Chapter 4 — Exercises

Thirty-four problems, graduated from recall through applied judgment. Items marked with a dagger (†) have worked solutions in the Answers to Selected Exercises appendix — try them before you look.

Every computational item in this set foots. If your column does not add up, the error is yours, and finding it is the exercise. Do the arithmetic in a spreadsheet and keep the file; several problems build on earlier ones, and the register you start in problem 23 is the one you will still be editing in Chapter 33.

A. Recall and definitions (1–8)

1. Define business plan in one sentence. Then explain, in one more, why the chapter insists it is an argument rather than a prediction.

2. What is a bottom-up sales forecast? Name its four variables and state which of the four is a physical fact rather than a belief.

3. Define the assumptions register and list the five things each row must carry.

4. † A pro forma profit-and-loss statement and an actual profit-and-loss statement look identical on the page. What is the difference, and what does that difference oblige you to attach to the pro forma?

5. What is a use of funds schedule, what must it total, and what does a reader conclude if it doesn't?

6. Name the five readers of a restaurant business plan from §4.1 and the single question each one is actually asking.

7. Why is the executive summary written last? Name the specific failure that occurs when it is written first.

8. † Explain what sensitivity analysis is for. Why is its useful output a ranking of assumptions rather than a range of outcomes?

B. Building the forecast (9–15)

9. A 92-seat restaurant serves dinner six nights a week at 1.5 turns with a $38 average check. Estimate its annual dinner revenue.

10. A plan projects 130 brunch covers on 74 seats. What turn rate does that imply? State one reason it might be achievable and one reason to be suspicious of it.

11. † Build the bottom-up forecast for a 54-seat neighborhood restaurant: dinner five nights a week at 1.6 turns with a $39 average check, plus one Sunday brunch at 96 covers with a $21 average check. Give revenue per service, revenue per week, and annual revenue.

12. Using your answer to problem 11, compute total annual covers and the blended average check across the whole business. Explain why the blended figure is lower than either individual check average.

13. † A plan's headline revenue is $1,200,000. Its bottom-up build produces $1,092,400. Compute the gap in dollars, per operating week, and as a percentage of the headline. Then write three named bridge items — with arithmetic — that would close it, and say which of the three you would trust least.

14. A restaurant forecasts 52 operating weeks at $22,000 a week. Assume roughly half of a marginal revenue dollar survives as operating profit. What does losing two weeks to a closure cost in revenue, and what does it cost in operating profit?

15. Convert Bellwether's plan revenue of $1,550,000 into sales per seat per year and sales per square foot (68 seats, 2,800 sq ft). Then do the same for the base case of $1,410,760, and write one sentence on what the comparison tells a reader that the annual dollar figure does not.

C. The pro forma (16–22)

16. † Complete this year-one pro forma and show that it foots.

Revenue is $1,320,000, mixed 70% food / 30% beverage. Food cost runs 31% of food sales; beverage cost runs 21% of beverage sales. Labor is 33% of total sales. Occupancy is $102,000. Other operating is 14.5% of sales, and general and administrative is 3.0%.

17. The restaurant in problem 16 carries $58,000 of annual debt service. What is left before tax and distributions, in dollars and as a percentage of sales?

18. In problem 16, occupancy is a fixed $102,000. Revenue comes in at $1,180,000 instead. What is occupancy as a percentage of sales now? What, precisely, has changed about the business?

19. † For the restaurant in problem 16, compute the dollar value of one percentage point of: food cost, beverage cost, labor cost, and other operating cost. Rank the four. Then explain in two sentences why the ranking is not the same as the ranking of how hard each one is to move.

20. Bellwether's occupancy improves from 6.1% of sales in year one to 5.1% in year three while the rent stays at $95,200. Explain the mechanism, and state what the same mechanism does if revenue comes in below plan instead of above it.

21. † A plan's year two shows revenue up 11% and operating profit up 20%. Without any further information, name the most likely mechanism producing that relationship. Then name the one thing you would look for in the plan that would make you doubt it.

22. A lender asks for year one broken out monthly rather than as a single annual column. Name three specific things the monthly view reveals that the annual column structurally cannot, and say which of the three would worry you most as the operator.

D. Assumptions and sensitivity (23–28)

23. Build a five-row assumptions register for a concept of your own — or for Bellwether, using rows the chapter did not write. Every row must carry a value, a confidence level, a basis stated in plain language, a dollar exposure per unit of movement, and where it gets tested. No row may use the words "industry standard."

24. † A restaurant's cost structure is $460,000 of fixed cost per year, with every marginal dollar of sales carrying 51¢ of variable cost. Compute operating profit at $1,300,000 of sales and at $1,150,000. State the difference, and explain what the relationship between the revenue change and the profit change tells you about the business.

25. Using the structure in problem 24, at roughly what level of annual sales does the business cover all of its costs? Express the answer in annual dollars and in average weekly sales across 52 weeks.

26. † Rank these four adverse moves for Bellwether by dollars of operating profit lost, showing the arithmetic for each. Use the plan's figures: $1,116,000 of food sales, $434,000 of beverage sales, $1,550,000 of total sales, 68 seats, five dinner services at a $46 check, and a contribution of 50.24¢ on each marginal revenue dollar.

• (a) Food cost rises 2 points, from 30% to 32% of food sales.
• (b) Dinner turns fall from 1.40 to 1.30.
• (c) Labor rises 1.5 points, from 32.3% to 33.8% of sales.
• (d) Pour cost rises 2 points, from 22% to 24% of beverage sales.

27. A colleague argues that sensitivity analysis is a waste of time: "You can't predict anything anyway, so why bother modeling a bunch of things that also won't happen?" Write a 150-word reply that takes the objection seriously and answers it.

28. † The combined downside case in §4.6 still produces an 11.4% operating profit. Argue — in a paragraph — that this result should make a careful reader more suspicious of the plan rather than more comfortable with it. Then name the two lines you would examine first, and say why.

E. Writing, judgment, and the Business Plan (29–34)

29. Write a one-page executive summary, using the nine moves in Figure 4.7, for a concept of your own. Hard limit: one page. If it runs over, cut moves 2 and 3 to a single sentence each before you cut anything else, and be prepared to explain that choice.

30. † Rewrite this risk statement so that it actually does the job a risk statement is supposed to do: "Labor cost may be higher than projected." Your version must contain the movement, its dollar consequence, the effect on prime cost, the specific action you would take, and the trigger at which you would take it.

31. A consultant advises removing the assumptions register from the plan before it goes to the bank, on the grounds that it "hands the lender ammunition." Write your reply — no more than 200 words — and be specific about what the register actually does to a reader's assessment of the rest of the document.

32. † Business Plan extension. Add three rows to Bellwether's assumptions register that the chapter did not include. Candidates worth considering: credit-card processing cost, the opening ramp, insurance, the technology stack, staff meal, comps and voids, or utilities in a building with a wood-fired hearth. Each row needs a value, a confidence, a plain-language basis, a dollar exposure, and an assigned chapter.

33. Business Plan extension. §4.3 gives two different bridges from $1,410,760 to the plan's headline — one built from the patio, events, and takeout, and one built entirely from turns and brunch covers. Reconstruct both, then argue for the one you would actually put in front of a lender. Your argument must address which version is easier to verify after opening.

34. † Business Plan extension. The pro forma holds occupancy flat at $95,200 for three years, which the register flags as an unmodeled assumption. Bellwether's occupancy is $28 per square foot of base rent plus $6 per square foot of NNN charges on 2,800 square feet. Model a 3% annual escalation on the base rent portion only, restate occupancy for years two and three, and restate operating profit for both years. Then state the total three-year cost of the escalation — and explain why that figure understates the real problem.