Livoria Sandwiches Inc. provides exceptional quality sandwiches at a great price. Livoria has been able to maintain profitability since inception and has continued to grow its business and revenues. Recent unforeseen external events have caused significant cash flow issues and shook the family business. Livoria is hoping to see annual net income of $1. 1 million by 2015. This report will provide alternatives and the pros and cons of initiating these alternatives.
A recommendation of one of the alternatives as well as an implementation plan will be provided to assist in obtaining the goal, maintaining profitable and alleviating the cash flow issue. Current Situation Livoria is facing an unforeseen legal obligation that impacts its current earnings and cash flows. Livoria however is in a good position to take advantage of a growing demand and changing customer demographic in the City of Dawkins. Exhibit 1, SWOT analysis, further describes the current situation at Livoria.
Key Success factor – High quality unique product and faithful customer base Financial Assessment The current financial situation does not look great.
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However if the onetime extraordinary allowance for a legal action is removed, Livoria shines. Livoria would have achieved a profit margin of 24% in 2012; this is the best in the industry. Livoria obtains the highest contribution margin at 53% as well as best sales growth at 5. 4%. (Appendix B Livoria Sandwiches Inc) Looking forward we see that our demand is coming in very strong, too strong in fact for our current capacity.
Pro-forma financial statements have been generated showing what our realistic potential is for the next 3 years in Exhibit 3. Current capacity constraints will decrease production on our lowest Contribution margin items, meat ball and veal. With this happening we will not meet our 1. 1 million net income goal by 2015 The key stakeholders (Paul, Sam) have varied opinions on how to proceed and the following recommendations are developed with the stakeholder’s opinions and objectives in mind. Preferences Franchise – Paul Enhance menu – Sam Net income of 1.
1 million – Paul &Sam Maintain Control (not franchise) – Sam Not to borrow money from bank– Paul & Sam Alternative # 1 Franchise – Exhibit 2 Pros Increase Market share and create brand awareness Create additional cash flow and contribution for owners as seen in Exhibit 3 We may be able to meet demand by franchising additional shops Less stress on the Livoria Brothers allows for time to focus on additional business options Will meet the $1. 1 Million goal Cons Loss of control Loss of family environment New owners may produce inferior product
With lack of control Livoria may lose quarterly health audits and damage reputation Difficult to implement The alternative will help obtain the main goal, however it is not recommended because it does not fit well with mission and vision of Livoria. It’s a quick fix however it can and will have a long term negative impact Alternative #2 Expand the Menu – Exhibit 4 Pros Increase revenues As we once again decrease the production of our lowest CM per unit items now (veal, chicken and meatball) we will be able to meet the demand of the higher CM vegetarian options We will achieve our 1.
1million target Expand target market attract new customers Generate an additional $191K in cash flow by end of year 3 Capitalize on the shifting desires of the industry Creates growth Cons May lose current faithful customers because of lack of meat sandwich production Will need to train employees on new sandwiches Advertisement costs With the small stores we may not have the space to produce additional sandwich types This alternative will allow the brothers to obtain their goal and is in line with the company corporate values, mission and vision.
Alternative #3- Increase Current Menu item Prices Exhibit 5 Pros With the growing household income, it is feasible to increase prices Additional net income and cash flow are generated Net income of $1. 1 million by 2015 will be obtained Simple implementation Faithfull customers will be willing to pay for consistent quality No loss of quality Cons Some customers may be lost Loss of market share Forecasted demand is based on current prices, this could be far different if price increase is included Doesn’t consider the changing tastes of the customers Growth will not be seen
Although this is a very good alternative, it is not recommended for Livoria. Reason is, the current demand forecast could be different with price increase. The risk is too high and doesn’t create growth. Recommendation The best option for Livoria at this time is to expand its menu into the vegetarian options. Not only is this the best way to prepare for the future but it will also meet all of the preferences of the stakeholders while aligning with the corporate objectives, mission and vision of the company. The $1. 1 million goal will also be met by the end of 2013. No constraints will be broken. Implementation
In order for Livoria to be successful in implementing the menu expansion, it must first contact its suppliers and ensure they can meet the change and increase in veggie demand. Next training and logistics must be arranged in house to adapt to the change in menu options. Quality must be maintained and no short cuts can be made. With the financial analysis provided in Exhibit 4 we see that in order to meet the new demand we must remove other menu items, and limit the production of other menu items (highlighted). A schedule needs to be in place to ensure we are within our time constraints, as at this moment, no new staff can be recruited.
Next an advertising campaign is recommended to ensure that the potential vegetarian clients are informed of our new offerings, $20,000 per year in ad expenses has been budgeted. Conclusion With a swift implementation the Livoria brothers can meet their goals without losing focus on the corporate objective and passion that started this business. The future is very bright and Livoria can expect to bounce back as long as we keep an eye on the ever changing demands of the market. Exhibit 1 SWOT Analysis Strengths Faithful Customers High quality Low cost (CM) Location (Zone 1) Restaurant Layout
Market share Low employee turnover Fresh Weakness Limited menu Niche target market (sandwiches only, non veggie) Small stores / limited staffing Current Cash flow Tax accountant Opportunities Expand menu to meet local demand Growing market Affordable Vegetable supplier for veggie menu Growing household income can allow for increased prices Very few Sandwich food in Zone 1 Threats Limited suppliers Legal insurance coverage Quarterly Health audits Start up fast food chains Exhibit 2 – Franchise Exhibit 3 con’d Exhibit 4 – Expand the Menu Exhibit 4 Con’d Exhibit 5 – Increase Prices