Cafés Monte Bianco

Profit Wheel Analysis

1. Cash Wheel

This part of the profit wheel is composed of the operating cash, inventory, accounts
receivable, and sales. The main question therefore is whether the company has
enough inventories, accounts receivable, operating cash, and sales to switch to a
private brand of coffee. The answer to which would be a yes. In terms of cash, the
company posted an initial cash of 1.121 billion ITL at the start of the year; the
composition of private coffee sales on total sales is continuously increasing month
on month and the same goes for the account receivables as well.

2. Profit Wheel

Sales, investments in assets, operating expenses, and profits would be the main
considerations in this area of profit planning. Café Bianco still shows a healthy
financial picture in terms of these four variables. In terms of sales, its private brand
managed to generate some 9.934 billion ITL in 2000 out of the total sales of
56.112 billion ITL for that entire year. Operating expenses have been roughly
steady as its profits were able to cover for it substantially. Net profit stood at 1.945
Billion ITL for the year 2000, which meant that its operations are going to be
sustainable in the near future should it continue to have the same business model
that it is using.

3. ROE Wheel

The main considerations for this part of profit planning would be profits, asset
utilization, stockholders’ equity, and return on equity. Among the four, the ROE
and ROA should be the most important one as it directly answers the question on
whether the company is using its equity and its assets effectively. ROE is obtained
by dividing net income over shareholders’ equity. The ROE for Café Bianco would
be 0.04. ROA is obtained by dividing net income by assets. The ROA for Café
Bianco would be 0.04 as well. Since Café Bianco is just starting out, it would be
important to have a positive ROE and ROA values because that means that it is
using whatever resources (equity, assets, and cash, among others) to generate a
steady income.
Under the above strategy, it would be hard to tell when exactly Café Bianco will
start running into some cash problems. The main consideration to answer this
question would be how much net cash the company has and whether its cash flow
is in a positive or a negative direction. Its initial cash was 1.121 billion ITL. Its
cash flow is far from being in the negative territory because it is generating a net
profit after tax of 1.945 billion ITL per year. Its operating expenses are flat and
have been more than covered by its gigantic revenues. The division that sells
private brands of coffee’s total expense is not that high to make a dent on the
company’s net profit figures. Moreover, its expenses have been more than covered
by its huge sales for the year already. This means that the company’s cash flow is
sustainable and so it should not run into any cash problems in the future.
The main recommendation that should be given to Giacomo Salvetti would be to
continue the shift towards selling a private brand of coffee with a diverse coffee
grade. The key here would be to make the transition slowly so as not to introduce
unnecessary shocks into the business, its customers, and most importantly its
finances. So far, the private coffee brand division’s revenues represent some
twenty percent of the company’s total revenues so it would be too risky a move to
make a sudden shift into private branding.
The main assumptions that were made in order to come up with the analysis were:
1) the revenue and profitability figures would be relatively stable with significant
growth over the next few years, 2) that the company would continue its shift into a
private brand of coffee slowly rather than abruptly. These assumptions are critical
in that they can easily tell the difference between a successful and a soon to be
bankrupt business for Café Bianco and its owners. A drop in profitability figures
over the next years would, for example, undermine the business’ cash situation.
That would make it harder than expected to generate the cash it needs to continue
funding its plan to shift to a private brand of coffee.
At 7%, the yearly cost of completely shifting to a private brand of coffee with a
grade of “A” with an advertising cost of 7% would be 63.616 billion ITL. This
computation is based on the figures from Exhibit 2 where it says that the estimated
cost for a private brand coffee graded A would be 35,500 ITL per kg and the
estimated volume would be 1,792,000. Would Café Bianco be able to cover this
expenditure? The answer is no because its revenues (without all the deductions
such as operating and other expenses) is even lower than that at only 56.112 billion
ITL. This would be a foolish move financially because that would surely bankrupt
the company.