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Executive Summary Create Your Own (C.Y.O.) Cereal Eric Sharer 2130 Barracks Road Charlottesville Virginia. 22903 Phone: (703)-927-2578 Fax: None Email:sharerea@dukes.jmu.edu Web Address: www.cyocereal.com Management: Store Manager Brooks Healy Assistant Manager Blake Hadley Industry: SIC-2043 Cereal Breakfast Foods Number of Employees: 7 Bank: Bank of America Law Firm: N/A Amount of Financing Sought: $301,679 Current Investors: 5.64% Founder Contributions $17,000 53.03% Outside Equity Investors - $160,000 41.33% Bank Loan - $124,679 at 6% Use of Funds: Equipment purchase, storefront lease, inventory purchases Business Description: C.Y.O. Cereal, a LLC, is a retail store, selling custom bowls, boxes, and bars of cereal. Located at 2130 Barracks Road Charlottesville Virginia. 22903, with one retail store, revenues of $1.4 million on sales of 70,096 Cereal Bowls, 88,872 Cereal Bars, and 91,376 Cereal Boxes are expected by the second year with an annual growth of 1.2% and a rate of return of 11%. Company Background: Start-up Management: College graduate Products/Services: Retail of customized cereal bowls, boxes, and bars with full customer personalization. Technologies/Special Know-how: Customer creation of cereal bowls and boxes on store floor and in addition Just-In-Time creation of cereal bars allow customers a convenient and a delicious personalized product. Target Markets: Cereal Killers, On-theGoers, and Soccer Moms consisting of a total 82,154 people. Market potential cereal bowls: $4.6 million, cereal boxes $6.1 million, and cereal bars is $5.8 million. Total market potential is $16.5 million and growth rate equal to 3.4%

Distribution Channels: Utilization of direct distribution to customers through storefront. Competition: Starbucks Corporation; Dunkin Brands, Inc.; Krispy Kreme Doughnut Corporation; Einstein Noah Restaurant Group. This market is subject to rising consumer spending and national economic strength, which is growing at a rate of 4%. Financial Projections (Unaudited): 2009 2010 Revenue: $351,758 $1,055 EBIT: ($175) $22 2011 $1,129 $44 2012 $1,208 $67 2013 $1,304 (dollars in thousands) $97

Mission We strive to conveniently customize high-quality products to exceed customer expectations. Vision To provide innovation to the cereal industry by bringing convenience and customization to the fingertips of society. Our Products and Services At Create Your Own (C.Y.O.) Cereal we offer a wide variety of high quality cereal products and toppings, while providing our customers with a unique dining experience. The cereal products we offer are comprised of the most well-known brands on the market today, including Kelloggs, General Mills, and Quaker Oats. Furthermore, we offer a variety of toppings, milks, and non-dairy products which enable our customers to create their own customized bowl of cereal, cereal bars, and boxed cereals. At C.Y.O. Cereal we pride ourselves on all levels of service. Along with our commitment to customer service, our product services will include preparation of cereal bars. These bars will be baked in house, and sold either individually, or in boxes of twelve custom bars. Employees will also stock and ensure freshness of toppings, cereals, and milks for the creation of our products. All of our services will lead to a memorable experience for our customers due to our family friendly and trendy atmosphere. Business Description The location and trade area of C.Y.O. Cereal will be 2130 Barracks Road Charlottesville, VA 22903 (BarracksRoad, 2012).The key assets that are crucial to our success include employees, inventories, refrigerated serving bar for toppings, and cereal dispensers. Our staff will consist of seven passionate employees, who are devoted to our customers and the success of C.Y.O. Cereal. For employee training refer to page 12.The equipment that enables our employees to offer products includes weighing scales, cash registers, ovens, and a refrigerator. In addition, we have an intangible asset that is a special recipe for the creation of our cereal bars different from our competitors. Industry Review As part of the snack shops industry, we compete with a wide variety of vendors and snack products. The U.S. snack shop industry includes 37,789 businesses that generated an estimated $27.8 billion in revenue in 2012. Consumer spending is expected to grow by 2.8% annually due to an improving economy. As a mature industry, the annual growth rate for the snack shop industry is

projected to be 4% over the next 5 years (Samadi, 2012). We are subject to regulations from the Food and Drug Administration (FDA), which sets the standards of food handling and presentation. Competitors Our major competitors in the snack shop industry include Starbucks Corporation, Dunkin Brands Incorporated, Krispy Kreme Doughnut Corporation, and Einstein Noah Restaurant Group. Starbucks leads in market share at 35.6% by offering specialty coffee products, pastries, and breakfast sandwiches. The second leading market brand is Dunkin Brands Incorporated, which includes Dunkin Donuts and Baskin Robbins, controlling 24.5% of the market share. Dunkin Donuts offers coffees, baked goods, sandwiches, and other breakfast items. A smaller well known competitor, Krispy Kreme Doughnut Corporation, controls 2.1% of the market. Krispy Kreme offers a wide variety of donuts, coffees, and other beverages. Our final major competitor is the Einstein Noah Restaurant Group, which includes New York Bagels, Einstein Bros., and Manhattan Bagel brands, controlling 1.6% of the market share. Einstein Noah Restaurant Group specializes in bagel sandwiches, wraps, soups, salads, pastries, coffees, and snacks (Samadi, 2012). Market Segmentation Analysis After detailed market research we segmented the cereal market into six different segments: Early Birds, Health Nuts, Cereal Killers, On-the-Goers, Soccer Moms, and the Pick Me Uppers. The Early Bird segment consists of 20,830 workers in the City of Charlottesville who want a delicious bowl of cereal before work (City of Charlottesville, 2011). Another segment, the Health Nuts, consists of those people who are concerned with what they are eating and if it is nutritious for their body. This is an attractive opportunity for our area, because Charlottesville was recently named one of the top ten healthiest towns in America (City of Charlottesville, 2011). Our next segment is the Cereal Killers who are obsessed with cereal and will eat it as a meal. This is an important market segment for C.Y.O. Cereal because 72% of meal replacement is cereal or cereal bars (Browne, 2012). The Onthe-Goers segment consists of those people who eat cereal while traveling, in which 42% of travelers choose to eat cereal (Browne, 2012). Similar to the On-the-Goers, the Soccer Mom segment incorporates young families with children in a daily routine and need a quick, easy way to feed their kids. The majority of Soccer Moms are between the ages of 35-50 and spends 42.3% of their food budget dining out (Samadi, 2012). Our final segment is the Pick Me Uppers. This segment includes those who like to enjoy a quick snack between meals, in which 63% of people who enjoy snacks choose cereal (Browne, 2012).

Target Segments The three segments C.Y.O. Cereal has targeted are the Cereal Killers, On-the-Goers, and Soccer Moms. Cereal Killers, characterized by a passion for cereal, will be our most frequent customers. As cereal is a timeless meal, this segment can include any demographic. We expect the segment to reflect the demographics of Charlottesville, which is 52% female, 66% white, and predominantly in their 20s. Those under 20 years of age make up 18% of the population, and those 30-49 years of age make up another 22% (City of Charlottesville, 2011). The Cereal Killers come to our store for a cereal meal, and possibly walk out with a box of cereal or cereal bars. Due to their love of cereal, Cereal Killers will average 1.5 visits per week. They respond favorably to reminders of their love for cereal, which can be visually transmitted effectively via newspaper and social media. Targeting Cereal Killers helps promote C.Y.O. Cereal as a specialized cereal venue that includes cereal-related branding and promotions. It helps develop a niche that cant be found in Charlottesville. They make up the top 10% of consumers of cereal in the Charlottesville area, which includes 9,119 people within 5 miles of our store (Federalrealty, 2011). On-the-Goers see our store as a convenient source of food to satisfy themselves in-between their daily obligations. Over 26,000 college students fall in this segment because they are seeking a meal in between classes. Also included in this segment are 34,640 people who work in the city, who eat before, during, or after work (City of Charlottesville, 2011). While there may be some overlap between the students and city workers, this is a large segment to target. They will respond favorably to the image of a quick, convenient meal, which can be portrayed via newspaper or radio, as much of this segment can be reached through these channels. By using these channels, On-the-Goers will visit our store once every two weeks. Targeting this segment can be advantageous to us as it promotes the convenience we offer to customers. Soccer Moms include one or both parents who are striving to feed their kids in an easy but pleasing manner. As of 2010, there 7,257 children in Charlottesville, and 5,138 parents, making the size of the soccer mom segment 12,395 (U.S. Census Bureau, 2010). Those children have parents or guardians who need to feed them, and will view our business as a satisfying and convenient dining option for their kids. Soccer Moms will visit the store once a week. They will respond favorably to family-oriented advertising, including images of kids and their families having a fun dining experience. This message can be sent to them via daytime radio ads and magazines, which can be found throughout family households. Targeting this segment is advantageous to us because it promotes a family atmosphere that any diner can enjoy.

Our Brand While our firm is novel in the fact that we exclusively offer cereal products, as a snack shop and cereal provider we are in a mature market. We intend to enter this market by branding ourselves to our target markets as a unique, fun, and family friendly way to enjoy an array of great cereal meals. C.Y.O. Cereal will create brand equity through the quality of our products. Customers will come to learn that we provide name-brand cereals. We will use high quality milks sourced locally, fresh fruit, and high quality toppings such as Hershey products. Co-branding with widely known name-brand products will enhance our brand equity, allowing the customer to utilize the best ingredients on the market. We offer many options so that customers will continue to come back and try new variations of our cereal bowls, bars, and customized boxes. To promote our brand name, C.Y.O. Cereals logo will be placed on our cereal boxes and packaged cereal bars (see marketing insert for logo). Product Strategy After gaining success selling our cereal products to our target market segments, we intend to start offering other breakfast products. Refer to the growth and contingency plan for further details on page 14. These will complement our cereal bars and bowls that customers eat in the store. Below in Table 1, our perceptual map shows where our products stand in relation to competition on how healthy their products are and the amount of control the consumer has over their product.

Table 1

Price Strategy Our initial pricing objective will be to maximize unit volume. Our pricing strategy will strive to sell as many cereal bowls, boxes, and bars as possible. This strategy increases revenue and operating margin, and decreases costs because we buy our supplies in bulk. The prices are different for the cereal bars, bowls, and boxes, with individual markups for each. The price of a cereal bowl is determined based on the weight of the customized bowl, charged by the ounce, not including weight of the actual bowl. The price of a cereal box is fixed, with an added margin of over $2 on top of our average cereal box costs. Our cereal bars are priced in a similar manner to reflect the high variable costs per box while striving to sell large volume. These prices reflect our differentiation strategy while maintaining the objective of maximizing unit volume. One pricing strategy we use is odd-even pricing. This strategy is used because it helps our products appear to be less than they are. We are also using cost-plus pricing, which is based on our variable costs of each product. From our variable costs, we add a markup to each item to ensure a positive margin on each product line. Cereal bowl prices are 38 cents per ounce. For example, a 9 ounce bowl of cereal will be priced at $3.42, where the cost will be $1.18. This is a 190% cost markup. We feel this is an appropriate price point because while its a bowl of cereal, its considered a meal by many. Compared to other meal options around town, $3.42 is a low price. For a 14 ounce box of cereal, the average price is $5.99 after weighing. Compared to the average cost of $3.92, this is a 53% markup. Recognizing this is more than $1 over the average box of cereal, customers are willing to pay more for a take-home cereal they cannot find in stores. Finally, boxes of 12 cereal bars are priced at $6.99 per box, where the average cost is $4.10, a 70% markup. While this is also priced higher than grocery-store cereal bars, customers will pay for the freshness and customizability that cannot be offered from a grocery store. We expect our products to be price inelastic. In the U.S., cereal has an elasticity of -.55 (Andreyeva ,Brownwell, 2012). If we were to increase our prices by 2% we would expect demand to decrease by only 1.1%, increasing our total revenues. Demand Factors Demand for our product will be affected in several ways. First, our wide variety of cereal and toppings will cater to consumer tastes. Cereal has long been a popular and common meal for Americans. We offer enough toppings that even the pickiest of eaters will be able to find something to enjoy within our product line. Our cereal bowls, which are positioned as a meal, are competitively priced among competitors who provide breakfast meals. Our cereal boxes and bars are priced above

the standard box or bar of cereal. We believe this wont affect our sales adversely, as customers will be willing to pay more to customize their purchases. Distribution Strategy C.Y.O. Cereal will order cereals through online delivery services channels, such as PeaPod, for all product inventories. Indirect service channels such as local grocery stores will be utilized if we run out of inventory. As the producing companies standardize our ingredients, our strategy is to seek out the cheapest price per ounce for these products. We intend to stick with our distributor once we establish the cheapest price, and will only switch distributors if we determine a long term cost benefit. We directly distribute products to consumers through our storefront. Cereal bowls are created and purchased in the store. Meanwhile, cereal boxes and bars will be made, packaged, and sold to customers by employees. Potential issues include sourcing any of our product inputs. If there is a quantity shortage or delay in getting product inputs, it could delay or even halt certain sales. A prevention plan is detailed in the operations section on Table 9 on page 18. Promotion Strategy Our promotion strategy is aimed to stimulate demand and encourage trial of our unique products. To accomplish this, we plan on raising awareness by utilizing free cereal bar samples and discounts offered through the local newspaper, The Daily Progress. Our online presence will be developed to provide inexpensive visual advertisements, illustrating C.Y.O. Cereals offerings. We intend to offer free samples of cereal bars beginning one month before the grand opening and continuing one month after the opening. Two part-time employees will be tasked with handing out samples at the local Fashion Square Mall for 20 hours per week before the grand opening, and 8 hours per week after our opening. We will be at the Charlottesville Fashion Square during high traffic times of the week, such as weekends and nights. The promotion budget covers the wage expense up until the opening, and the cost of the samples. The first month wage expense is $1,846, and over two months we intend to give out 19,138 samples at a cost of .17 cents per sample. Our total sampling cost will be $5,100. The second aspect of our promotions is a weekly coupon on the front page of the Daily Progress, a local Charlottesville newspaper that reaches 23,401 people daily. The coupon will offer 10% off any purchase within the store, and will be valid for one week. We intend to begin running the coupon the first week of our opening and continue it for two months. The cost of running this

coupon once a week for 8 weeks in the Daily Progress will cost $680. We expect 5% of our coupons to be redeemed, which when applied to our average unit price of $5.62, gives a total discount expense of $5,261 (Daily Progress Media, 2012). The final aspect of our promotions will be focused on building an online presence. We will obtain the cyocereal.com domain name, which when included with hosting, costs C.Y.O. Cereal $87 per year. The service includes a web design, which will create individual webpages consisting of an about us, food and nutritional information, contact us, location, and product pictures/description pages. We intend to link our website to a Facebook and Twitter page, which will also be linked together. The Facebook page will include more information about our business and will be updated regularly about local events in Charlottesville. This will help build up our business as friendly, local, and fun by relating to our customers on a personal level. It will also increase awareness as a source of free advertising. Total promotion expense, as outlined above, will be $11,128. In years 2-5 we intend to maintain our website, but will vary our other expenditures. Rather than coupons and free samples, we intend to allocate our promotion budget towards radio ads, newspaper ads, and fliers posted around the city and on campus at the University of Virginia. First Year Monthly Sales Forecast In Table 2 below, we outline our projected monthly sales during our first year. The total revenue of our first year is $351,757, which is slightly above the average $348,084 for startup businesses in our industry (Bizminer, 2012). Our sales vary seasonally due to college students coming and going during winter and summer breaks. We are optimistic that the promotions leading up to the grand opening will provide us a relatively strong first month that will improve in the following months. Accounting for the exodus of college students and University of Virginia employees, we expect summer sales to drop slightly, before resurging in the beginning of year two.

Table 2 Future Yearly Sales Forecast We have also forecasted our yearly sales through year 5. With our promotions strategy concentrated after summer when schools are back in session and residents are not

vacationing, we project to grow our sales each year, as shown in Table 3 below. The market we compete in is defined as the Charlottesville area, which includes 49 snack and beverage bars and 18 ice cream parlors. For snack and beverage bars, the annual market revenue is $25,667,264. The total market revenue of ice cream parlors in Charlottesville is $8,056,291, for a combined total of $33,723,555 (Bizminer, 2012). C.Y.O. Cereals market share in year one can be calculated by dividing our revenue by total market revenue. We predict annual market sales to increase at the pace of inflation, which historically has been 3.4% (Trading Economics, 2012).

Table 3 Market Potential Our three target markets are Cereal Killers, On-the-Goers and Soccer Moms. We expect the Cereal Killers to visit our store on average 1.5 times a week. The On-the-Goers we expect on average to visit .5 times a week on average and the Soccer Moms to visit once a week. To find our market potential we multiplied the average weekly visitations by our market size. We multiply this by 52 weeks a year and our average unit price of $5.62. This equation leads us to a market potential of $16,480,436.44. Breakeven Analysis We expect 28% of unit sales to be cereal bowls, 35% to be cereal bars, and 37% to be boxed cereals. We allocated fixed costs based on these percentages. Our variable cost for an average bowl of cereal, calculated in Table 4 below, is $1.18. The variable cost of a cereal box is $3.92, and $4.10 for a 12-pack of cereal bars. The gross margins for years 1-5 are $45,398, $309,792, $339,158, $370,683, and $409,569 respectively, as shown in our income statement on page 24. Our fixed costs for years 1-5 are $220,534, $287,382, $295,476, $303,820, and $312,944 respectively, as shown in our income statements on page 24. After interest and taxes, our annual earnings for years 1-5 are $182,617, $14,929, $36,527, $61,419, $93,536 respectively. We break even in year 5 once our earnings surpass the loss taken in year 1. The following calculation finds the portion of year 5 in which breakeven occurs: 69,742/93536= .75, or 4.75 years to breakeven. We divide our net profits, which is -$69,742 by our total projected profit in year 5 to find how far into year 5 we breakeven. At

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this point we will have generated $4,722,933.46 in sales. We will have sold 386,678 bowls of cereal, 236,488 12-pack cereal bars, and 291,737 cereal boxes. Breakeven Market Share When we breakeven we will have generated $4,722,933.46. Based on our total market size outlined in Table 3 above, during that time the market will have generated $170,842,997. Thus, over the 4.75-year breakeven period, we will attain an average market share of 2.76%.
Product Variable costs ($/oz) Cereal Cheerios .18 Kashi Go Lean .25 Fiber One .30 Bran .17 Special K .27 Life .23 Captain Crunch .21 Cocoa Puffs .24 Rice Krispies .20 Wheaties .30 Frosted Flakes .25 Fruity Pebbles .25 Fruit loops .28 Kix .21 Cinnamon Toast Crunch .21 Apple Jacks .27 Almonds .34 Walnuts .40 Granola .15 Peanut butter .25 Raisins .18 Craisons .31 Hershey chocolate chips .22 Sprinkles .16 Hershey white chocolate .22 Dry Fruit: Bars & Boxes Strawberries .41 Bananas .16 Blueberries .58 Apples .28 Sunflower oil 1.02/cup 1 egg .17 Tsp. salt .01 & Flour .24/cup Toppings Marshmallows .31 Peanut butter chips .27 Reeses Pieces .27 Hershey Kit Kats .33 Chocolate cookies .21 Hershey chocolate syrup .09 Caramel syrup .21 Cinnamon sugar .16 Sugar .12 Honey .25 Brown sugar .06 Cinnamon .19 Thawed fruit: Cereal Bowls Strawberries .16 Bananas .09 Blueberries .22 Apples .20 Milks Soy .03 1% .03 2% .03 Whole .03 Almond .03 Miscellaneous Wax paper and cereal bar box .16 Cereal box packaging .42 Tsp. baking powder .16 Cereal bowl .08 Spoon .06 Tsp. Vanilla .10

Table 4 Competitive Advantage At C.Y.O. Cereal we offer a wide variety of cereal products and toppings, while providing our customers with a unique dining experience. Our business will be one of a kind and may attract competitors due to the lack of trademarks and patents. We have chosen a strategy and competitive advantage to address this problem. Our competitive advantage and Michael Porters strategy of differentiation will make it difficult for competitors to imitate our business model. We are able to accomplish this by offering high quality products and superior customer service. This strategy is apparent in all three of our products which include cereal bowls, cereal bars, and cereal boxes. We offer customers the ability to personalize cereal bowls with a variety of toppings. C.Y.O. Cereals second product is pre-made customized cereal bars for consumers that are on the go. Along with the

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bars, our firm offers a create-your-own cereal box which is focused towards consumers who know what they want. This provides the consumer the opportunity to bring home a delicious box of customized cereal and enjoy it at any time from the comfort of their home (Kerin, Hartley & Rudelius, 2012). Supply of Labor In order to ensure high quality products and superior customer service, C.Y.O. Cereal will focus on staffing because our employees are essential to a successful strategy. C.Y.O Cereal will have a supply of labor at the end of year one of seven employees with a management staff consisting of one store manager and one assistant manager. The makeup of our lower level employees consists of two full time sales associates and three part time facilities supplies associates referred to in the organizational chart in Table 5 shown below. Seven employees will allow the management staff to schedule employees easily making sure that the staffing needs are secure. As C.Y.O Cereal grows in its first five years of operation, we realize that we will have to hire more employees to meet customer demand. Looking forward to year two we will hire one more assistant manager and one more full time sales associate giving us a total of nine employees. C.Y.O. Cereal Organizational Chart
As of 9/2/2013

Table 5 To ensure that our staff has the expertise to run our business, we will recruit and hire those that are most qualified for the job. There are several outlets for recruitment of employees that C.Y.O. Cereal will pursue. Our employees will come from the Charlottesville, Virginia area; we will use Now Hiring advertisements outside of our location and on the University of Virginia campus. C.Y.O. Cereal will take advantage of social recruiting by using the Charlottesville Craigslist website, Twitter, Facebook, and LinkedIn (Bersin, 2012). LinkedIn will be used exclusively for the hiring of our management staff since it is a professional networking site. For C.Y.O Cereals management staff to be the most effective, we will hire managers who are college graduates that have had previous management experience. They must be able to

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effectively communicate with employees and customers while also having knowledge of daily financial reports. Finally, our managers will be strong leaders who are trustworthy and are able to effectively handle stressful situations while maintaining a successful business. The lower level employees must be pursuing or have completed a high school education and sixteen years or older. They must be outgoing, friendly, and personable, while also being young and trendy which will contribute to our organizational culture. Previous restaurant or retail experience is beneficial, but not mandatory, due to the fact that we have on the job training. These employees must be able to operate appliances in our business and have remedial math skills. Once we have found applicants who meet these requirements we will bring them in for a structured interview then select the ones that are most qualified. C.Y.O Cereals managers will undergo training to guarantee the safety and wellbeing of our customers and staff. Our managers will be ServSafe, first aid, and CPR certified. ServSafe certification will allow our managers to be educated about food and safety regulations for restaurants (ServSafe, 2012). CPR and first aid certifications are necessary in case there is ever an emergency situation in our establishment (Cintas, 2012). For the lower level employees there will be on the job training as well as a customer service and orientation training, which our managers will teach after they are hired (Goodwright, 2010). Also they will be given the opportunity to become ServSafe certified for a pay raise. This also contributes to keeping a sanitary and safe work environment. C.Y.O Cereal will hire employees that are intrinsically motivated to work hard and well within teams. To further promote motivation to meet our organizational goals, we will offer an incentive system in the form of a profit sharing plan. After each quarter, if the store meets or exceeds a target profit of $50,000, each employee will receive a five percent share. To better show that C.Y.O Cereals employees will be compensated appropriately through wages, salaries, and benefits, we have displayed this information in Table 6 on the next page. C.Y.O. Cereal has chosen to pay our managers well within the pay range due to the fact that the job requires a college education and specific skills. C.Y.O Cereals sales associates and facility supplies associates will be paid the average of their job title pay ranges in order to compete for quality employees. As our company grows we plan on increasing their pay by implementing a profit share plan in which bonuses are given based on meeting target profits, refer to financial assumption 8 and staffing chart note 5 below. Full-time employees will be given benefits because they work 40 hours a week and to increase job incentive. The only benefit our facility supplies associates receive is profit sharing. The costs of mandatory expenses are referenced in financial assumption 8.

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C.Y.O Cereal Staffing Chart1

Staffing Chart Notes: 2Pay Ranges for Managers and Sales Associates (PayScale 2012). 3Actual compensation: We will pay our employees the mean of their specific pay range. Refer to Management Financial assumptions 8 4Mandatory payroll expenses abbreviations: FICA Federal Insurance contributions act includes (Social Security & Medicare), FUTA- Federal Unemployment tax, SUTA- State unemployment tax Refer to Management Financial Assumptions 8 5Benefits offered: Health insurance entails a premium of $11,059 with out-of-pocket expenses consisting of Co-Payments, Co-insurance and Deductibles totaling $2,275. Consisting of 83% coverage for employees (prnewswire.com).( profit sharing Plan: if meets or exceeds a quarterly goal of $50,000 in sales employees will receive a 5% bonus.) 6Cost of Benefits- Refer to Management Financial Assumptions 8 7Total by Position- Refer to Management Financial Assumptions 8

Table 6

Time Line In Table 7 below, we have displayed a timeline of key events that will be vital to our success. C.Y.O Cereals business owners plan on establishing leadership early on in the process of starting the business. Strong leadership is a fundamental component of a successful business. After the interview, selection, and training process of managers, business owners will shift leadership roles to the newly hired store managers. From this point on, the store manager is in charge of hiring and training lower level employees while also running day to day functions of the business.

Table 7

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Growth and Contingency Plan C.Y.O Cereal plans to grow its market share and business in many ways. We will use promotional plans such as free sampling and couponing during times of high volume consumer traffic such as holiday and back to school seasons to further growth. The promotion strategy is referred to on page 7. Another outlet of growth we seek to explore is opening a second location if we are successful at our first location. A second location will allow us to establish a broader trade area and seek out new customers. C.Y.O. Cereal will also grow by adding a new product line such as hot cereal. This will allow us to reach out to new customers who enjoy hot cereals such as oatmeal and cream of wheat. C.Y.O. Cereal is optimistic that we will grow and be profitable due to our promotion strategy. If the plan for growth fails, we have instituted a contingency plan which is addressed later in the document. C.Y.O. Cereals management staff will have certain controls in place that will guarantee growth. These controls include the promotion schedule, quarterly sales goals, and customer input on new product lines. The promotion schedule will ensure that we use effective free sampling outside of the store to promote our business and products frequently throughout the year. Sales goals will motivate employees to promote and sell our products so we can reach a certain profit in order to have enough money to establish a secondary location. Finally, customer surveys will help us have a better understanding on what new products customers would like to have. Along with growth controls, we have quality controls in place such as ServSafe certifications for managers to ensure quality of food and a safe work environment. The employee incentive system guarantees that employees offer exceptional customer service and high quality products. C.Y.O. Cereal plans on having a business owners insurance policy which will insure inventory, property, general liability, and all equipment and software (Towne Insurance, 2012). Since we will not own our location, we will not be responsible for the insurance of the building. The business policy will be on an annual basis consisting of an insurance expense of $1,250. In case our equipment is not working properly, we will have service plans to protect our equipment. These plans provide routine maintenance on ovens and the refrigerated serving bar ensuring optimal efficiency. In the unfortunate event of imminent business failure, C.Y.O. Cereal has put together an alternative plan to ensure business success. If the store front location is not a profitable venture, we will seek new opportunities in places such as malls, train stations, and gas stations where there is a high volume of consumer traffic. We plan to install kiosks in such locations that will allow people on the go to enjoy cereal. Another plan that we may use if business is headed south is to adopt new

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product lines such as coffee, yogurt, pastries, and branded clothing. All of these opportunities are not planned for emergency use only; they may also be used for the possibility of growth. Operational Strategy The operational strategy will be focused on Just-In-Time product design for cereal bowls, cereal bars, and cereal box products illustrated in the process flow chart on page 17. At C.Y.O. Cereal each product is made through a unique process contributing to our competitive advantage noted on page 10. The process of creating cereal bowls entails a customer grabbing a bowl, selecting cereal, a variety of toppings, and a type of milk. We will charge them based on weight of the cereal bowl. Our cash registers, attended by an employee, are connected to an integrated weight scale that charges the customer by the ounce. The process of making cereal bars begins when the customer pre-orders a combination of cereals and toppings to be made into a dozen bars. Next, our employees will mix the ingredients together and place the tray into an oven at 350 degrees for twenty minutes (Richford, 2012). After a brief cooling period they will be served to the customer. Our third product will be custom-made boxed cereal. The customer will select a standard sized cereal box, which they will use to fill with cereal and any toppings. This process is completed when the customer brings the filled box to the register where they will be charged by the weight of the box. Our operational processes, displayed in the SIPOC diagram below, allow us to offer countless variations of all our products. SIPOC

Table 8

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Process Flow Chart

F1:1 Select Cereal Type Select Topping type F1:2

Cereal Bowl Creation

Select Bowl (one size, 16 oz)

Cereal Bowl or Box Creation

Select Milk Type

F1:3

Weigh

Cereal Box Creation Customer Enters

Select Box

Payment F2:1 Premade Cereal Bar Creation Select Premade Bar Show custom bars to customer F3:4

Custom Cereal Bar Creation

Place Customized Cereal Bar order by phone or instore

Custom

Premad e Bar Inventor y Line of Visibility

Bowl Inventor y

Box Inventor y

Cereal Inventor y

Topping s Inventor y

Milk Inventor y

Premade or Custom Bars

Line of Visibility

F3:1 Premade or Custom Bars Custom Bars Write custom bar order on duplicate forms

F3:2 File one duplicate and place other in baking queue

F3:3 Mix ingredients Put onto tray Bake raw cereal bars Let cool

Premade Bars Premad e Bar Inventor y Bowl Inventor y Box Inventor y Cereal Inventor y Milk Inventor y Topping s Inventor y F1:1-do not carry type of cereal customer wants, cereal is not fresh F1:2-Do not carry type of topping customer wants, toppings are not fresh F1:3-Do not carry type of milk customer wants, milk is not fresh F2:1-Premade cereal bars are not the type customer wants F3:1-Incorrectly write out custom cereal bar order F3:2-Forget to file duplicate form and/or do not put order in custom bar queue F3:3-Mix the incorrect ingredients for custom order F4:1-Shipment is late F4:2-Shipment includes incorrect or lacking correct materials

Receive shipmen t from supplier s

F4:1 Inspect shipment to match receipts

F4:2

Employees inventory shipment materials

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Table 9 Resource Allocation Our employee resources in year one are based on a 75 hour work week, divided amongst full-time and part-time employees. Each full-time employee will work 40 hours a week and our parttime staff will work 20 hours per week, see Table 10 below for employee resources. Employee hours are based off hours of operation of the store in year one which are: Monday through Thursday 6 a.m.5 p.m.; Friday through Saturday 6 a.m.6 p.m.; and Sunday 6 a.m.1 p.m. At all times, there must be a manager or assistant manager on duty along with one sales associate (FTE) and two facilities supplies associates (PTE). In the first year, the utilization of our management is 75 hrs/wk which is actual output divided by design capacity of 80 hours (Manager 1*40hrs+Assistant Manager 1*40hrs) giving us a utilization of 93.75%. For sales and facilities supplies associates, the utilization is equal to actual output of 75 hrs/wk divided by design capacity of 140 hrs/wk (Sales Associate 1 * 40hrs+Facilities Supplies Associate 3 * 20hrs) giving our firm a 53.57% utilization. In year 2 our firm will hire an additional assistant manager and sales associate to accommodate increased customer demand and expanded store hours, but will stay constant through year 5. The store will be opened for a total of 100 hrs/wk from year two on: Monday through Thursday 6 a.m.9 p.m.; Friday through Saturday 6 a.m.10 p.m.; and Sunday 6 a.m.2 p.m. Management utilization will be 83.33%, calculated by actual output 100 hrs/wk divided by the design capacity of 120 hrs/wk (Manager 1*40hrs+Assistant Manager 2*40hrs). Lower level

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employee utilization will be 55.56%, calculated by actual output of 100 hrs/wk divided by the design capacity of 180 hrs/wk (Sales Associate 3*40hrs+Facilities Supplies Associate 3*20hrs).

Table 10 At C.Y.O. Cereal we will have equipment consisting of computers, cash registers, weighted scales, cereal dispensers, oven, refrigerator, and a refrigerated serving bar as shown in Table 11. In the first year we will have one refrigerator, but to accommodate our increased sales of 200% in year two, referenced in Financial Assumption 2, an additional refrigerator will be purchased. Through the use of our oven, total 12-pack cereal bar sales will be 23,157. We are able to bake 7.3 batches per hour (60 min/20 min to bake per batch*3 trays per batch) generating 51.3 actual hours of baking per week. When divided by 75 working hours per week (design capacity), our utilization rate is 68.4%. In year 2, due to increased demand, we will purchase a second oven to increase production. This second oven will be able to support our growth through the next five years. In year 2, cereal bar baking utilization will be 48.68 actual hours per week divided by 100 working hours per week (design capacity) giving us a 48.68% utilization. This is a low enough utilization where we are able to grow our cereal bar sales to a great degree without worrying about reaching 100% utilization.

Table 11 Inventory Issues Inventory is a critical aspect of the operational processes toward C.Y.O. Cereals success. Thus, our firm plans to utilize a fixed interval replenishment system. Within this system, our employees will do weekly inventory level checks as well as weekly inventory replenishment. A system such as this creates a proactive approach to keep inventory at a consistent level in correlation with customer demand. This allows our firm to keep inventory costs low by a quick turnover rate, and allows us to monitor inventory for quality assurance. We will also keep a safety stock of $5,000 throughout the year in case of demand fluctuations not accounted for in sales forecasts.

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C.Y.O. Cereal orders our inventory on a weekly basis due to our supplier lead time capabilities and reliability. The lead time of our order is one day of processing and one day to deliver from PeaPod as seen in Table 12. This is ideal for weekly replenishment because it is quick enough to keep up with our inventory usage as well as keeping the highest quality of freshness. Freshness is a high priority because the quality of milk can quickly deteriorate below our freshness standards before it expires. Along with our suppliers convenient lead time, they are highly reliable. PeaPod has been around since 1989, has delivered more than 20 million orders, and allows flexibility of delivery times (PeaPod, 2012). They provide a two hour window for delivery so we know when our delivery will arrive. Also, PeaPod will charge a processing fee of $11.95 and a fuel surcharge of $0.69 which is a minimal cost to our company, keeping our replenishment system ideal. In case we need additional inventory due to heightened sales in a given week, our firm plans to purchase needed inventory at an individual basis at the local grocery store, Harris Teeter, at the materials retail value. Table 12 Proactive Quality Assurance Our proactive quality assurance will begin with proper documentation for all inventory orders placed. A C.Y.O Cereal manager will enter data into a computer program that monitors inventory levels for each type of cereal, topping, milk, and various other ingredients. The system we have in place will provide notification when a particular item in inventory reaches a predetermined level. Upon the arrival of inventory from a supplier, the employee currently on the job will check shipments with the invoice. This will ensure that all inventories are matched to our specifications and expectations. Equally important, the expiration dates will be checked to ensure the highest quality of freshness. Secondly, to ensure that our service quality is inimitable, there will be an application process followed by an interview when looking to hire new employees. The interview will allow us to make sure that each individual will contribute positive charisma to our atmosphere. Once hired employees will go through a training process that is referenced on page 12. Thirdly, when customers place orders for their cereal bars they will have the ability to do so either in the store or over the phone. To assure the customers always receive what they order, C.Y.O. Cereal will have order slips in the store that they will fill out themselves. Once given to an employee, each order will be entered into the computer along with filed in a filing cabinet in the back corresponding with the pick-up date. When calling in an order, the employee will take the customers order, reiterate their order back to them after it is placed to verify there was no miscommunication, and

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then it will be also be entered into the computer and filed in the managers office. Along with their orders we guarantee quality through key standards in the making of cereal bars and boxes. These standards include correct baking temperature and time of the cereal bars in the ovens and freshness checks periodically of our inventory. Lastly, to make certain that customers are enjoying their experience, we will have feedback sheets available. This will allow customers to let us know what they like, dislike, or any other additional comments they feel necessary about our services and products. This will make certain that C.Y.O. Cereal is doing everything possible to offer the best quality to each and every customer. Reactive Approach If by chance one of our products did not meet the customer quality expectations, then our firm will implement our reactive quality assurance plan. Within this plan our managers start by fully understanding the issue at hand through open communication with our customers, we then ask that our customers fill out a complaint form to keep on record. This record allows our firm to see patterns and reoccurring problems so that we can create solutions within our operations. First if it is a small fix, managers can quickly make the change that is needed, and then create awareness with our employees about the issue so that it does not happen again. If the problem cannot be handled immediately our manager will step back and evaluate the issue has and try to develop solutions to fix it. Once the solution has been created and implemented, the manager will train employees about the new correct protocol. Benchmarking At C.Y.O. Cereal we feel it is important to benchmark, our performance against the best in our industry. Due to the bare amount of customizable cereal bars in the United States today, the closest industry to our products appeared to be the snack and non-alcoholic beverage industry. Within this industry the frozen yogurt companies closely match our operational processes. They provide a self-serve store format, which has given consumers the freedom to choose their flavors, toppings and serving amount, just as our organization would (Panteva, 2012). The top two frozen yogurt franchises that are doing it best today are Yogurtland and Menchies. Yogurtland places itself at the top of the list due to their unique flavors that are formulated in-house. Menchies comes in close second due to their emphasis on creating a family-friendly environment. They have recently launched a new platform to increase customer loyalty among families with young kids. (Ambrosio, 2011). Though C.Y.O Cereal may not offer the same exact product, our core ideas of business are the same. Benchmarking ourselves to this industry opens many doors for new ideas and expansion

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in our business. For one, we could eventually develop our own specialized kind of cereal, or incorporate a strategy like Menchies by offering a toy with purchase to increase our customer loyalty with families. Benchmarking for our business will help our overall quality and growing success. Total Quality Management At C.Y.O. Cereal we plan to utilize the core concepts of Total Quality Management (TQM). The three principles of TQM that we plan to utilize are customer focus, continuous process improvement, and total involvement. The customer focus principle is outlined by internal and external customers who define what quality is at C.Y.O. Cereal. Internal customers create operational and tactical planning, policy making, and administrative support. Our external customers provide support by giving feedback on our offerings and operations. The internal customers will then take feedback to make corrective actions and improve training techniques. C.Y.O. Cereal implements continuous process improvement through Shewharts Plan-DoAct-Study (PDSA) cycle. This process begins by identifying and developing a plan to improve operational procedures. Once a plan is developed, we will test the plan on a sample group. We will then check if the plan is working within the small group to reach a conclusion if it is ready for implementation. If the plan results meet our firms needs then we are able to implement the plan into our firms processes and operations creating continuous improvement. The last principle of TQM identifies a true commitment to all levels of the firm. This is important because the prior principles are dependent on the collaboration of all employees to establish a successful process. We will foster commitment by allowing open channels of communication and utilizing proper leadership techniques. Value Creation In Table 13 below are the functional areas in which our business creates the most value.

Table 13

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Capital Formation To finance the initial operations of C.Y.O. Cereal, we estimate financial requirements to be $301,679. This sum will consist of an aggregate $17,000 investment by the founders, $160,000 in angel investments, and $124,679 in long-term debt. These amounts were figured based on the industry analysis of 60% of capital structure was due to equity. Furthermore, with a contribution of only 9.6%, the founders of C.Y.O. Cereal will likely be minority shareholder, while the potential exists for an angel investor contributing a large enough investment to enjoy a majority shareholder status. This capital is needed to cover the high costs associated with our business start-up, but investors will enjoy large dividends in the future as a result of our high ending cash balances. Dividends will begin in year two continuing through year five, and will steadily increase in the percentage of EAT, which are 40%, 60%, 60%, and 70% respectively. These steady increases results in the following dividends of $5,972, $21,916, $36,852, and $65,475 for years 2, 3, 4, and 5. Return on Investment An investor of C.Y.O. Cereal will begin to recognize returns in Year 5, which will grow dramatically throughout the life of the company from then on. Based on the Constant Growth Model, C.Y.O. Cereal expects an IRR of 34.87% and an MIRR of 33.92%, as we reinvest at the WACC of 20%. Furthermore, C.Y.O. Cereal is also able to provide a superb amount of value to its shareholders as shown by a positive NPV of $85,557.17. This model was chosen instead of the Book Value of Equity due to the higher NPV, IRR, and MIRR results. The higher results show the best profitability for C.Y.O. Cereals investors. After the fifth year of operations, C.Y.O Cereal will continue to grow at a yearly rate of 1.2% into perpetuity. Conclusion C.Y.O. Cereal will be the front runner in innovation in the snack shop industry by offering top quality and highly customizable products, providing tremendous growth opportunities. Our innovative marketing and operational plans set us aside from any competitor in the market. With your initial investment, along with those of the founders C.Y.O. Cereal will have the foundation for a profitable and successful business venture.

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Financial Appendices
C.Y.O. Cereal Pro Forma Income Statement Year 1 Revenues2 COS(Cereal Bowls)4 COS(Cereal Bars)4 COS (Boxed Cereal)4 COS (Credit Card Transaction Costs)7 COS (Direct Labor: Part-Time and Gross Margin - SG&A Expenses9 - Salaries, Wages and Benefits8 - Utilities Expense10 - Lease Expense11 - Depreciation Exp. (Building) - Depreciation Exp (Office Equip.)6 EBIT Interest14 EBT Taxes EAT Dividends Change in Retained Earnings Pro Forma Balance Sheet Year 1 Cash12 Accounts Receivable7 Inventory4 Total Current Assets Net Fixed Assets6 Total Assets Accounts Payable5 Accruals Current Liabilities Long-term Debt14 Common Stock13 $ Retained Eanings Total Liabilities & Equity $ $ $ 52,118 1,954 5,000 59,072 84,645 143,717 18,772 5,883 24,655 124,679 177,000 (182,617) 143,717 36.3% 1.4% 3.5% 41.1% 58.9% 100.0% 13.1% 4.1% 17.2% 86.8% 123.2% -127.1% 100.0% $ $ $ $ Year 2 67,826 5,863 15,000 88,689 94,680 183,369 52,362 8,078 60,440 119,589 177,000 (173,660) 183,369 37.0% 3.2% 8.2% 48.4% 51.6% 100.0% 28.6% 4.4% 33.0% 65.2% 96.5% -94.7% 100.0% $ $ $ $ Year 3 69,425 6,273 16,050 91,748 83,115 174,863 55,930 8,219 64,149 92,763 177,000 (159,049) 174,863 39.7% 3.6% 9.2% 52.5% 47.5% 100.0% 32.0% 4.7% 36.7% 53.0% 101.2% -91.0% 100.0% $ $ $ $ Year 4 71,066 6,712 17,174 94,951 71,550 166,501 59,747 8,360 68,106 55,876 177,000 (134,481) 166,501 42.7% 4.0% 10.3% 57.0% 43.0% 100.0% 35.9% 5.0% 40.9% 33.6% 106.3% -80.8% 100.0% $ $ $ $ Year 5 72,836 7,249 18,547 98,633 59,985 158,618 64,404 8,500 72,905 15,134 177,000 (106,421) 158,618 45.9% 4.6% 11.7% 62.2% 37.8% 100.0% 40.6% 5.4% 46.0% 9.5% 111.6% -67.1% 100.0% $ $ $ $ $ Full-Time)8 $ $351,758.46 (20,678) (89,811) (90,775) (3,518) (101,579) 45,398 (40,878) (107,251) (24,000) (39,000) 0 (9,405) (175,136) (7,481) (182,617) 0 (182,617) (182,617) 100.0% -5.9% -25.5% -25.8% -1.0% -28.9% 12.9% -11.6% -30.5% -6.8% -11.1% 0.0% -2.7% -49.8% -2.1% -51.9% 0.0% -51.9% $ $ $ 14,929 5,972 8,957 $ $ 22,410 (7,481) 14,929 0 $ Year 2 $ 1,055,275 (62,035) (269,432) (272,326) (10,553) (131,138) 309,792 (55,753) (155,628) (24,547) (39,889) 0 (11,565) 100.0% -5.9% -25.5% -25.8% -1.0% -12.4% 29.4% -5.3% -14.7% -2.3% -3.8% 0.0% -1.1% 2.1% -0.7% 1.4% 0.0% 1.4% $ $ $ 36,527 21,916 14,611 $ $ 43,683 (7,156) 36,527 0 $ $ Year 3 1,129,145 (66,377) (288,292) (291,389) (11,291) (132,638) 339,158 (58,877) (159,128) (25,107) (40,799) 0 (11,565) 100.0% -5.9% -25.5% -25.8% -1.0% -11.7% 30.0% -5.2% -14.1% -2.2% -3.6% 0.0% -1.0% 3.9% -0.6% 3.2% 0.0% 3.2% $ $ $ 61,419 36,852 24,568 $ $ 66,863 (5,444) 61,419 0 $ $ Year 4 1,208,185 (71,024) (308,472) (311,786) (12,082) (134,138) 370,683 (62,219) (162,628) (25,679) (41,729) 0 (11,565) 100.0% -5.9% -25.5% -25.8% -1.0% -11.1% 30.7% -5.1% -13.5% -2.1% -3.5% 0.0% -1.0% 5.5% -0.5% 5.1% 0.0% 5.1% $ $ $ 93,536 65,475 28,061 $ $ 96,625 (3,089) 93,536 0 $ Year 5 $ 1,304,840 (76,706) (333,150) (336,729) (13,048) (135,638) 409,569 (66,306) (166,128) (26,265) (42,680) 0 (11,565) 100.0% -5.9% -25.5% -25.8% -1.0% -10.4% 31.4% -5.1% -12.7% -2.0% -3.3% 0.0% -0.9% 7.4% -0.2% 7.2% 0.0% 7.2%

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25
Notes to Financial Statements: 1. The business will be a Limited Liability Corporation. No taxes will be incurred at the business level. 2. For Year 1 : Annual Revenues = (17,524*$3.42) + (23,157 * $5.99) + (21,905 * $6.99) = $351,758 (Bizminer,2012) For Year 2: Sales are expected to grow by 200% (i.e. triple) from year 1 to 2, his will increase total sales to $1,055,275. For Year 3: Sales are expected to grow by 7% from year 2 to 3, this will increase total sales to $1,129,145. (Bizminer, 2012) For Year 4: Sales are expected to grow by 7% from year 3 to 4, this will increase total sales to $1,208,185. (Bizminer, 2012) For Year 5: Sales are expected to grow by 8% from year 4 to 5, this will increase total sales to $1,304,840. (Bizminer, 2012) 3. Based on Peapod 2012 , our variable costs will be as follows: Per Bowl of Cereal: $1.18 Per 12- pack Bars of Cereal: $4.10 Per Box of Cereal: $3.92 4. For Year 1: C.Y.O. Cereal will keep $5,000 of inventory on hand at the end of the year. All inventories are paid for, on average, one month after ordering. Delivery is typically made within the same week of ordering. 1st year inventory is projected by multiplying projected sales units multiplied by variable cost: Cereal Bowl 17,524 units x $1.18 = $20,678 Cereal Bars 23,157 units x $4.10 = $89,811 Boxed Cereal 21,905 units x $3.92 = $90,775 For Year 2: C.Y.O. Cereal will keep increase its end of year inventory by 200% to $15,000 of inventory at year end. Due to an increased sales volume, inventory levels will proportionally rise with sales. Cereal Bowl 17,524 units x 200% = 52,572 units x $1.18 = $62,035 Cereal Bars 23,157 units x 200% = 65,715 units x $4.10 = $269,432 Boxed Cereal 21,905 units x 200% = 69,471 units x $3.92 = $272,326 For Year 3:C.Y.O. Cereal will keep increase its end of year inventory by 7% to $16,050 of inventory at year end. Due to an increased sales volume, inventory levels will proportionally rise with sales.(Bizminer, 2012) Cereal Bowl 52,572 units x 7% = 56,252 units x $1.18 = $66,377 Cereal Bars 65,715 units x 7% = 70,315 units x $4.10 = $288,292 Boxed Cereal 69,471 units x 7% = 74,334 units x $3.92 = $291,389 For Year 4: C.Y.O. Cereal will keep increase its end of year inventory by 7% to $17,174 of inventory at year end. Due to an increased sales volume, inventory levels will proportionally rise with sales. (Bizminer, 2012). Cereal Bowl 56,252 units x 7% = 60,190 units x $1.18 = $71,024 Cereal Bars 70,315 units x 7% = 75,237 units x $4.10 = $308,472 Boxed Cereal 74,334 units x 7% = 79,537 units x $3.92 = $311,786 For Year 5:C.Y.O. Cereal will keep increase its end of year inventory by 8% to $18,547 of inventory at year end. Due to an increased sales volume, inventory levels will proportionally rise with sales. Cereal Bowl 60,190 units x 8% = 65,005 units x $1.18 = $76,706 Cereal Bars 75,237 units x 8% = 81,256 units x $4.10 = $333,150 Boxed Cereal 79,537 units x 8% = 85,900 units x $3.92 = $336,729 5. All supplies and utilities are paid for one month after ordering each year. This will result in a one month lag in payments for Accounts Payable that will need to be paid off in the following year. Ending Accounts Payable will be equivalent to C.Y.O. Cereals (Material Purchases Material Payments) + (Utilities expense Utilities Payments) For Year 1: Accounts Payable = ($201,264 184,492) + (24,000 22,000) = $18,772 For Year 2: Accounts Payable = ($603,793 553,477) + (24,547 22,502) = $ 52,362 For Year 3: Accounts Payable = ($646,058 592,220) + (25,107 23,015) = $ 55, 930 For Year 4: Accounts Payable = ($691,282 633,675) + (25,679 23,539) = $ 59,747 For Year 5: Accounts Payable = ($746,585 684,370) + (26,265 24,076) = $ 64,404 6. C.Y.O. Cereal has the following equipment (RestaurantSource, 2012) a. For Year 1: Office Equipment (10 year life straight line depreciation) Computer (1) 600 Desk and Chair 500 Cash Registers (2) 1400 Weight Scales (2) 500 File Cabinet 150 Dispensers 2,500 Refrigerated Topping Bar 3,800 Signs & Menu Bars 6,000 Furnitures/fixtures 66,000 Convection Oven 3,600 Refrigerator 9,000 Total $ 94,050 Annual Depreciation $94,050/10yrs = $9,405 per year b. For Year 2: The fast growing sales gives rise to the need for additional equipment such as refrigerator storage to keep up with the increase of inventory kept on hand and one extra oven to handle increased cereal bar orders. The firm plans to buy two new refrigerators for $9,000 each and a new oven for $3,600. (RestaurantSource, 2012) It will also be depreciated straight-line in 10 years, so annual depreciation expense = $21,600/10 = $2,160 per year Annual Depreciation = $9,405 + $2,160 = $11,565 Net Fixed assets increases due to the addition of the two refrigerators and additional oven. Total Net Fixed Assets = $84,645 + $21,600 - $11,565 = $94,680 c. For Year 3: No additional equipment is required. The following expenses do NOT vary with sales. Office Equipment (10 year life) Annual Depreciation = $11,565

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d. For Year 4: No additional equipment required. Depreciation = $11,565 e. For Year 5: No additional equipment required. Depreciation = $11,565 It is estimated that 60% of customers will pay for their purchases with cash and 40% will use a credit card. It is estimated to take 3-5 days for credit card purchases to be collected. Credit card transaction costs equal 2.5% of credit card purchases based on information collected from credit card companies. a. For Year 1: Accounts Receivable Annual Revenues x Credit Card Percentage x (5/360 days) $351,758 x 40% x (5/360) = $1,954.21 Credit Card Transaction Cost $351,758 x 40% x 2.5% = $3,517.58 b. For Year 2: Accounts Receivable $1,055,275 x 40% x (5/360) = $5,862.64 Credit Card Transaction Cost $1,055,275 x 40% x 2.5% = $10,552.75 c. For Year 3: Accounts Receivable $1,129,145x 40% x (5/360) = $6,273.03 Credit Card Transaction Cost $1,129,145 x 40% x 2.5% = $11,291.45 d. For Year 4: Accounts Receivable $1,208,185 x 40% x (5/360) = $6,712.14 Credit Card Transaction Cost $1,208,185 x 40% x 2.5% = $12,081.85 e. For Year 5: Accounts Receivable $1,304,840 x 40% x (5/360) = $7,182 Credit Card Transaction Cost $1,304,840 x 40% x 2.5% = $13,048.40 A total of 7 employees will be needed during the 1st year. (PayScale, 2012)There will be 10 paid days outstanding at the end of each year for employees. (Assume 355 work days) 1 Manager 41,000 (+16.62% Benefits and Health)= $58,873.20 1 Assistant Manager 32,000 (+16.62% Benefits and Health)= $48,377.40 2 Sales Associates 18,500x2= 37,000 (+16.62% Benefits and Health)= $68,342.10 3 Facility Supplies Associate 9,500x3= 28,500 (+16.62%) = $33,236.70 Total Salaries and Benefits Cost = $208,829.40 Full-Time Benefits, remain constant for years 1, 2, 3, 4, and 5. (P.R.Newswire,2012) Social Security = 6.20% Medicare = 1.45% FUTA = 0.80% SUTA = 3.17% Workers Compensation = 5.00% Health Insurance = $11,059 a. For Year 2: Due to our increase in sales and inflation in customers, C.Y.O. Cereal will hire an additional assistant manager as well as another sales associate. This will result in the following salaries and benefits cost for year two: (PayScale, 2012) 1 Manager 41,000 (+16.62% Benefits and Health)= $58,873.00 2 Assistant Managers 32,000x2=64,000 (+16.62% Benefits and Health)= $96,754.80 3 Sales Associates 18,500x3=55,500 (+16.62% Benefits and Health)= $97,901.10 3 Facility Supplies Associates 9,500x3= 28,500 (+16.62%) = $33,236.70 Total Salaries and Benefits Cost = $286,765.70 b. For Year 3: After two years of experience for most of our employees we are going to raise the salaries for all full-time employees. 1 Managers $58,873.20 + $1,500 = $60,373.20 2 Assistant Managers $96,754.80 + $2,000 ($1,000x2)= $98,754.80 3 Sales Associates $97,901.10 + $1,500 ($500 x 3) = $99,401.10 3 Facility Supplies Associates $33,236.70 + $0 = $33,236.70 Total Salaries and Benefits Cost = $291,765.80 c. For Year 4: After three years of experience for most of our employees we are going to raise the salaries for all full-time employees in the same increments. 1 Managers $60,373.00 + $1,500 = $61,873.20 2 Assistant Manager $98,754.80 + $2,000 ($1,000x2)= $100,754.80 3 Sales Associates $99,401.10 + $1,500 ($500 x 3) = $100,901.10 3 Facility Supplies Associates $33,236.70 + $0 = $33,236.70 Total Salaries and Benefits Cost = $296,765.80 d. After four years of experience for most of our employees we are going to raise the salaries for all full-time employees in the same increments. 1 Managers $61,873.20 + $1,500 = $63,373.20 2 Assistant Manager $100,754.80 + $2,000 ($1,000 x 2) = $102,754.80 3 Sales Associates $100,901.10 + $1,500 ($500 x 3) = $102,401.10

7.

8.

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3 Facility Supplies Associates $33,236.70 + $0 = $33,236.70 Total Salaries and Benefits Cost = $301,765.80
9.

10.

11.

12.

13. 14.

15. 16.

Based on Cereal Bowl Holdings LLC (The Cereal Bowl), C.Y.O. Cereal will incur the following SG&A Expenses: a. For Year 1: Telephone 3,000 Insurance 15,000 Legal/Accounting 2,000 Training 6,000 Miscellaneous 3,750 Total SG&A $29,750 It is assumed all SG&A expenses are paid in cash i. According to Bizminer (Industry Financial Report 2012), when comparing our firm to the industry average of Ice Cream Parlors, we found their promotion expense to be $11,128. This will be added into the SG&A account on our income statement. We further allocated this total to the following promotions. Print Advertising 1,113 Billboards 4,451 Sampling 4,451 Coupons 1,113 Total Promotion $11,128 b. For Year 2: Annual SG&A Expenses will rise 50%, while promotion expenses will stay the same. $29,750 * 50% + 11,128 = 55,753 c. For Year 3: Annual SG&A expenses are expected to grow 7% from the 2nd year, while promotion expenses stay constant. (Bizminer, 2012) $44,625*(1+.50) + 11,128 = $58,877 d. For Year 4: Annual SG&A are expected to grow by 7% while promotion expenses stay the same from 3rd year. (Bizminer, 2012) $51,091*(1+.50) + 11,128 = $62,219 e. For Year 5: Annual SG&A expenses are expected to grow by 8% from 4th year, while promotion expenses stay constant. (Bizminer, 2012) $51,097*(1+.50) + 11,128 = $66,306 The company will incur a utility expense of about $2,000 a month, or $24,000 annually. All utilities are paid for, on average, 1 month after expense is incurred. (CerealBowl, 2012). According to the Business Labor Statistics, average inflation rate is 2.28%, which will affect utilities expense in the following 4 years (U.S. Department of Labor, 2012) For Year 2: $24,000 x 2.28% = $24,547 For Year 3: $24,547 x 2.28% = $25,107 For Year 4: $25,107 x 2.28% = $25,679 For Year 5: $25,679 x 2.28% = $26,265 Our company will incur a lease expense of $3,250 per month. This will result in an annual expense of $39,000 per year. (FederalRealty, 2012) According to the Business Labor Statistics, average inflation rate is 2.28%, which will affect lease expense in the following 4 years. For Year 2: $39,000 x 2.28% = $39,889 For Year 3: $39,889 x 2.28% = $40,799 For Year 4: $40,729 x 2.28% = $41,729 For Year 5: $41,729 x 2.28% = $42,680 Target Ending Cash balance for the firm for Year 1 is equal to 2 months of operating expenses (i.e. SG&A expenses + Lease Expense + Salaries, Wages and Benefits), which are equal to [$64,878 + 39,000 + 208,829]*2/12 = $52,118 For Year 2: ($80,300 + 39,889 + 289,766) *2/12 = $67,826 For Year 3: ($83,284 + 40,799 + 291,766) *2/12 = $69,425 For Year 4: ($87,898 + 41,729 + 296,766) *2/12 = $71,066 For Year 5: ($92,571 + 42,680 + 301,766) *2/12 = $72,836 Founders will contribute $17,000, and outside equity investors are needed to provide $160,000. This is based on the debt ratio of Ice Cream Parlors from Bizminer (Industry Financial Report 2012), which stated that about 60% of our debt should be in equity. The Company will borrow $124,679 from a bank at a 6% interest rate. Interest payment will be equal to $7,481 in year 1. No dividends will be paid. Year 2: Due to C.Y.O. Cereals high cash balance, the company will pay back $5,090 of Long Term Debt in order to reach the target cash of $67,826. Interest payment will be $7, 481. The pay back will result in a $625 decrease in interest expense in Year 3. The company expects to pay 40% EAT in dividends. Year 3: C.Y.O. Cereal will continue to pay back their Long Term Debt due to a high cash balance. The Company will pay back $26,826, incur an interest expense of $7,156, and pay 60% of EAT in dividends. This will result in a decrease of $1,712 in interest in Year 4. Year 4: C.Y.O. Cereal will continue to pay back their Long Term Debt due to a high cash balance. The Company will pay back $36,866, incur an interest expense of $5,444, and pay 60% of EAT in dividends. This will result in a decrease of $2,354 in interest in Year 5. Year 5: C.Y.O. Cereal will continue to pay back their Long Term Debt due to a high cash balance. The Company will pay back $40,742, incur an interest expense of $3,089, and pay 70% of EAT in dividends. WACC is 20%. This came from the fact that though 25% is the common percentage for start-ups, mature low-risk restaurants have much lower WACCS (around 8-10%). (NYU.edu, 2012) From this research, C.Y.O. Cereal adjusted our WACC downward 5%. Industry Average Growth Rate is 1.2% (Samadi, 2012)

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