2. Vincent was an accountant offered a job as a bookkeeper
($30,000 per year), with limited advancement potential
Declined the offer and decided to open his own coffee
establishment, via parent’s financing.
Opened “The Cappuccino Express”, a drive through coffee
business near a local park, selling only two types coffees -
cappuccino and decaffeinated
“The Cappuccino Express” was well received and within
three years, another store had been added
Management left to store manager,Vincent concentrated
on the entire enterprise
Hired assistant to do record-keeping activities and other
chores
3. What factors can be expected to have a major
impact on the success ofThe Cappuccino
Express?Which factors can be influenced by
Vincent himself and why?
4. Critical success factors include:
• Location
• Cost of producing each coffee
• Quality of coffee
• Competition level
• Production rate
• Type of Coffee
Two types of factors – External and Internal
Vincent is only able to influence internal factors:
• Location
• Quality of coffee
• Production rate
• Type of Coffee
External factors are dependent on the economic environment and
specific circumstances.
5. What major tasks doesVincent have to
undertake in managingThe Cappuccino
Express? Can he do all tasks by himself?
6. The major tasks to be undertaken include:
• Ensuring the business is profitable
• Evaluating and maintaining product quality and
service
• Supervision of employees
• Overseeing/Planning the construction of new outlets
• Deciding how the business will promote it’s products
• Maximising employee performance
Vincent could delegate some tasks specific to each
site to the relevant site manager, as to take on all this
by himself is not efficient.
7. What are the major costs of operating “The
Cappuccino Express”? How might the figures
be different from the expenses as reported in
the financial statements?
8. Major costs of operation:
Expenses are explicit costs with a material value
Direct material, direct labour and overhead
Land and labour costs would be the largest
Operating expenses: insurance, licensing, marketing (i.e. advertising),
purchase of equipment and other expenses
Government rates, taxes, levies etc.
Difference from expenses reported in the financial statements:
Opportunity cost
The time spent running “The Cappuccino Express” foregoes time spend
elsewhere
Being a bookkeeper with a wage of $30,000/a (assumed to be the second best
option)
Therefore, creates an economic profit or loss
The value of “The Cappuccino Express” (which is unknown) in comparison with
being a bookkeeper
9. Vincent would like to measure the
performance of each site manager.
Profitability is one measure, he could use but
what might cause a problem here? Do you
think alternative performance measures such
as employee turnover, service and product
quality and customer satisfaction would
reflect managers performance more
accurately?
10. Company Analysis
- A unique drive-through coffee establishment
- In operation forThreeYears
-Total of two outlets (one in the industrial park area in town, another North ofTown)
General performance measurement - Profitability (potential problems underlined)
ROA (Return On Assets)
ROE (Return On Equity)
Ratios are meaningless if:
not compared with other company in the same industry
not compared with past values
Target profits
Internal Factors affecting profit generation
Location of the establishment &Target market
One establishment opening later than the other
Generating new customerVs. keeping regular customers
These uncontrollable factors affect each individual establishment in generating profits. As
such, profitability as a tool to measure performance does not give a fair rating to each site
manager
11. Performance measurement is:
“The process of assessing the proficiency with which a
reporting entity succeeds, by the economic
acquisition of resources and their efficient and
effective deployment, in achieving its objectives.”
~CIMA OfficialTerminology, 2005
Service and product quality
Customer satisfaction
12. Looking at the performance measures
suggested in Q4, which of these should
Vincent select if he could use only one?
13. Perks of good performance in:
Profitability
Good income for current/next period
Product & service quality
Exclusivity and competitive edge in industry
Customer Satisfaction
Likeliness of retaining customers
14. Suppose that last year, the original site had
yielded total revenues of $146,000, total costs of
$120,000, hence a profit of $26,000. Also assume
thatVincent had judged this profit level to be
satisfactory. For the coming year,Vincent
expects that due to factors like increased name
recognition and demographic changes, the total
revenues for the site will increase by 20% to
$175,200.What amount of profit should he
expect from the site?What actions can a site
manager take to increase his/her site’s
profitability?
15. Expectations of profit:
Theoretically: if revenue increases to $175,200 and expected overall cost
remain the same,Vincent is expected to generate a total profits of 55200.
However: expenses often increase along with profit.
As a result,Vincent’s overall profit would be less than 55220 due to increase in
expense.The total profit would be in between 26,000 and 55200 as long as the
overall cost will not excess total revenue.
An increase in total revenue does not guarantee an increase in overall profit
profit depend on both revenue and expense.
By only accessing the limited information provided unable to estimate the
value ofVincent’s coffee shop without make assumptions.
Actions to increase profitability :
Better quality control on good and service
Establish role of regulations to organise labour, plants and other resources in a
more effective and efficient way
Interpreting customer’s feedback into decisions makings to meet their needs
are most likely to increase profit within the field of site managers