Tim's Coffee Shoppe is situated in a mid-sized city with a busy downtown business district and near a large university. The business is strategically positioned to attract many customers in the city, especially students who would potentially impact sales. Another factor that is likely to drive up sales is the wide variety of coffee beverages land associated products the Shoppe offers. There are different flavors for different customers. The Shoppe also features an ambient interior that offers a feeling of relaxation while catching up with friends over a drink. However, it faces fierce competition from a well-established national chain that would threaten its sales. Nonetheless, it's positioning in the market, and prices are designed to improve its revenues and profits.
More customers and more sales will translate to improved income earned. Currently, Tim's Coffee Shoppe's income statement shows an income earned of $475,680. With the district's strategic market positioning and other strategies like competitive pricing and excellent interior design, the figure is more likely to increase.
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However, certain expenses will increase at a significantly larger margin. For instance, salary expenses will increase. This is because the Shoppe will need to employ additional staff to meet the increasing demand. Alternatively, to motivate the current workforce to be more productive, Tim will need to make their employment perks more attractive. Another expense that is likely to shoot substantially is the supplies expense. Due to more frequently moving products due to increased demand, the business will require more materials to sustain the demand. Tim will be forced to make more regular purchases from the suppliers of the business. Depending on the rate of consumption, the expense may double or triple.
Other expenses may slightly increase while others remain constant. Tax and interest expense may increase slightly. Tax is determined by the amount of profits a business makes. Thus, even though income earned may increase, some expenses may also shoot significantly—the business may not increase its profits significantly. Interest expense originates from loans and other forms of credit funding. To meet the growing demand, Tim will need to secure loans as a source of capital to run the business successfully. New loans will come with new interest rates, which will contribute to the current expense. Rent, lease, and depreciation will remain the same unless the business changes location or acquires more long-term assets. The current lease agreement only applies to the refrigerator.
Insurance expense may or may not increase. Insurance is the amount a business pays an insurance company to shield it from possible risks. Whether the figure on the financial statement changes or stays, the same will depend on two factors. One, the coffee shop is exposed to more business risks forcing Tim to seek coverage from additional risks. Two, whether or not the business settles insurance expenses, it incurs in the financial year.
From the analysis, several businesses are moving in around Tim's coffee shop mostly because the shop is located in a busy business district. At the same time, the business is situated nearly a large university. Therefore, Tim's customers shall constitute students and corporate employees. The business is expected to increase, which will reflect in the company's earnings. At the same time, increased business activities mean more expenditure in running the business. The analysis highlights key aspects of the proforma income statement that are likely to change and the extent of these changes.
