1. The Pudong Coffee Shop
3Z --from SHUFE 1

2. Outlines Balanced Scorecard Case Overview Tactics Background
Financial
Forecast
Tactics
Conclusion
Background
Current Situation

3. Case overview 1
The Pudong coffee shop is located in Pudong area which is surrounded by several large office buildings and a business school.
Li, the owner of the coffee shop, puts much attention on the quality of food and service, which he believes will lead to the consumers’ loyalty. 2 3
The coffee shop suffered a loss in 2009 even though it had a net cash inflow. And Li wants to find someone to help him to improve his coffee shop.

4. Current situation The revenue and net profit
1. The coffee shop’s revenue is 915,000 in 2008,and 930,000 in 2009, which is a slight increase.
2. But the net profit is totally different. It’s 32,300 in 2008 and in 2009.
Conclusion: The revenue is not the only reason that affects the loss.

5. 2008
2009
After a detailed analysis, we find that cost of sales increased a lot from 2008 to 2009, which caused a loss in the end.

6. why? problems The customer’s growth rate is below the average
The coffee shop’s customer’s growth rate is 1.64% which is lower than average rate of approximately 10% in China.
problems
The large part of employees are part-time
There are only two full-time employees, others are part-time unskilled employees. This would impose a negative impact on the quality of service, which would eventually increase the customer attrition rate.
Text
The inventories is in a high level
It has a inventories of in 2009,higher than that of 2008, which is too much as a coffee shop and causes a higher fee of garbage collection

7. Problem 1 customer’s growth rate is low
The text tells us that the average spend per customer is 50, thanks to the revenue, we can calculate the number of the customers in the whole year.
It can be seen that only 300 more customers in 2009, the growth rate is 1.64%. However, the coffee consumption in China is growing at a double-digital rate.

8. Compare the promotion costs as a % of the revenue between the local coffee shops and the Pudong coffee shop
Conclusion:
This indicates that comparing with other coffee shops, the Pudong coffee shop spend less in promotion. And this may explain why its customer’s expanding rate remains low.

9. Low wages and remuneration The system of the recruitment
Problem The service ?
Low wages and remuneration
The system of the recruitment

10. Problem The service
EMPLOYMENT SYSTEM: Two full-time employees and several part-time employees would probably influence the quality of service.
Bad service will cause customer dissatisfaction and reduce the amount of the customers as well as destroying the reputation of the shop.
The increasing rate of losing customers would result a decline in revenue as well as profit.

11. Problem 3 Too much inventory
Conclusion:
As is shown in the chart ,the inventory
increases in 2009, it’s unwise to keep such a high level of inventory, for as a coffee shop, the drink and the food need to stay fresh to ensure the quality.

12. Relationship among the 3 problems
Low customer expanding rate
High level of inventory
Bad service
Low quality of the food and drink

13. Let’s see how to solve these problems.
Customer Loyalty
To provide excellent service and achieve high customer satisfaction
Strategic Objectives
High Profitability
To attain high profits, by increasing sales revenue and controlling costs 13

14. Balanced Scorecard —From strategy to actions Strategic Objectives
· Gross/Net profit Margin
· Operating expenses ratio
· Increase in sales, COS etc
· Inventory turnover period
Financial Perspective
· Customer expanding rate
· COS/Gross profit per customer
· Customer satisfaction
· Customer waiting time
· Wastage
· Customer complaining times
Strategic Objectives
Customer Perspective
Internal Operations Perspective
Innovation and Leaning Perspective
· Employee satisfaction
· Employee turnover
· Training times 14

15. Financial perspective Compared to the previous year
Low Profitability
y/e 31 Dec 2009
y/e 31 Dec 2008
Increase (decrease)
ROCE
1.47%
4.19%
-2.72%
Gross Profit margin
5.48%
5.75%
-0.27%
Operating Expenses ratio
53.8%
50.8% 3%
Net Profit margin
-1.47%
3.53%
-5%
For the year ended 31 Dec 2009
· 2,000 cash inflow from Cash Flow Statement
· 13,710 loss from Income Statement
Why did the coffee shop generate cash inflow, but also suffered a loss?

16. Financial perspective Why did the coffee shop generate cash inflow, but also suffered a loss?
ATTENTION：
Control costs
Reason
Sales increase by 1.64%, COS (paid on credit) increase by 8%, operating expenses increase by 7.5%
IS- Accrual basis CFS- Cash basis

17. Financial perspective Cost Analysis
Purchasing price increases and
excess the average level.
As a % of sales
2008
2009
Increase (decrease)
Average in local regions
GAP (2009 vs. Average)
Cost of sales
42.5%
45.2%
2.7%
40%
5.2%
Utilities
4.3%
0.9% 5%
0.2%
Depreciation
9.0%
8.8%
-0.2%
3.8%
Advertising and promotion
3.2%
0.5%
-1.8%
Be way above the average level.
Need to better utilize the furniture
and fittings.
Need more promotion to attract more customers.

18. PROBLEM: Inventory turnover period(2009)=36 days
Financial perspective
Cost control—Inventory Management
PROBLEM: Inventory turnover period(2009)=36 days
· Too long for a food service industry
· Inventory may get obsolescence and go bad easily
SOLUTIONS
· Better relationship with suppliers
- Obtain trade discount
- Deliver in time
· EOQ and JIT
- Keep safety stock and order in time when the stock is down to that level
- JIT purchase 18

19. Customer satisfaction
Customer perspective
Five-star service at
fair price
1.6% compared to the estimated expanding rate in China of 10%
Customer expanding rate
COS/Gross profit per customer
Increase of 1.3%/Decrease of 1.1% compared to 2008
Customer satisfaction
Customer return rate 19

20. Customer perspective How to explore new customers?
Market segmentation
· Businessman— espresso
· Office lady— non-fat coffee
· Student— blended coffee
Take-away service
· Call order
· Mail order 20

21. Customer perspective How to improve customer return rate?
Quality of food 1
Quality of service 2
Various choices of food 3 21

22. Customer perspective How to improve customer return rate?

23. Customer perspective How to improve customer return rate?
Staff
training
Provide
intensivies
More
full-time staff
Quality of service

24. Customer perspective How to improve customer return rate?

25. Internal operation perspective1
Customer waiting time
Staff
Training
-Economy
-Efficiency
-Effectiveness 2
Wastage 3
Customer complaining times
Also via training 25

26. Innovation and learning perspective
Employee satisfaction
· Provide bonus for good performance
· Offer rewards to “star of the month”
· Issue employee satisfaction
survey
Employee turnover
· More full-time employees
· Treat employees equally and equally
Employees
Training times
· Orientation Training
· Frequent training per quarter
· Depth of training

27. Financial forecast 1 Income statement 2 Cash flow statement 3
Pudong Coffee Shop 1
Income statement 2
Cash flow statement 3
Balance sheet 27

28. Financial forecast Assumptions Pudong Coffee Shop 1 2 3 4 5 6
Sales prices will increase by 3% 1
Sales volume will increase by 5% 2
Discretionary cash expenses increase by 4% 3
Suppliers will extend trade credit by 4% 4
Inventory turnover rate will be unchanged 5 6
No investing or additional financing activities 28

29. These 4 numbers are （1+4%）times of the numbers in 2009
Income statement for 2010
524,527.5=485,000*(1+5%)*(1+3%)
481,267.5=445000*(1+5%)*(1+3%)
1,005,795=930,000*(1+5%)*(1+3%)
Income Statement for year ended:
31st December 2010
31st December 2009
Revenue (beverages/drinks)
524,527.5
485,000
Revenue (food sales )
481,267.5
445,000
Total revenue (food and beverages)
1,005,795
930,000
Cost of sales
(458,640)
(420,000)
Gross profit
547,155
510,000
Less Operating expenses:
Depreciation of tangible assets
(82,000)
Wages and remuneration
(135200)
(130,000)
Rental
(200,000)
Utilities (lighting and heating etc.)
(49,920)
(48,000)
Garbage collection
(10,400)
(10,000)
Advertising and promotions
(31,200)
(30,000)
Total operating expenses
(508,720)
(500,000)
Operating profit for year
38,435
10,000
Interest payable on loans
(18,370)
(23,710)
Profit (loss) for year
20,065
(13,710)
458,640=420000*(1+5%)*(1+4%)
These 4 numbers are （1+4%）times of the numbers in 2009

30. Repayment of loan including interest
Financial forecast
Pudong Coffee Shop
Bank loan’s computation process
Year
Interest rate
Interest payable
Bank loan payable
Repayment of loan including interest 7%
410,000
28,700
338,700
100,000
23,710
262,410
18,370
180,780
12,650
93,430
6,570 0﹡
Note:
In order to rationalize the computational process, we assume that at the end of 2012, the balance of the bank loan payable is exactly 0. 30

31. Cash flow statement for 2010
Summarised cash Flow statement for year ended:
31st December 2010
31st December 2009
Operating cash flow
Operating profit (loss) for year
38,435
10,000
Add: depreciation
82,000
120,435
92,000
Changes in working capital:
Less: Increase in inventories
(1,544)
(6,000)
Add: Increase in trade payables
19,044
16,000
137,935
102,000
Investing activities:
NIL
Financing activities:
Repayment of loan including interest
(100,000)
= Overall cash flow (deficit) for year
37,935
2,000
Add: Opening bank balance
198,000
196,000
Equals: Closing bank balance
235,935
No investment

32. Balance sheet for 2010 Summarised Balance Sheet at: Goodwill
31st December 2010
31st December 2009
Goodwill
400,000
Furniture and fittings (net)
164,000
246,000
Inventories
45,544
44,000
Cash at bank
235,935
198,000
Total assets
845,479
888,000
Owner’s equity
438,655
418,590
Bank loan payable
180,780
262,410
Trade payables
226,044
207,000
Total liabilities and owner’s equity
226,044=207,000*(1+5%)*(1+4%)

33. Financial forecast Pudong Coffee Shop Inventory’s computation process
Take the inventory in 2010’s Balance sheet for example
Formula:
Inventory Turnover Rate = Cost of sales / Average inventory
Year
2010
2009
Cost of sales
458,640
420,000
Opening inventory
44,000
38,000
Closing inventory X
Average
(44,000+X)/2
41,000
458,640 / [( 44,000 + X ) / 2] = 420,000 / 41,000
X = 45,544 33

34. Break-even point Pudong Coffee Shop Analysis:
Year
Total
revenue
The average
spend per
customer
The quantity
Of customers
Cost of
sales
cost per
expenses
Break-even
point
2009
930,000 50
18,600
420,000
22.58
523,710
19,100
2010
1,005,795
51.5
19,530
458,640
23.48
527,090
18,814
51.5=50*(1+3%)
23.48=22.58*(1+4%)=458640/19530
Analysis:
In year 2009,The Pudong coffee shop had not reached the break-even point, so it had a loss.
According to the forecast, in year 2010, the Pudong coffee shop will reach the break-even point, and finally gets a profit.

35. Cost-volume-profit chart
Break-even point
Pudong Coffee Shop
Cost-volume-profit chart
2009 and 2010
the quantity of customers
cost
loss
profit
18,814 19,530 FC
2010 break-even point
the quantity of customers
cost
loss
profit
18,600 19,100 FC
2009 break-even point
Loss
Gain
However, still low profitability

36. Overall evaluation Pudong Coffee Shop Assumptions
1、We use the Enterprise's valuation model.
2、We use six assumptions in the financial forecast.
3、We use the loan interest rate 7% as the discount rate.
4、Because of the depreciation and bank loan payables，
we can only get the data of year 2008 to 2012, so the
period for evaluation is from 2010 to 2012. 36

37. Overall evaluation Balance sheet of three years’ forecast
Pudong Coffee Shop
Balance sheet of three years’ forecast
Year
2010
2011
2012
Goodwill
400000
Furniture and fittings (net)
164000
82000
Inventories
45544
51300
53435
Cash at bank
235935
306934
422263
Total assets
845479
840234
875698
Owner’s equity
438655
499964
606149
Bank loan payable
180780
93430
Trade payables
226044
246840
269549
Total liabilities and owner’s equity 37

38. Overall evaluation Income statements of three years’ forecast
Pudong Coffee Shop
Income statements of three years’ forecast
Year
2010
2011
2012
Revenue (beverages/drinks)
524,527.5
567,276
613,510
Revenue (food sales )
481,267.5
520,491
562,911
Total revenue (food and beverages)
1,005,795
1,087,767
1,176,420
Cost of sales
(458,640)
(496,019)
(536,445)
Gross profit
547,155
591,748
639,976
Less Operating expenses:
Depreciation of tangible assets
(82,000)
Wages and remuneration
(135,200)
(140,608 )
(146,232)
Rental
(200,000)
(20,0000)
Utilities (lighting and heating etc.)
(49,920)
(51,917)
(53,993)
Garbage collection
(10,400)
(10,816)
(11,249)
Advertising and promotions
(31,200)
(32,448)
(33,746)
Total operating expenses
(508,720)
(517,789)
(527,220)
Operating profit for year
38,435
73,959
112,755
Interest payable on loans
(18,370)
(12,650)
(6,570)
Profit (loss) for year
20,065
61,309
106,185 38

39. Overall evaluation Cash flow statements of three years’ forecast
Pudong Coffee Shop
Cash flow statements of three years’ forecast
Year
2010
2011
2012
Operating cash flow
Operating profit (loss) for year
38,435
73,959
112,755
Add: depreciation
82,000
120,435
155,959
194,755
Changes in working capital:
Less: Increase in inventories
(1,544)
(5,756)
(2,135)
Add: Increase in trade payables
19,044
20,796
22,709
137,935
170,999
215,329
Investing activities
Nil
Financing activities:
Repayment of loan including interest
(100,000)
= Overall cash flow (deficit) for year
37,935
70,999
115,329
Add: Opening bank balance
198,000
235,935
306,934
Equals: Closing bank balance
422,263 39

40. From the cash flow statements of 2010, 2011 and 2012.
Enterprise's valuation model
From the cash flow statements of 2010, 2011 and 2012.
Year
Base period
2010
2011
2012
Total cash flow
37,935
70,999
115,329
Discount rate 7%
Discount factor
0.9346
0.8734
0.8163
Expected present value
191,608
35,454
62,011
94,143
Perpetual growth rate
4.15%﹡
Present value for year ended
3,303,266﹡
4,046,632﹡
Overall value
3,494,874﹡
Note:
Perpetual Growth Rate 4.15% = (1+5%)*(1+3%)-1-4%
Final value 4,046,632 = 115,329 / (7%-4.15%)
3,303,266 = *
3,494,874 = 3,303, ,608 40

41. Action Plans Objectives hierarchy Expand to other areas Three-year
Achieve average
customer growth rate
One year
Three months
Reverse loss
and attain profit 41

42. Action Plans 1. Control costs Three-year
· Better relationship with suppliers
- Obtain trade discount
- Deliver in time
· EOQ and JIT
- Keep safety stock and order in time when the stock is down to that level
- JIT purchase
One year
Three months 42

43. Provide discounts for both.
Action Plans
2. Market Segmentation
&
Take-away service
Three-year
Market segmentation
· Businessman— Espresso for most successful businessmen.
· Office lady— Non-fat coffee for office ladies who care more about their slimness.
· Student— Blended coffee for the students who love multiplied tastes.
Take-away service
· Call order
· Mail order
One year
Provide discounts for both.
Three months 43

44. Action Plans 3. Improve quality of food Three-year
· Shorten purchasing period to make food more fresh
· Develop featured coffee and special coffee of the day
· Provide various kinds of coffee to satisfy different customers‘ requirements
One year
Three months 44

45. Action Plans 4. Improve quality of service Three-year
· More staff training, including orientation training and frequent training per quarter.
· Offer rewards to the “star of the month”.
· Employee more full-time employees to enhance loyalty and decrease employee turnover rate.
One year
Three months 45

46. Thank you ! 46