retained earnings. The debt to equity
ratio will be lower, signifying that the business is able to finance itself through its own earnings rather
than relying on outside sources. The projected debt to equity ratio in year 5 is 0.48 (Appendix VI).
6.2 Required Rate of Return
Crave has determined that a required rate of return on equity of 25% is applicable to the business. This is
considered reasonable as small businesses average between 20 and 25% as the required rates of return.
The risk has been assessed at the high end of the range due to several factors. There are two major
competitors in Saskatoon and several minor competitors and Crave prices will be higher than the
competitors and a high volume of sales is required for break even. As the marketing plan indicated, the
ratio in Saskatchewan for number of speciality baked goods stores to number of individuals is higher than
it is in Alberta, thus indicating a more saturated market. However, Crave’s competitive advantage of
variety, location, and brand image restricts the rate of return from exceeding 25%.
6.3 Critical Success Variables
The critical success factors in the business include meeting the sales projections. It is difficult to
determine how much product to bake ahead of time in order to avoid having spoilage or running out of
products before close. It will take a few months into operations to determine the amount of production
that is required each day, and this will have to be monitored continuously. The sales volume is the most
important factor so that fixed costs can be covered. The prices of the products are fixed so as to
compliment those of the other Crave stores open across the country and posted on the website.A second
success factor is inventory management and quality. This means keeping track of the amounts in
inventory and ensuring that the perishable items such as cream and milk are not nearing their expiry dates.
This will ensure the items are of good quality as the inputs are fresh and produced daily. As well, proper
management of inventory will reduce the amount of spoilage that will result.
6.4 Best and Worst Case Scenarios and Sensitivity AnalysisAs indicated, one of the most critical
success factors is the sales volume. Due to this, the sensitivity analysis has been done using variances in
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 29
Crave Cupcakes and Cookies 2011
sales volumes to calculate the best and worst case scenarios. The sales volumes in the best case scenario
assume a full oven of three rounds per day in the first year, increasing to four full rounds in the fifth year.
The best case also assumes that all items sell, resulting in zero spoilage or waste. This results in a profit in
all five years. Refer to Appendix XVI.
The worst case scenario (Appendix XVIII) assumes that Crave will only be able to sell two rounds of
baking each day in the first year, increasing to only three rounds in the fifth year. Spoilage and waste has
been calculated at approximately one to two percent of sales. This percentage is based from the spoilage
in the base case which is determined from Appendix II. The result is a loss in all five years. However, the
loss appears to be shrinking each year which signals that the business still has potential but it will take
more than the five years to realize a profit.
6.5 Break Even Analysis
The break even analysis has been calculated under Appendix V. The weighted sales price is based off of
the number of units sold. The variable cost percentage allocation is calculated using the dollars of sales
per unit over the total sales and assigned to the products. This is also based off of the number of units
sold. This resulted in a weighted gross margin of $0.81 in the first year. To break even $560,856 worth of
revenue would have to be generated with 235,871 items sold. Appendix V also provides a breakdown of
the number of units required to break even into cookies, cakes, regular cupcakes, and mini cupcakes. In
the first year (Appendix II), the expected sales are only $527,325, thus falling short of the break even
amount. In the second year, Crave will break even as expected sales are $589,390 and the break even
amount is $566,950. Crave will also break even in years three through five.
6.6 Ratios
The debt to equity ratio is decreasing. This indicates that Crave is able to pay off the long term debt that
was associated with the capital asset purchases. This is indicative of a health y company.
The industry average for cost of sales as a percentage of revenue is 57% (Canadian Industry Statistics),
while Crave Cupcakes sees 69% in the fifth year (Appendix VI). Crave is higher than the industry
average, but is comfortable with this fact for a few reasons. First, the company has estimated the amount
of spoilage and waste that would occur each year, which affects the cost of sales as a percentage of
revenue ratios. In addition, Crave is confident that growth will continue in the years beyond the financial
projections.
Crave is projected to enjoy an increasing return on assets and on equity (Appendix VI). The net profit
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 30
Crave Cupcakes and Cookies 2011
margin increases up to year three, and then decreases in year four due to the additional capital asset
outlays and the addition of the part time baker. The net profit margin continues to increase in year five.
The net profit margin is under the industry average, but Crave is comfortable with this as the company
expects to continue to see improved results and the company is still growing.
The return on equity is also growing, which indicates a good investment for the equity shareholders. Due
to the significant capital outlays in the fourth year, and the use of an additional part time baker, the return
on equity decreases in the fourth year in comparison to year three, but increases again in the fifth year.
6.7 NPV and IRR
Using the above discussed rate of return of 25%, the net present value after five years is calculated as
$87,581. This positive number indicates that the business will earn more than its original investment. The
upfront investment on capital assets will be $88,400 however there are positive cash flows from
operations beginning in the first year which will help fund the investment.
The internal rate of return is determined to be 36%. This shows that the investment will produce the
required return on equity as it is over the 25% required rate of return. Thus, the business will earn more
than what the investors require, even though it is a higher risk venture.
The payback period is calculated to be just less than four years, which is a longer time frame than what
most investors require. This would be a downside to investing with Crave as one will not receive their full
investment for an extended period of time, compared to other ventures. This is slightly mitigated due to a
higher required rate of return.
6.8 Overall Feasibility of Crave
Due to Crave’s knowledgeable and experienced manager, the unique and trendy Broadway Avenue
location, and a strong marketing plan, the business plan for the expansion of Crave Cupcakes & Cookies
into Saskatoon is projected to be a success as the investment will see a positive net present value and an
internal rate of return that exceeds the required return on investment. Crave will be proud to start
preparing indulgences in Saskatoon!
7.0 References
“2006 Community Profiles”. Statistics Canada. Web. 06 July 2011.
<http://www12.statcan.ca/census-recensement/2006/dp-pd/prof/92-
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 31
Crave Cupcakes and Cookies 2011
591/details/page.cfm?Lang=E&Geo1=CSD&Code1=4711066&Geo2=PR&Code2=47&Data=Count&Sea
rchText=Saskatoon&SearchType=Begins&SearchPR=01&B1=All&GeoLevel=PR&GeoCode=4711066>
“Canadian Industry Statistics”. Gross Domestic Product: Bakeries and Tortilla Manufacturing. Web. 23
June 2011.
<http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic3118vlae.html >
“Establishments”. Bakeries and Tortialla Manufacturing. Web 07 July 2011.
http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic3118etbe.html
“Equity Billboards”. Equity Billboards. Web. 07 July 2011.
<http://www.equitybillboards.com/>
“Industry: Baker”. Salary for Industry: Bakery. Web. 23 June 2011.
<http://www.payscale.com/research/CA/Industry=Bakery/Salary>
“Saputo Fruits Ltd.” Profile Canada. Web. 07 July 2011.
<http://www.profilecanada.com/companydetail.cfm?company=183629_Saputo_Fruits_Ltd_Saskatoon_S
K>
“SME Benchmarking”. Industry Canada. Web. 05 July 2011.
<http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic3118bece.html>
“Sysco Canada”. Sysco Canada Home. Web. 04 July 2011
<http://www.sysco.ca/canada/home.cfm?id=2421>
Fleischhacker, N., Heron, D., Nagle, S. Paquette, T.
Page 32