Financial Plan – Starbucks
ANSWER
Financial Plan – Starbucks
Description of the organization
Starbucks Corporation is an American multinational chain of coffee houses. The firm headquartered in Seattle Washington is the world’s largest chain of coffee houses. It is also a major representation of the second wave of coffee culture in the United States. As of 2020,
Starbucks had around 32,660 stores around the globe. The chain of stores also offers free Wi-Fi to its consumers who are present to have a coffee drink or any form of beverage.
The need for funding the company
There is a need for Starbucks to however expand to more nations and locations across the world. Expansion is important to the business in that it will enable the firm to reach out to a new group of customers. Despite the firm having a well-mined customer base, the firm has an opportunity of adding new consumers. As a result, this will help boost the sales and profit margin of the company. As a result, the firm will be able to grow further and be competitive in the market.
Sources of funding
The most suitable source of funding for the company will be by borrowing from banks and also from bonds. Starbucks has a great financial record and could hence easily access funding from a bank. Its financial position is surety to the banks of its ability to repay back the loans with some interest rate. Another source of financial capital is a bond. This entails a financial contract issued by various levels of government.
The risk associated with the sources of funding
A major risk of taking a bank loan as a source of funding is first the high-interest rate that the firm may incur. In most times, there is a likelihood of fluctuating interest rates, which can be influenced by a changing economy (Cappetto, 2019). By taking a huge loan, a company is likely to lose control by offering a percentage of the ownership stake in the business. The primary risks associated with taking a bond include credit risks, interest rate risks, and also market risks.
Most suitable sources of funding
Therefore, for Starbucks then the most suitable source of funding will be to take a loan from the bank. This is based on the advantage of having a bank loan over a bond. It is also influenced by the risks faced between taking a bank and bond loan.
Cost of capital for both short term and long-term funding sources
As of today, Starbucks’s weighted average cost of capital is 6.21% (WSJ Markets, 2021). This is an indication that the firm has the ability to commence the expansion investment, which will help generate more value than the cost of capital. The firm clearly generates higher returns on investments than it costs to raise the capital needed for investment (WSJ Markets, 2021). This means that it earns excess returns and is, likely to continue generating positive excess returns in the long term, meaning that its value will increase.
Estimation of direct costs
Direct costs estimation is $10million, which will be cut down as following:
| Capital | $350,000 |
| Marketing | $100,000 |
| Labor | $150,000 |
| Equipment | $200,000 |
| Inventory | $180,000 |
| Miscellaneous | $20,000 |
| Total | $10,000,000 |
| Profit and Loss Projection (3 Years) | |||||||||||||
| Starbucks | |||||||||||||
| 2021 | |||||||||||||
| 2021 | % | 2022 | % | 2023 | % | ||||||||
| Sales | $100,000 | 100.00% | $150,000 | 100.00% | $180,000 | 100.00% | |||||||
| Cost/ Goods Sold (COGS) | $35,000 | 35.00% | $45,000 | 30.00% | $70,000 | 38.89% | |||||||
| Gross Profit | $ 65,000 | 65.00% | $105,000 | 70.00% | $110,000 | 61.11% | |||||||
| Operating Expenses | |||||||||||||
| Salary (Office & Overhead) | $10,000 | 10.00% | $12,000 | 8.00% | $ – | 0.00% | |||||||
| – | – | – | |||||||||||
| Outside Services | $5,000 | 5.00% | $5,000 | 3.33% | $5,000 | 2.78% | |||||||
| Supplies (off and operation) | $1,000 | 1.00% | $1,000 | 0.67% | $1,200 | 0.67% | |||||||
| Repairs/ Maintenance | $1,000 | 1.00% | $800 | 0.53% | $600 | 0.33% | |||||||
| Advertising | $2,000 | 2.00% | $2,000 | 1.33% | $2,500 | 1.39% | |||||||
| Total Expenses | $ 19,000 | 19.00% | $ 20,800 | 13.87% | $ 9,300 | 5.17% | |||||||
| Net Profit Before Taxes | 46,000 | 84,200 | 100,700 | ||||||||||
| Income Taxes | – | – | – | ||||||||||
| Net Operating Income | 46,000 | 84,200 | 100,700 | ||||||||||
References
Cappetto, T. (2019). 5 Risks Businesses Face When Getting a Loan. Retrieved from https://www.insightsforprofessionals.com/finance/funding/5-risks-businesses-face-when-getting-loan
WSJ Markets. (2021). Starbucks Corp. Retrieved from https://www.wsj.com/market-data/quotes/SBUX/financials/annual/income-statement
