Red Apple Spa Marketing, Operations, and Financial Management Analysis - Example

TABLE OF CONTENTS PARTICULARS PAGE NO 1.0 Executive Summary 4 2.0 Introduction 5 3.0 Marketing 6 3.1 Products or Services to be Offered 6 3.2 Target Market/ Customers 7 3.3 Industry/Competitors Analysis 7 3.4 Location 8 4.0 Operations 9 4.1 Types of Financial Services Required 9 4.2 Hiring and Staff Requirements 9 4.3 Production/Assets Required 10 5.0 Financial Management Analysis 11 5.1Identification of Financial Goals 11 5.2 Evaluation of Risks 12 5.3 Ratio Analysis 13 5.4 Vertical and Horizontal Analysis 14 Projected Yearly Profit and Loss 15 Outline of Funding Needs 16 Investment Proposal 17 6.0 Conclusion 18 7.0 References 19 8.0 Appendices 20 1.0 Executive Summary The report provides a detailed business plan for Red Apple Spa which is to be shortly opened at Parliament Square, Off Parliament Place, Melbourne, Australia with prime focus on women and girls. The report further provides an investment plan for Mr. Ron Holiday who can certainly look upon to invest in the spa business due to its higher profits and better return of investment along with future potential of sustainable growth. Furthermore the financial creditability of the business plan is very strong and ensures guaranteed returns for Mr. Ron Holiday. The Red Apple Spa shall provide premier spa services for women and girls and looks to target female of age group 25 to 55 years. The business shall hire a systematic management team and is looking towards an equal partner for $60000. The ratio analysis of anticipated financial statements looks promising with superb return on investment and higher profits along with an outlook for future expansion in terms of providing franchise business. Business along with financial risks have been identified which includes both systematic and unsystematic risks and can be curtailed by generating better cash flows. Business strategies have been systematically developed to ensure price/value relationship and ensure complete customer satisfaction. 2.0 Introduction This report looks to prepare a business plan for a spa business with a three year projection. The report aims to plan and set up a spa business for which an investment plan shall be presented to a potential investor, Mr. Ron Holiday. The Red Apple Spa shall be fully dedicated to ensure complete customer satisfaction along with a friendly, fair and creative work environment. The Red Apple Spa shall be a complete day spa experience only to female customers and shall look to serve the beauty and health needs of women and girls. The customers shall be provided with a wide variety of services such as aromatherapy, head massage, oil massage, facing and anti-aging treatments, waxing services, hair services, nail treatments, make-ups along with many other skincare services exclusive for females. The mission of the spa is to supply excellent services and quality products to enhance their physical appearance and provide mental satisfaction. The management structure of the spa will be systematically organized into different experts an professional managed by different team leaders and other subordinates (Prosch et al, 2000). All departments shall work in a synchronised manner to operate in a co-operative manner. The spa has set achievable standards or targets and decided to achieve them through additional financing in the form of long term debt which shall be collateralized by the assets of the company and shall be paid from the generating cash flows of the business. The spa shall initially require a capital of $ 120000 apart from the long term debt for which it shall look towards a potential investor who shall enter into a partnership with the owner. The partnership shall be an equal partnership of $60000 each and the profits from the business shall be equally divided as well. 3.0 Marketing Marketing is crucial for the success of any business or organization as it figures out the strengths and potentials for the business which helps a business in attracting maximum number of customers. The targeted customers need to be identified as strategies shall be developed according to the targeted customers and products or services shall be designed or re-designed accordingly. 3.1Products or Services to Be Offered Red Apple Spa shall mainly look towards providing products and services which are directed towards its business objectives. Initially as a start up, the spa shall look to provide the basic or elementary services such as skin care treatment, massage, waxing, sauna, hydrotherapy, Jacuzzi, nail treatments etc and after gathering a loyal set of customers shall look towards services which are directed as per specific needs and wants of its customers. The spa is specifically designed to meet the needs of female customers therefore the services for females are equipped with provisions of skin care and body therapy. Different type of facials shall be provided as per skin demands and products which suits and are specifically designed for female skin. Indian Head Massage shall be an innovative service which is meant for face, head, neck and shoulders and shall look towards overcoming mental stress and tension, cleansing and rebalancing the entire body. Massage therapy is another service which is expected to draw a larger number of customers. The therapy shall offer three different types of massage which a guest can select individually or a combination of two or all. The first such massage shall be Swedish Massage which uses aromatherapy to enhance the healing effects of massage with handmade mix of aromatic oil. The second massage shall be “Heated River Stone Massage”, where stones shall be placed strategically on specific points of the body to deeply warm the body parts while the muscles shall be consistently massaged, melted and released. The third shall be a Stress Relieving Spa Facial which shall be designed to soothe and soften female complexion while deeply de-stressing the entire body. A complete package of relaxation, calming and therapeutic. 3.2 Target Market/Customers The Red Apple Spa business lays it concentration on the beauty needs of women and girls so its major target group of customers are females within the age group 25 to 55 years of age. The business has planned to focus its services on corporate women, health minded individuals and females concerned about skin and looks. The spa looks towards a demographic and psychographic segmentation of its targeted market based on age, gender, income and other interest factors with major concentration on middle age women. Furthermore, The Red Apple Spa in order to convert its potential targeted customers into actual or real customers shall look upon different pricing strategy where the price of the services shall vary or depend upon the beauty packages. There shall be tailored made packages available to the customers. The customers can be further regular member of the spa by paying just $52.99 for one month and avail special offer and discounts. 3.3 Industry/Competitors Analysis In the health and wellness industry, Spa industry is currently placed at the top position. Customers can find structured and professionally delivered programs at various different types of spa which are specifically designed. There are various categories of spa across the world which is generally categorised in seven different formats namely: Club spa, Cruise Ship spa, Day spa, Destination spa, Medical spa, Mineral Spring spa and Resort or Hotel spa. The number of customers attracted towards spa has risen significantly on a global scenario with a sharp rise from 16.2 percent in 2009 to 43.7 percent in 2012. The number of competitors as a result of the same has increased significantly too, however the spa business is still a growing business as more people have become health conscious and anticipated results are positive in the coming future (Reinhard, 2003). The Red Apple Spa shall face though competition from both local Day spa and international spa such as Hotel or Resort spa or Cruise Spa. For the initial first year, it shall be difficult for Red Apple Spa to give better and reduced prices to its customers however, the spa shall compete with its competitors in terms of quality, services and reliability. Furthermore, the Red Apple Spa shall also have an added advantage of better and popular location in context to its competitors. 3.4 Location The Red Apple Spa shall be opened shortly at Parliament Square, Off Parliament Place, Melbourne, Australia, which is the central business district in the country. The location is within the heart of the city and draws both local and large number of tourist which adds to higher probability of the spa generating better and higher business. The Red Apple Spa shall be a new upscale destination which shall look towards a complete day spa experience exclusive for women and girls. The location is further characterised with few or no such premiere spa available in such location thereby it shall be first of such premier spa in the town. Furthermore a recent survey has been conducted where respondents were asked to submit their preferred location for a new spa with majority of respondents looked towards a spa in the Parliament Square, Melbourne. 4.0 Operations Any business can achieve success only after successful implementation of its operations. Strategies hold no real value unless there is proper management to implement such strategies and assets required for such strategies implementation. 4.1Types of Financial Services Required Red Apple Spa shall operate as a small or medium term business undertaking and is looking upon a partnership form of business. The business during its initial stage looks for two partners with equal sharing of investment and return on profits. The Red Apple Spa may at a later stage imbibe more partners depending upon the business volume. The spa has set year wise achievable standards or targets and decided to achieve them through additional financing in the form of long term debt which shall be collateralized by the assets of the company and shall be paid from the generating cash flows of the business. The spa shall initially require a capital of $ 120000 apart from the long term debt for which it shall look towards a potential investor who shall enter into a equal partnership with the owner. Further the long term debt shall be paid off with fixed instalment of $15000 per year. Long term debt is introduced not just as a source of working capital requirements but to ensure the benefits of leverage effect. 4.2 Hiring and Staff Requirements The management structure of the spa is organized and planned in a systematic manner to ensure right people at the right job. Red Apple Spa shall operate in three main areas which are massage, aesthetician and retail and shall hire people accordingly. Each segment shall have a fixed number of employees and a supervisor to look after the activities and services of each segment. There shall be a hierarchical system of management and the team of each segment shall be flexible depending upon the work pressure, customer demand and expertise of each department. The spa shall hire a lead manager who shall be just under the two partners and shall report to the partners of the spa. Each segment shall have a professional expert and at least three subordinates under him/her who shall act as both trainee and shall guide and help the experts in services provided. Further there shall be a receptionist to welcome and make bookings of all guests and 4-5 workers who shall look after the cleanliness and other basic needs of the spa. An accountant shall also be hired who shall look after all profits and cash flows along with a marketing technician whose major job shall be of promotion and analyzing market demands and developing strategies accordingly. 4.3 Assets Required The Red Apple Spa unlike any other business shall apart from the basic assets such as land and property require other assets which are essential for the spa services. Different segments of the spa shall require different assets which shall be specific for such segment services. Supplies in the form of facial kits, creams, lotion, herbal oils etc shall be required at almost every segment services which shall be purchased from local vendors on monthly basis as per requirements. 4 special designed massage tables along with chairs shall be required. An automatic body relaxation massage equipment shall be purchased along with small equipments for specific massage such as foot and head. Computers shall be installed both at the reception and massage rooms along with a separate computer for the purpose of accounts maintenance. Furthermore the spa shall be fully air-conditioned with free wifi and separate bathing and Jacuzzi installed for ensuring complete relaxation to its customers and ensuring highest customer satisfaction. 5.0 Financial Management Unlike strategic and operations management, financial management holds significance importance as it lays down the financial feasibility of any business plan or project. It explains about the future potential profits or losses that a business is expected to earn along with financial risk factors associated with the same. Furthermore it holds great significance in developing an investment proposal for investors who look upon it minutely to ensure higher and better returns and select the most appropriate business idea. A financial plan for Red Apple Spa is discussed as under. 5.1 Identification of Financial Goals Setting up financial goals is important for any business as goals once sets, strategies are formulated to ensure fulfilment of such goals and strict controlling measures are taken for any from the forecasted financial goals. It is to be noted that this financial goals are based upon certain assumptions such as: There is inflationary economy with high purchasing power. A growing market for spa in near future. Cash payments for maximum services apart from insurance premium. No burden of rising interest rates and changes in taxation structure. The financial goals which Red Apple Spa looks upon are: Lower booking of profits in its initial two years of start up with a sharp rise in profits from the third years onwards. No withdrawal in terms of drawings during its initial three years so as to maximize rotation of profits and earn higher profits in future years. Strict control over indirect expenses so as to maximize return on business. Churning of profits in future growth and expansion of business with purchase of new and technological advance equipments. Contingency plans to be developed along with provisions for any inappropriate situation which might affect the working capital requirements of the business. 5.2 Evaluation of Risks One of the significant risks for Red Apple Spa is entry of a similar competitor in the market which shall have a direct impact on its revenue generation and loss of real and potential customers which shall be clearly reflected in its profits. Furthermore there are financial risks associated with the business as the spa uses financial leverage and debt financing. There is potential financial risk in terms of the spa generating regular cash flows to be able to make payments of its long term debt financing. The business of spa is further exposed to both systematic and unsystematic business risks. Systematic risk is the general level of business risk resulting from fluctuating economical, political and market conditions. These are inherent risk and nothing much can be done about it apart from spa’s ability to correctly anticipate and react to changing conditions. The Spa business shall further be exposed to unsystematic risk like rising direct and indirect costs, expenses, insurance and marketing which can however be controlled by the proper management and maintaining an operating leverage with generation of free cash flows. However despite the aforesaid systematic and unsystematic risks, Mr. Ron Holiday can look to invest in the Red Apple Spa as any business is prone to such risks but with effective management skills such risks can be curtailed to an extreme extent. 5.3 Ratio Analysis Ration analysis is an important tool to evaluate various aspects of any business. The ratio analysis of Red Apple Spa is based on its projection of future income and expenses. Some of the major ratios have been discussed as under. (All ratios has been calculated and is the part of appendix) Profitability Ratios: The profitability ratio of Red Apple Spa is attractive as the net profit margin ratio is expected to increase significantly in the third year to 16.62% from 11.7% in 2013. Although there might be slight decrease in net profit margin ration in 2014 to 8.62%, it is not much of a concern as the business is looking for consolidation in its initial two years with profit maximization from third year onwards. Similarly the return on investment and return on capital employed show strong profitability as the return on capital employed may rise up to 39.21% in 2015 from 7.72% in 2013. Activity Ratios The debtor turnover ratio shall become zero in 2015 which shows the spa having superb cash management skills with no debtors thereby ensuring high cash flow generation and meeting up its working capital requirements and ensure avoidance of most of unsystematic business risks along with financial risks. However the accounts payable ratio shall rise from 0.8 in 2013 to 1.36 in 2015 which is m=not much of a concern due to high cash generated. Liquidity Ratio The current ratio of Red Apple Spa is satisfactory for the year 2013 at 2.06 which means it shall be able to pay off its current obligations with current assets. However the concern is third year where the ratio stands at 0.28 in 2015 showing high signs of company not being able to meet its current obligations with current assets. However on deeper scrutinizing of the balance sheet, the spa is more likely to introduce loan in 2015 for ensuring leverage effect making it satisfactory for investor to invest in the business. The net working to sales ratio show similar trends. Return Ratios The return ratios for Red Apple Spa draws the attention of its investors as the earning power ratio shall rise from 0.23 in 2013 to 0.62 in 2015 showing significant returns to its investors. Furthermore the return on equity shows phenomenal growth from 0.03 in 2013 to 0.1 in 2015 making it a business which can definitely be invested upon. 5.4 Horizontal and Vertical Analysis Horizontal Analysis Horizontal analysis measures the trends and changes in financial statement items over a time. Here 2013 has been taken as a base year. The horizontal analysis has been shown in the appendix The horizontal analysis represents significant growth in the third year with income rising to 328% in 2015 from 2013 and profits rising to 507% in 2015 from 2013. There has been rise in the expenses as well however the profits rise is much higher. Vertical Analysis Similar to the horizontal analysis the vertical analysis represents the business to a one which investor looks to invest upon. The vertical analysis has been shown in the appendix. There has been sharp rise in equipments showing more technological advancement for the spa. Furthermore long term debt has fallen from 32.94% in 2013 to 13.28% in 2015 as a percentage of total shareholder’s equity and profit expressed in terms of shareholder’s equity has risen from 2.67% in 2013 to 10.27% in 2015 showing better churning of profits and sustainable future growth for the business. 5.5 Projected Yearly Profits and loss The projected yearly profits and loss statement for Rep Apple Spa is analysed and discussed as under. INCOME STATEMENT FOR THE YEARS ENDING DECEMBER 31, 2013, 2014 AND 2015 (IN THOUSANDS) 2013 2014 2015 Income $ 76,152 $ 106,772 $ 325,930 Less Expenses Wages expense 61,454 90,098 249,767 Supplies expense 1,328 1,208 5,408 Rent expense 500 500 500 Insurance expense 1,810 3,611 13,838 Telephone expense 900 1,000 1,000 Electricity expense 1,250 1,155 1,256 Profit $ 8,910 $ 9,200 $ 54,161 As already have been highlighted and explained in the ratio and vertical and horizontal analysis. The Red Apple Spa looks an ideal business to be invested for as the profits booking shall start from 3rd year onwards with forming market base in its initial two years. Although certain expenses such as wages are on rise the main reason for the same is business expansion with new technological advancements in form of equipments. Insurance expenses also show a significant rise which is on account on insuring the new equipments. In a nutshell, profits are to rise significantly and return on investment shall be very high. 5.6 Outline for Funding Needs The Red Apple Spa is looking for a partner with a partnership of 50% in its capital introduction and equal sharing of profits as well. The same could be well established by taking a term loan however, the business idea has been set up for future growth and long term debts has already been considered. Furthermore, a business partner is more required to look after the business once the business achieves its break-even point and looks towards franchise business in the future years. Adding a partner and not introducing loan shall also reduce the financial risk of liquidity problems and ensure steady maintenance of its working capital requirements. The partner shall have an added advantage of high return on its investments as clearly reflected in the financial analysis of the spa. 5.7 Investment Proposal Mr. Ron Holiday should look towards becoming an equal partner in the Red Apple Spa business by just investing $60000 because of the following benefits. The spa is to be the first of premier service spa with location advantage. Future market of spa business looks very lucrative with high growing rates. Strong start-up business plan by consolidation of business in its initial two years and then looking towards profit maximization. Huge return on capital employed from 7.72% in 2013 to 39.21% in 2015. Clear payments of long term debts and inclusion of additional loan in third year to ensure leverage benefits. Business expansion in the third year with purchase of new technological advance equipments once a loyal set of customers is build. Achievement of break-even in quicker time due to high market growth rate. Positive profit booking from 11.7% in 2013 to 16.62% in 2015. Profit expressed in terms of shareholder’s equity anticipate to rise from 2.67% in 2013 to 10.27% in 2015 showing better churning of profits and sustainable future growth for the business. Sustainable rise in return on equity and earning power ratio making it an ideal business to be invested upon 6.0 Conclusion The report looks to provide a complete business plan for a spa business which Mr. Ron Holiday can definitely look to invest upon. The Red Apple Spa shall be set up at Parliament Square, Off Parliament Place, Melbourne, Australia and look to target both girls and women of age group 25-55 years. The market for spa has shown significant growth and more likely to show positive trend in future years. The financial analysis of its anticipated financial statements show initial building up the business in initial two years and profit booking from third year onwards with future expansion and ensuring sustainable growth of the business. 7.0 References Prosch, Allen, Douglas Jose, Ram Valluru, Jody Wichmann, Thomas Dorn, and Michelle Semerad. Achieving Success With a Business Plan. University of Nebraska Cooperative Extension, 2000. Reinhard R. Bergel, PhD, Hannelore R. Leavy – The Spa Encyclopedia: A Guide to Treatments & Their Benefits for Health & Healing, Thomson Delmar Learning, Clifton Park, New York, USA, 2003 8.0 Appendices 1.0 Calculation of Ratios Sr No RATIO FORMULA WORKING       2013 2014 2015   PROFITABILITY RATIOS         1 Net Profit Margin Operating Profit/Net Sales *100 (8910/76152)*100 (9200/106772)*100 (54161/325930)*100       11.7 8.62 16.62             2 Return on Investment Ratio Net Profit after interest and taxes/Shareholder's fund (8910/33910) 9200/443110 54161/527271       0.26 0.02 0.102             3 Return on Capital Employed (Net Profit After Tax/ Gross capital employed)*100 (8910/120000)*100 (9200/128910)*100 (54161/138110)*100       7.42 7.14 39.21   Activity Ratio                     4 Debtors Turnover Ratio Total Sales/ Accounts Receivable (76152/150000) (106772/200000) -       0.51 0.53 0             5 Accounts Payable Ratio Total Sales/ Accounts Payable (76152/95000) (106772/210000) (325930/240000)       0.8 0.5 1.36   Liquidity Ratio                     6 Current Ratio Current Assets/Current Liabilities (195910/95000) 230110/210000 73281/265000       2.06 1.09 0.28             7 Net Working capital to sales ratio Current assets- Current liabilities/Sales (195910-95000)/76152 (230110-210000)/106772 (73281-265000)/325930       1.33 0.19 -0.59               Return Ratios                     8 Earning Power Ratio Operating Income/Total Assets (76152/333910) (106772/443110) (325930/527271)       0.23 0.24 0.62             9 Return on Assets Net Income/ Total Assets 8910/333910 9200/443110 54161/527271       0.03 0.02 0.1             10 Return on Equity Net Income/ Shareholder's Equity 8910/333910 9200/443110 54161/527271       0.03 0.02 0.1 2.0 Horizontal Analysis of Income Statement Particulars 2013 2014 Increase/decrease % change 2015 Increase/decrease % change                 Income 76152 106772 30620 40.21 325930 249778 328.00                 Less Expenses                               Wages expense 61454 90098 28644 46.61 249767 188313 306.43 Supplies Expenses 1328 1208 -120 -9.04 5408 4080 307.23 Rent Expense 500 500 0 0.00 500 0 0.00 Insurance Expense 1810 3611 1801 99.50 13838 12028 664.53 Telephone Expense 900 1000 100 11.11 1000 100 11.11 Electricity Expense 1250 1155 -95 -7.60 1256 6 0.48                 Profit 8910 9200 290 3.25 54161 45251 507.87 3.0 Horizontal Analysis of Balance Sheet Particulars 2013 2014 Increase/decrease % change 2015 Increase/decrease % change Assets               Current Assets               Cash 45910 30110 -15800 -0.34 73281 27371 0.60 Accounts Receivable 15000 20000 5000 0.33 0 -15000 -1.00                 Non-Current Assets               Land 63000 63000 0 0.00 63000 0 0.00 Equipment 75000 150000 75000 1.00 210990 135990 1.81                 Total Assets 333910 443110 109200 0.33 527271 193361 0.58                 Liabilities and Shareholder's Equity                               Current Liabilities               Accounts Payable 95000 210000 115000 1.21 240000 145000 1.53 Loan         25000 25000 0.00                 Non Current Liabilities               Long Term Debt 110000 95000 -15000 -0.14 70000 -40000 -0.36                 Owner's Equity               Capital 120000 128910 8910 0.07 138110 18110 0.15 Profit 8910 9200 290 0.03 54161 45251 5.08                 Total Shareholder's Equity 333910 443110 109200 0.33 527271 193361 0.58 4.0 Vertical Analysis of Income Statement Particulars 2013 % CHANGE 2014 % CHANGE 2015 % CHANGE               Income (Sales) 76152 100 106772 100 325930 100               Less Expenses                           Wages expense 61454 80.70 90098 84.38 249767 76.63 Supplies Expenses 1328 1.74 1208 1.13 5408 1.66 Rent Expense 500 0.66 500 0.47 500 0.15 Insurance Expense 1810 2.38 3611 3.38 13838 4.25 Telephone Expense 900 1.18 1000 0.94 1000 0.31 Electricity Expense 1250 1.64 1155 1.08 1256 0.39               Profit 8910 11.70 9200 8.62 54161 16.62 5.0 Vertical Analysis of Balance Sheet Particulars 2013 % CHANGE 2014 % CHANGE 2015 % CHANGE Assets             Current Assets             Cash 45910 13.75 30110 6.80 73281 13.90 Accounts Receivable 15000 4.49 20000 4.51 0 0.00               Non-Current Assets             Land 63000 18.87 63000 14.22 63000 11.95 Equipment 75000 22.46 150000 33.85 210990 40.02               Total Assets 333910 100.00 443110 100.00 527271 100.00               Liabilities and Shareholder's Equity                           Current Liabilities             Accounts Payable 95000 28.45 210000 47.39 240000 45.52 Loan         25000                 Non Current Liabilities             Long Term Debt 110000 32.94 95000 21.44 70000 13.28               Owner's Equity             Capital 120000 35.94 128910 29.09 138110 26.19 Profit 8910 2.67 9200 2.08 54161 10.27               Total Shareholder's Equity 333910 100.00 443110 100.00 527271 100.00 Read More