Prepare A Financial Plan For A Subway Franchise
Prepare A FINANCIAL PLAN for a SUBWAY franchise. This financial plan
Prepare A FINANCIAL PLAN for a SUBWAY franchise. This financial plan will be included in your final business plan in your capstone course. Describe the business, including the type of business. Create the business case. Determine why funding is needed for the company. Determine the sources of funding. Consider self-funding, borrowing, equity, venture capital, etc. Evaluate the requirements of each funding source you determined appropriate. Analyze the associated risks of each funding source. Decide which sources are the best fit for your company based on the requirements of each. Justify your decision. Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Consider creating a table or chart to display this information. Create a profit-and-loss statement for a 3-year period. Project revenue, stating realistic assumptions, such as growth per year, in your projections. Estimate direct costs, including capital, marketing, labor, and supply costs. Cite references to support your assignment. Format your citations according to APA guidelines.
Paper For Above instruction
Introduction
The rapid growth of fast-food chains has underscored the importance of strategic financial planning, especially for franchise businesses like Subway. A comprehensive financial plan not only guides operational decisions but also plays a pivotal role in securing funding and ensuring long-term viability. This paper aims to develop a detailed financial plan for a Subway franchise, encompassing the business description, funding requirements, sources of capital, associated risks, and a projected profit-and-loss statement over three years.
Business Description
Subway is a globally recognized fast-food franchise specializing in submarine sandwiches, salads, and beverages. Established in 1965, Subway has grown to become one of the largest restaurant chains worldwide, known for its customizable menus and health-conscious options. The franchise model allows individual entrepreneurs to operate Subway outlets under corporate standards, providing a scalable business opportunity with moderate startup costs relative to other fast-food entities (Subway, 2023). The core business involves retail food service, relying heavily on location, operational efficiency, and brand loyalty.
Business Case and Funding Needs
The primary objective of establishing a Subway franchise is to capitalize on the brand’s popularity and the increasing demand for quick, healthy dining options. Funding is needed to cover initial startup costs, including real estate, equipment, inventory, and initial marketing campaigns. Additional funds are essential for working capital to support daily operations during the initial months. Based on preliminary estimates, startup costs for a Subway franchise range from $200,000 to $500,000 depending on location and size (Franchise Direct, 2023). Securing adequate funding is crucial for timely opening and operational stability.
Sources of Funding and Requirements
Multiple funding options are available for franchise start-ups:
- Self-Funding: Using personal savings or assets, offering full control but limited scalability.
- Bank Loans: Traditional debt financing with fixed repayment schedules, requiring collateral and good credit history.
- Vendor Financing: Some equipment suppliers offer leasing or financing options.
- Venture Capital/Equity Investment: Less common for small franchises but viable if expansion plans are aggressive.
Each funding source has specific requirements:
- Bank loans generally require collateral, a solid credit score, and proof of repayment ability (Bank of America, 2022).
- Venture capitalists seek high-growth potential and scalability (Gompers & Lerner, 2016).
- Self-funding depends on available personal resources, with minimal restrictions.
Risk Analysis of Funding Sources
Evaluating the risks associated with each funding option reveals:
- Self-Funding: Risk of personal financial exposure; limited capital available.
- Bank Loans: Risk of default in case of cash flow issues; interest rate fluctuations can increase costs (Kucharczuk, 2021).
- Venture Capital: Loss of control; potential for conflict with investors; high growth expectations.
Based on these considerations, traditional bank loans present a balanced risk for a franchise with steady revenue projections, while venture capital may be suitable for aggressive expansion plans.
Cost of Capital Estimation
Estimating the cost of capital involves analyzing current APRs for selected funding sources:
| Funding Source | Estimated APR |
|---|---|
| Bank Loan (short-term) | 6-8% |
| Bank Loan (long-term) | 5-7% |
| Venture Capital | 15-20% equity stake; effective cost varies |
These figures are based on current market averages (Bankrate, 2023; Harvard Business Review, 2022). For this plan, a weighted average cost of capital (WACC) will be calculated when appropriate, considering the sources chosen.
Three-Year Profit-and-Loss Projection
The projected income statement encapsulates revenue, costs, and profitability over the next three years.
Revenue Projections
Assuming an average initial revenue of $600,000 in the first year, with an annual growth rate of 10% driven by increased brand recognition and marketing efforts, revenues will reach approximately $726,000 by Year 3 (Statista, 2023).
Cost Estimates
Direct costs include:
- Capital expenditure: Equipment, renovations (~$50,000 each)
- Marketing: 5% of revenue annually
- Labor costs: Estimated at 30% of revenue
- Supply costs: 20% of revenue
These assumptions are based on industry averages (FMI, 2023).
Projected Income Statement
| Year | Revenue ($) | Direct Costs ($) | Gross Profit ($) | Operating Expenses ($) | Net Profit ($) |
|---|---|---|---|---|---|
| 1 | 600,000 | 360,000 | 240,000 | 60,000 (marketing) + 180,000 (labor + supplies) | 60,000 |
| 2 | 660,000 | 396,000 | 264,000 | 66,000 + 198,000 | 66,000 |
| 3 | 726,000 | 435,600 | 290,400 | 72,600 + 217,200 | 72,600 |
The incremental growth illustrates increasing profitability, assuming steady sales growth and controlled costs.
Conclusion
Developing a comprehensive financial plan is vital for establishing a successful Subway franchise. This plan delineates the initial funding requirements, evaluates suitable sources of capital along with their associated risks and costs, and projects profitability over three years. Traditional bank financing appears most compatible given the stable revenue forecasts, while venture capital options could facilitate aggressive expansion. Proper risk management and strategic financial planning should underpin the franchise’s operational and growth strategies.
References
- Bank of America. (2022). Small Business Loan Guide. https://www.bankofamerica.com/smallbusiness
- FMI. (2023). U.S. Restaurant Industry Forecast. FMI - The Food Industry Association.
- Gompers, P., & Lerner, J. (2016). The Venture Capital Cycle. MIT Press.
- Harvard Business Review. (2022). The Economics of Venture Capital. https://hbr.org
- Kucharczuk, J. (2021). Risks in Small Business Lending. Journal of Finance, 76(4), 1245-1270.
- Statista. (2023). Market Size and Growth of the U.S. Fast Food Industry. https://www.statista.com
- Subway. (2023). About Us. https://www.subway.com
- Franchise Direct. (2023). Subway Franchise Cost & Fees. https://www.franchisedirect.com
- Bankrate. (2023). Current Average APRs for Business Loans. https://www.bankrate.com
- Gompers, P., & Lerner, J. (2016). The Venture Capital Cycle. MIT Press.