NIGHTCLUB

Accounting 100

Assignment

Semester 1, 2013

Background

Luca Pacioli has formed a partnership with you and your group members to own and operate a Nightclub. The nightclub will be situated in Beaufort St, Mt Lawley, a suburb of Perth, Western Australia. Mt Lawley is increasingly attracting hip young people to its wine bars, local pub, café’s and restaurants and is establishing itself as the new ‘place to go’ for young and trendy professionals. The nearby suburb of Northbridge (1.5 kilometres away and adjacent to the City of Perth) is home to most of Perth’s existing nightclubs. The increasing numbers of visitors to Beaufort St businesses has been creating a parking problem, and some residents have made noise complaints, but to date the local government has said they are pleased with the vibrancy that the influx of new restaurants, cafes, bars and other businesses are bringing to the area. The partnership wants to open the nightclub’s doors with a lavish opening night “end of financial year” party on 30 June 2013.

Luca is contributing all the capital required to get the nightclub running. This includes the cash to set up the business premises (initial capital costs), and operating funds which are expected to cover the shortfall in profits for the first year until the nightclub is expected to make good profits of its own – having established itself by reputation as the “place to go”. The target market for the nightclub is young professionals and wealthy youth. The goal is to make as much money as possible within the next 5 years by establishing this new business, and then to sell it for a healthy profit at the end of that period.

Luca is an experienced nightclub owner but has other, larger ventures that occupy his time and therefore he will have minimal involvement in the day to day running of the nightclub. However, Luca was very involved in deciding the location and type of nightclub to open and is confident that it will be successful. Luca effectively takes the role of a silent partner, but can be called on every now and then for advice if required. However, given that he contributed all of the capital, Luca does want the partnership agreement to indicate that, in the event of a dispute, his vote is to be the deciding vote.

You and your fellow group members are contributing the business acumen and effort required to operate the business. As active partners, your responsibility is to manage the business efficiently and effectively and to ensure compliance with any legislative requirements. While none of you have worked in nightclubs before, you are confident that you can use your accounting skills to keep the business on track. You all work together at an accounting firm “Curtin and Curtin” that provides business advice, and you feel you have the necessary skills to put the advice you normally give to clients into practice in this first business venture of your own. In addition to that, each of you know a number of other young accountants that work in other firms in the city, and believe that you can convince them to visit your nightclub and bring other young professionals with them – especially on opening night when you will give away a voucher for ‘free entry for a month’ to any of your friends and acquaintances that bring at least one other person with them to opening night. You haven’t worked out yet what other marketing you might do.

However, managing this nightclub is to be a part time job for each of the partners, as all of you are employed full time at Curtin and Curtin. The nightclub has therefore employed a full time manager, Lydia, to manage the bar, to develop staff rosters and to manage the club in general. All other staff (i.e. bar staff, security staff) are employed on a casual basis. Lydia has worked in nightclubs for 8 years and has great experience, but has never managed a nightclub herself before.

If the business is successful, there may be an opportunity to expand into the adjoining building (the owner is eager to sell). This may be useful, as the economy in Perth is recovering from the financial crisis, and it looks like strong economic growth will follow. In recent years, the big law and accounting firms in Perth have been employing less young professionals due to this downturn, and combined with the mining opportunities in Western Australia in particular, confidence is returning along with stronger employment opportunities. The State Government, which has just been re-elected, has made a commitment to spending a lot of money to “revitalise the city”. This includes improving the links between the City of Perth business district and Northbridge.

memorandum to: All Partners from: Luca pacioli subject: Various Issues date: 18/03/2013 cc: To File

Attached are a number of items I would like you to examine in relation to our nightclub business.

This includes an analysis of our current situation regarding the nightclub business and the formulation of a strategic plan for the future.

Further outlined in the attached document are a number of opportunities that may enable us to exceed our profit estimates. I need you to perform an analysis of these opportunities and advise which, if any, we should adopt.

Please address each of the tasks outlined in the attached document and present your calculations and recommendations in a report format. In order to take advantage of these opportunities I must receive your report by 5pm Monday 6th May.

Submissions received after this time will attract a penalty of 10% for each day they are late up to 7 days. After that time the information will be received too late to affect our decisions relating to the business and therefore no value will be given to reports received after that time.

I look forward to reading your report and providing feedback regarding your findings.

Luca Pacioli
Chairman

Task One

In a recent seminar I attended, it became clear that many new businesses fail due to a lack of proper planning and management. To maximise the potential of our business I would like you to prepare a strategic plan. Specifically I would like you to prepare and incorporate a SWOT analysis and a list of short, medium and long term objectives. (We will include our mission statement, values and other information into the plan at a later date and these are therefore not required at this stage).

I think at least six key objectives should be specified – don’t forget that they should be SMART.

The SWOT analysis cannot be just a list, but must give some brief detail of the rationale for each of the items. Ideally there needs to be at least 3 strengths, 3 weaknesses, 3 opportunities and 3 threats. These should be high priority SWOT items.

Our background information should be taken into account, as well as any other information you feel is relevant. Don’t forget to say why you have specified each of your responses, but don’t be too wordy – this should be a clear and concise report. Reports of over 600 words will be penalised as it will take me too long to read them.

Task Two

I’m considering extending the nightclub by acquiring the small property next door to the club. The current owner of the property is eager to sell and the asking price is $200,000. The property contains a relatively small area that can be enclosed in winter and opened up in summer. The cost to renovate the property and link it with the nightclub is estimated to be $15,000. The property is expected to be held for five years at which time it is estimated the property could be sold for $215,000. The business is estimated to have a cost of capital equal to 11% and the payback policy is unknown.

Cash information pertaining to the extension is shown below:

Item | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Increase in drink sales | 90,000 | 75,000 | 65,000 | 48,000 | 35,000 | Increase cost of security | 15,000 | 15,000 | 13,000 | 12,000 | 9,000 | Increase cost of bar staff | 20,000 | 20,000 | 16,000 | 14,000 | 10,000 |

Required

a. Use quantitative analysis to determine whether the expansion should be undertaken. Both the payback method and NPV method should be used to make this evaluation and recommendation. Please show your workings in a separate appendix.

b. Analyse and discuss the potential income tax impact on this project for both the payback and NPV analysis in part a. (task two) above, assuming there is no accrued income or expenses and the average tax for partners is 30%.

Task Three

In an attempt to increase patronage in the future, I am considering the introduction of a membership scheme. The memberships will entitle prospective members to receive priority entry to the club, discounted drinks and admission to ‘members only’ functions. The ‘members only’ functions will be twice per year. At these functions members will receive free entertainment, finger food and heavily discounted drinks. In addition, members will also receive quarterly newsletters that outline upcoming events, promotions and highlights of the previous quarter.

The estimated costs associated with the membership package for the next 12 months, assuming 200 members, are outlined below:

Expenditure | $ | Wages paid to Lydia to manage the memberships (i.e. organise functions, write and post newsletters etc)1 | 7,000 | Cost of making membership cards – made as required | 1,000 | Cost of entertainment on ‘members nights’ (total for 2 functions) – paid 2 months in advance to secure acts | 1,500 | Cost of finger food for ‘members nights’ (total for 2 functions) – advise caterers of numbers day before event | 3,000 | Cost of posting newsletters to members (4 times per year) | 640 | Wages to doorman to admit members during the year. If the membership scheme were not introduced then these doorman would not be required, but if it proceeds these costs must be met regardless of the success of this option. | 4,000 |

1 Lydia would be used in other areas of the club if the membership scheme were to be abandoned.

Income: In addition to the membership fee income, the sale of drinks for 200 members is estimated to produce a $1,000 contribution on each of the two ‘members nights’.

Issue 1

Determine the minimum price that the memberships should be sold for so that the promotion doesn’t cost us anything (ie. we break even).

Issue 2

a. If a $2,000 advertising campaign to promote the memberships was conducted it is estimated that it would increase memberships to 350. If this campaign is successful in increasing memberships to 350, what would the minimum selling price be for the memberships in order to break even? b. If we assume option a. from issue 2. (above) is chosen, what price should we sell memberships for to make a profit of at least $5,000?

Issue 3

Assuming our original estimate of members of 200, what would the minimum selling price be for the memberships to break even if the ‘membership nights’ were eliminated from the package and the club offered a brass key ring instead, allowing members free entry to the club. The cost of the key rings to the club would be $15 each and would replace the need for membership cards. Assume that those 200 members will still attend the club a couple of extra nights a year (to take advantage of their free entry with membership) and will therefore still contribute the same additional amount to drink sales as they would have if they came to member nights.

Task Four

The respective professional bodies are organising a “Professional Night” for young doctors, engineers, accountants and lawyers. The night is to be billed as “The Big Deal”. I see this as an opportunity to establish the nightclub as a club for young professionals, which is important given that this demographic have high levels of disposable income. I am therefore very keen to host the forthcoming “Big Deal”.

The function is to be held on a Friday night and the professions want sole use of the facility until at least 12 midnight. During the night all drinks, which are normally sold with a contribution margin of $3, will have a contribution margin of just $1.50. The function is estimated to attract 1,000 people.

Historically, there is approximately 600 customers who attend the nightclub prior to 12 midnight on a Friday night, each of whom, on average, purchase two drinks. Professionals attending “The Big Deal” are estimated, on average, to buy four drinks each. The night will also include a dance exhibition by local Latin and flamenco dancers. The dancers will perform free of charge but a PA system is required to announce the dancers and prize winners.

Costs associated with the event include the following:

Item of Expenditure | Cost | Cost of finger food | $10 per person | Cost of hiring a DJ | $800 | Cost of security 1 | $600 | Hire of PA equipment | $400 |

1 The security employed for the “Big Deal” are the same security used every Friday between 6pm and 12pm.

Required

The professional bodies have offered to pay a maximum of $15,000 to the successful applicant to book the club for exclusive use. Using the information above, conduct an analysis and determine whether our nightclub could provide the requested exclusive booking to the professional bodies without losing money.