Performance Music School - Edwards School of Business Painter... · Web viewPerformance Music School will be a one-stop music school for all ages, focusing on old time and traditional

Performance Music School

A Business Plan

By: Celeste Smith

Class: Comm 447

Date: April 9, 2015


Executive Summary

Performance Music School is a one-stop-shop for music education in the old time

and country music genres. It offers music lessons, instrument rental, and retail items

for many different instruments. This music school will be located in the Stonebridge

neighbourhood of Saskatoon, Saskatchewan, and will target school-aged children

and senior citizens.

I will be the head teacher and manager of the school. As the number of customers

increases, I will hire an administrative assistant as well as seek out other music

teachers that will act as independent contractors. Sales are expected to grow at forty

percent per year due to word of mouth advertising, Kijiji, and posters in local

schools, churches, and senior centres.

Through personal experience teaching, I have found there to be a lack of fiddle

teachers in particular, and a surplus of students, which is why I see this as a good

opportunity. Because of this, not being able to find enough teachers is a potential

risk. However, the business would still be profitable even if I were the only teacher

at the school. The profits are expected to grow steadily for about five years, when

the number of customers approaches the capacity limit. At that time, the business

should be earning nearly $63,000 in net profit, which yields a total owner

compensation of just over $96,000.

This business offers a high return on investment, an acceptable owner’s salary, all

with minimal risk. This would be a great business opportunity for someone, but I

will not be pursuing it at this time because of undesirable working hours and my

ability to find a secure, similar-paying job elsewhere. This business is definitely

feasible and would be a good opportunity in the future.

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Table of Contents

1.0 Introduction...........................................................................................................51.1 Vision Statement..................................................................................................................................................61.2 Mission Statement.............................................................................................................................................. 61.3 Company Values.................................................................................................................................................. 6

2.0 Operations Plan......................................................................................................72.1 Location................................................................................................................................................................... 72.2 Floor Plan................................................................................................................................................................82.3 Hours of Operation.............................................................................................................................................82.4 Business Structure..............................................................................................................................................92.5 Credit Policy.......................................................................................................................................................... 92.6 Supply Analysis................................................................................................................................................. 102.7 Capacity Limit....................................................................................................................................................102.8 Margins and Cash Conversion Cycle........................................................................................................102.9 Planned Capital Budget..................................................................................................................................112.10 Operating Expenses......................................................................................................................................122.11 Working Capital..............................................................................................................................................13

3.0 Human Resources Plan.........................................................................................143.1 Employees............................................................................................................................................................143.2 Independent Contractors..............................................................................................................................153.3 Attracting and Retaining the Best Employees/Contractors..........................................................163.4 Five-Year Labour Cost Forecast.................................................................................................................173.5 Five-Year Benefits Cost Forecast...............................................................................................................173.6 Training Program Timing and Costs........................................................................................................173.7 Average Business Day.....................................................................................................................................18

4.0 Marketing Plan.....................................................................................................194.1 Services and Products....................................................................................................................................194.2 Prices......................................................................................................................................................................194.3 Sales Projections...............................................................................................................................................204.4 Market Size..........................................................................................................................................................214.5 Marketing Strategy..........................................................................................................................................214.6 Past Performance............................................................................................................................................. 224.7 Competition.........................................................................................................................................................234.8 Customers............................................................................................................................................................244.9 Target Markets.................................................................................................................................................. 244.10 Marketing Plan Budget................................................................................................................................264.11 Revenue Projections.....................................................................................................................................264.12 Customers Per Week....................................................................................................................................27

5.0 Financial Plan.......................................................................................................285.1 Five-Year Income Statement Projections...............................................................................................285.2 Five-Year Balance Sheet Projections........................................................................................................285.3 Five-Year Cash Flow Statement Projections.........................................................................................28

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5.4 Planned Capital Spending.............................................................................................................................285.5 Financing..............................................................................................................................................................285.6 Depreciation....................................................................................................................................................... 295.7 Dividend Policy..................................................................................................................................................295.8 Economic Forecast...........................................................................................................................................295.9 Ratios..................................................................................................................................................................... 305.10 Critical Variables............................................................................................................................................305.11 Net Income and Cash Flow........................................................................................................................315.12 NPV and IRR.....................................................................................................................................................315.13 Owner’s Compensation...............................................................................................................................325.14 Summary of Financial Results..................................................................................................................32

6.0 Summary..............................................................................................................346.1 The Opportunity................................................................................................................................................346.2 The Customers...................................................................................................................................................346.3 The Competitive Advantage.........................................................................................................................346.4 People Involved.................................................................................................................................................346.5 Risk Analysis.......................................................................................................................................................356.6 Feasibility – Worth the Risk?.......................................................................................................................36

List of Tables..................................................................................................................Figure 1: Building Exterior……………………………………………………………………………………6Figure 2: Location……………………………………………………………………………………...…………6Figure 3: Floor Plan……………………………………………………………………………………………...7Figure 4: Initial Capital Budget……………………………………………………………………………10Figure 5: Operating Expenses……………………………………………………………………………..11Figure 6: Working Capital…………………………………………………………………………………...12Figure 7: Five-Year Labour Cost Forecast…………………………………………………………….16Figure 8: Five-Year Benefits Cost Forecast…………………………………………………………..16Figure 9: Five-Year Sales Projections…………………………………………………………………..19Figure 10: Five-Year Student and Revenue Growth……………………………………………...20Figure 11: Marketing Budget………………………………………………………………………………25Figure 12: Five-Year Revenue Stream Projections………………………………………………..26Figure 13: Five-Year Projected Customers…………………………………………………………..26Figure 14: Five-Year Capital Budget…………………………………………………………………….27Figure 15: Five-Year Depreciation Forecast…………………………………………………………28Figure 16: Five-Year Net Income and Cash Flow………………………………………………….30Figure 17: Five-Year Owner’s Compensation……………………………………………………….31Figure 18: Five-Year Summary of Financial Results……………………………………………..32

Appendix A: Financial Model......................................................................................37

References.................................................................................................................38

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1.0 Introduction

Performance Music School will be a one-stop music school for all ages, focusing on

old time and traditional country music. Lessons will be offered for as many of the

following as possible, depending on the availability of teachers and demand from

students: fiddle/violin, piano, guitar, banjo, mandolin, double bass, voice, and

songwriting, with the opportunity to expand into other avenues in the future.

Performance Music School will not only offer music lessons, but also everything else

you need to learn how to play an instrument. This includes retail of a variety of

music books, CD’s, instrument rentals/sales, and supplies such as strings, picks,

music stands, and tuners. It will also offer in-house recitals twice per year as an

added perk for students. In this genre of music in particular, students need the

opportunity to play their music with other people, or “jam”. This music school will

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help its students find other musicians and organizations to practice with in a group

setting, and help prepare them for performance.

1.1 Vision Statement

To make Saskatoon a musical city.

1.2 Mission Statement

To teach music lessons to everyone to keep traditional music alive.

1.3 Company Values

Education

Enjoyment

Encouragement

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2.0 Operations Plan

2.1 Location

The planned location for the music school is 121-118 Cope Crescent in Saskatoon,

Saskatchewan. This is a newer office building in the South end of Saskatoon. This

particular office is 880 square feet, and is currently available for lease through

Colliers Canada. The lease price is $25 per square foot, which will total $22,000 per

year. This location was chosen for a few reasons. First, there is no music school

business in the Stonebridge neighbourhood, yet many young families have moved

there and there will likely be a school constructed there in the near future, which

will help drive demand for a music school. Second, this particular office building is

good because it is less expensive than many business locations because there is no

street-front view. This music school doesn’t need to be seen from the street because

it will not be catering to walk-ins, but instead will be serving scheduled students

who will be procured through other avenues.

Figure 1: Building Exterior Figure 2: Location

http://www.collierscanada.com/13183#.VLLrH1oZ4sI

https://www.google.ca/maps/place/Cope+Crescent,+Saskatoon,+SK+S7T/@52.0855652,-106.6426249,17z/data=!3m1!4b1!4m2!3m1!1s0x5304f102076886c9:0x170cbac86a634489

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http://www.collierscanada.com/13183#.VLLrH1oZ4sI





2.2 Floor Plan

The diagram shown below is the proposed floor plan. There will be five individual

teaching rooms to allow for five students at once. In the reception area there will be

some chairs and a couple of coffee tables for clients to wait for their lessons, a desk

for the administrative assistant, and a showroom for the retail items and instrument

rentals. This room will have the ability to be transformed into a small recital room

for events a few times per year. On the floor plan, there are also two lockable closets

to store extra inventory and extra chairs for the recitals. There is no need for a

washroom, as the building has one just down the hall.

Figure 3: Floor Plan

2.3 Hours of Operation

The hours of operation will really depend on lesson bookings. Because the retail

part of the business is basically just for the school’s students, there won’t really be

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any people coming to shop off the street, so it only needs to be open when there are

lessons happening. The planned operating hours are as follows:

Monday & Tuesday: Closed

Wednesday, Thursday & Friday: 2:00 p.m. to 9:00 p.m.

Saturday & Sunday: 10:00 a.m. to 9:00 p.m.

Again, the above schedule could be changed depending on the availability of

teachers and demand from students. During the time that no one is at the school, all

phone calls would be forwarded to my cell phone so I could still take bookings and

help clients at any time. The school will be closed for two weeks per year, one over

Christmas and the other over the school break in February. In total, the school will

be open fifty weeks per year.

2.4 Business Structure

Performance Music School will be set up in the form of a corporation for a few

reasons. The main reason is lower tax rates on profits of a corporation compared to

an individual. Other reasons include the elimination of personal liability as well as

the capability of the business to survive through potential changes in ownership.

2.5 Credit Policy

In the music lesson industry, the accepted way of paying is either writing post-dated

cheques for all lessons for the year, or paying for a whole month of lessons on the

first lesson of the month. This is very beneficial for a start-up business in particular

because the clients finance most of the required operating capital. Performance

Music School will not offer credit except on potential instrument rent-to-own

arrangements.

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2.6 Supply Analysis

Performance Music School will have many different suppliers for its inventory and

instruments, depending on exactly which instruments end up being taught. Below

are many of the suppliers to be utilized:

Michele Amy – music books

Gordon Stobbe – music books

Hal Leonard – music books

Coast Music – instruments and accessories

Music Distributors – instruments

2.7 Capacity Limit

With the proposed schedule of five days per week and the hours outlined in “2.3

Hours of Operation”, the capacity limit would be 430 students (215 hours) per

week. At $50/hour, the gross income from lessons only would be $10,750. The

school will be open 50 weeks per year, yielding a total of 10,750 hours per year.

2.8 Margins and Cash Conversion Cycle

For music lessons, the gross profit margin will be 25%, as that would be the fee to

the independent contractors for using Performance Music School as their place of

business. The cash conversion cycle on lessons would be an average of thirty days,

because customers pay at the beginning of the month, and the teachers would be

paid at the end of the month.

On retail, the gross profit margin would be approximately 35%, based on cost and

suggested retail from suppliers. The cash conversion cycle on this is estimated to be

sixty days, as most of the inventory will be turned very quickly in September when

most lessons begin, and minimal inventory will be held for the rest of the year.

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2.9 Planned Capital Budget

The planned capital budget is shown in the table below. It estimates the costs of the

required leasehold improvements, as well as factors in a contingency cost for

unforeseen expenses. Additionally, it lists the equipment needed to start the

business. The only capital items that will need to be purchased in the future are

additional musical instruments for rental purposes, and this will depend on the

number of students wishing to rent or purchase their instruments.

Figure 4: Initial Capital Budget

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2.10 Operating Expenses

The estimates of the ongoing operating expenses are listed in the table below. The

figures listed are for Year 1. The accounting and legal cost is based off estimates

from a professor and a local business owner. The breakdown of the advertising

budget can be seen in Figure 11. Benefits are based on projected labour expenses,

calculated on the minimum required amount of benefits in Canada. The phone, cell,

and internet expense is based on current offerings from Telus and Shaw. A

breakdown of the labour compensation cost can be seen in the Excel file in Appendix

A. The building is 880 square feet; with a lease cost of $25 per square foot and

occupancy of $10 per square foot, the total cost is $30,800. General supplies

includes stationary, cleaning products, and other office needs. Repair and

maintenance accounts for any expenses related to the damages and wear and tear to

the school. Capital cost allowance is a result of depreciation of assets; the

breakdown can be seen in Appendix A.

Figure 5: Operating Expenses

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2.11 Working Capital

I will personally contribute $30,000 to start this business. $24,150 will be put

toward beginning capital costs (see Figure 4), $3,000 will be put towards inventory,

and $500 will be held as accounts payable. The result is $8,350 in total working

capital.

Figure 6: Working Capital

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3.0 Human Resources Plan

3.1 Employees

Performance Music School will begin by employing only one person: myself.

Because the forecasted customers would require only slightly more than one full-

time employee, I will be able to take care of everything. However, by the third year,

having grown significantly, the business would benefit from having a part-time

administrative assistant/caretaker, at which point one will be hired. All other labour

will come from independent contractors. While the music school is this size, I don’t

anticipate needing any additional employees. Eventually if the school needs to be

open more than seventy hours per week, I would consider hiring an additional

administrative assistant and make the two of them part-time. I will personally train

the administrative assistant(s).

Manager/Head Teacher Job Description

Coordinate all marketing activities

Do all HR management

Manage all contractors and employees

Take phone calls outside of business hours

Open and close the school

Resolve any issues between students and teachers

Approve bills and payments

Oversee schedules

Coordinate year-end/tax and financial work

Evaluate teachers and their teaching styles

Teach music lessons

Full-time position

Manager Skills and Abilities:

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Teach music

Bachelor of Commerce Degree in Management

Organized

Proactive

Strong human resources/management skills

Five years of teaching experience

Administrative Assistant/Caretaker Job Description:

Take phone calls and schedule appointments during business hours

Clean the office

Take payment for all retail and rental items as well as lessons

Pay bills and contractors

Open and close the school if the manager does not

Part-time position

Administrative Assistant/Caretaker Skills and Abilities:

Customer service skills and experience

Strong computer skills

Organized

Business training an asset

3.2 Independent Contractors

Every music teacher will operate as an independent contractor. They will each get to

define their own hours of work, and use their own teaching style as long as it is

accepted by the manager and matches the students’ needs. They can also help

decide how much to charge per lesson, as the price will depend on the teacher’s

level of experience, education, qualifications, and demand. The music school will

charge the teachers twenty-five percent of the lesson cost as a service fee for the

venue, booking services and payment services. I will get as many teachers as

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necessary to fill up the instruction rooms as much as

possible. I anticipate that some of the teachers will be new

to the profession, and therefore may need some training. I

would offer training to new teachers to teach them

effective ways of helping different people learn and as a

test, have them teach myself and another person a lesson

or two to evaluate their effectiveness.

3.3 Attracting and Retaining the Best Employees/Contractors

To attract a good administrative assistant, I will offer a good wage of $15/hour for

the position, as well as allow for a flexible work schedule. This person will work full

time, but since the school will be open slightly more than forty hours per week,

likely many more in the future, I will allow this person to choose which days they

want to work and I will personally take over the position for the hours they choose

not to work.

Attracting the best contractors will be a bigger challenge because the school will

need many of them. One main reason for contractors to choose my school is because

they take home more pay than at competitors’ places of business. Performance

Music School will take 25% of its teachers’ income, whereas a leading competitor

takes 33%. Second, there are no other music schools within a short distance of

Stonebridge, so for teachers that live in and around that area, the location will be

more convenient for them to come to. Third, the services the music school will

provide to the contractors will make their experience hassle-free. The school will

find students for the teachers, and will take care of all scheduling, billing, recitals,

and maintenance of the teaching space.

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3.4 Five-Year Labour Cost Forecast

The calculations for the below labour costs can be found in Appendix A. Both the

manager’s salary and the administrative assistant’s wage increase by the inflation

rate, while the administrative assistant’s hours also increase according to the

number of students in the school.

Figure 7: Five-Year Labour Cost Forecast

3.5 Five-Year Benefits Cost Forecast

The cost of benefits is based on the applicable government required benefits (i.e.

Canada Pension Plan and Employment Insurance). The rates are different between

the manager and the administrative assistants, and the breakdowns can be seen in

Appendix A.

Figure 8: Five-Year Benefits Cost Forecast

3.6 Training Program Timing and Costs

The manager will conduct training of the administrative assistant, and no external

training will be required. Therefore there will be no additional costs to the salaries

they are already being paid. The independent contractors will already have all the

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necessary training, but a brief introduction and orientation will be conducted by the

manager on the contractors’ own time.

3.7 Average Business Day

On an average business day, either an administrative assistant or myself will open

the school ten minutes before the first scheduled lesson. The students will purchase

most of the required music books at the beginning of the year, but may buy more at

various times of the year. The administrative assistant or myself will handle such

sales, as well as answer the phone, organize schedules, and collect payments. Either

the administrative assistant or I will do a quick cleanup and close the school when

all of the lessons have been completed for the day.

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4.0 Marketing Plan

4.1 Services and Products

Performance Music School’s main offering is traditional and country music lessons.

This includes fiddle, guitar, piano, double bass, banjo, mandolin, voice, and

songwriting. In the future, if there were both teachers and students for other

instruments such as dobro or steel guitar, it would also branch into those areas.

This business’ second area of focus is instrument rental. I expect approximately half

of the students will not own their own instruments, but will instead choose to rent,

so the music school will supply those instruments for rental. If a student wished to

purchase one of the instruments, I would sell one to him/her as well for its value.

The third line of offerings is retail music books and instrument supplies. The school

will sell all music books required for lessons as well as additional ones that students

may find interesting and voluntarily purchase. Instrument supplies include things

like strings, picks, rosin, and shoulder straps; I will also sell small gifts and novelty

items.

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4.2 Prices

$25 per half-hour lesson, once per week

$30 per average music book

$21 average rental per month

Lessons will be booked in half-hour increments, and it will be mandatory that the

students come for one lesson per week. If a student wishes to have hour-long

lessons, they can book two lesson slots per week. Music books approximately range

in price from $20 to $40, so the average book would cost $30. Instruments have a

wide range of values, and the rental price would be calculated such that the cost of

the instrument is realized in twelve months of rental. Based on the beginning

inventory, the average instrument would rent for $21 per month. These prices are

based on the industry standard, and as such are very comparable to competitors’

prices. I anticipate being able to charge the same price as I have indicated above

plus inflation every year, but if I need to find more students, I would consider

offering some kind of discount or “first lesson free” marketing strategy to get

customers in the door.

4.3 Sales Projections

For the first year, I have estimated to fill 40% of capacity, which equals 86 students.

Approximately half of these students will rent instruments from the school, and

each student will likely spend approximately $60 on retail items and books per year.

Music lessons will account for around 87% of the revenue, rentals at 9%, and retail

at 4%. The graph below shows the sales projections for the first five years.

Figure 9: Five-Year Sales Projections

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I have personally taught music lessons out of my home for five years, and have

averaged a growth rate of 110% per year. This is likely not realistic for a brand new

business of a much larger size than my current studio, so I have estimated the

growth rate to be 40% per year until it reaches 80% of capacity. I anticipate that the

studio will never reach 100% capacity as there are simply some hours of the day

that music lessons would not fit into most people’s schedules.

Figure 10: Five-Year Student and Revenue Growth

4.4 Market Size

In 2011, Saskatoon had approximately 46,650 school-aged children and 31,533

seniors, for a total market size of 78,183 people (Statistics Canada, 2012). There are

plenty of potential clients; the important part is reaching them effectively and

convincing them to take music lessons at my school.

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4.5 Marketing Strategy

The most important part of my marketing strategy is word of mouth and referrals. I

have many close connections in the traditional music industry, so with some e-mails

and phone calls, the word would start to spread about my new music school. A few

of my competitors (individuals, not businesses) do not have room to take on any

new clients, and would be happy to send inquiries over to Performance Music

School.

The second part of my marketing strategy is in relation to online presence. I will

post advertisements on Kijiji because they are free and many people look there. I

will also design my own simple website that will appear when potential customers

search for music lessons in Saskatoon. To more closely target seniors, I will also list

the school on SaskTel 411.

The third part of my marketing strategy is to hang posters in places that my target

market would be, such as schools, churches, and senior centres. By putting a poster

in one third of the city’s facilities, about one hundred buildings would carry

advertisements for the school.

One competitive advantage of Performance Music School is convenience for the

customer. Because most of the people teaching traditional old time and country

music are individuals teaching out of their homes, they do not offer instrument

rental or retail. At Performance Music School, customers can get the same quality of

teaching, but with the convenience of only ever needing to go to one location.

There has recently been many articles spreading across the internet arguing that

music is very good for children’s development, encouraging parents to enroll their

students in music lessons. This is a very good trend for the music school business,

and I could use this as part of my promotion.

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4.6 Past Performance

I currently teach fiddle lessons out of my home, and have done so for five years. Out

of fifteen students, every one has come for more than one year of lessons, with the

exception of four that only started this year, but I anticipate will be coming back

next year. Out of these fifteen, thirteen have been children, one is a senior, and one

is a young adult. Over these five years, I have only lost two students, one because

she pursued different activities instead, and one because he felt he had learned

enough to go out on his own and just return for check-ins on occasion. Nine of my

students found me through referrals and word of mouth while six saw my Kijiji

advertisement. None have had any problems with the pricing (currently $20 per

lesson) and the revenue is all profit because my time is the only expense.

4.7 Competition

My major competitors are listed below. Some are music schools while others are

individuals teaching out of their home.

Long & McQuade

St. John’s Music

12 String Studios

Saskatoon Academy of Music

Custom Music Lessons

MusicTeachersDirectory.org

Everett Larson

Kim de Laforest

Anna Bekolay

Based on speaking with people in the industry, most of the individual teachers are

either fully booked to capacity or nearly full, and one of the major restraints for

music schools is finding enough teachers to cater to the demand. Finding teachers

will be a challenge for Performance Music School, but I will meet this challenge by

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offering teachers a higher percentage of lesson revenue than other schools as well

as by using my network to inform potential teachers of the benefits of contracting to

my school. One of the music schools tried to recruit me to teach there, but I was not

anxious to give up thirty percent of the income when I thought I could teach out of

my home instead. However, if I did not have a space at home to teach in and the

school took a lower percentage, I would be far more likely to work at a music school

and I think many other potential teachers would feel the same way. That is what

Performance Music School is going to offer.

4.8 Customers

Most of the customers will be children, and their parents will pay for the products

and services. Other customers will be seniors, as seen in section 4.9 Target Markets

below. Customers will be signed into a contract agreeing to purchase one half-hour

lesson per week for a year, and should they decide to break the contract, they will

have to pay a penalty. Most customers will want their lessons after school and in the

evenings, but seniors will likely want to come earlier on in the day. Customers will

buy because Performance Music School will help musicians of all levels excel

through education, enjoyment, and encouragement. We firmly believe that music

should be fun, so the teachers will teach what the students want to learn. Factors

influencing the customer’s decision to enroll in music lessons include instruments

taught, available lesson times, teaching quality, and the school’s proximity to their

home.

4.9 Target Markets

The primary target market is school-aged children. This is the easiest market to

enter because those are the people that typically begin taking music lessons, and

parents encourage them to. Word of mouth is also more prominent for this age

range because they have so many peers in school that they talk to about what they

are doing, and word would quickly spread to other children’s parents. This market

is also very attractive because these students are mostly at the beginning of their

23


musical career, and so they are more likely to be long-term repeat customers. This

market is the most attractive because of its size and potential for growth.

The secondary target market is senior citizens. It would be a bit more difficult to

target this market because they are less likely to use the internet to find out about

the school, but word still travels quickly among seniors, so it is still a viable market

worth targeting. Additionally, it will still cost very little to target this demographic.

There is much potential in this market because often, music lessons are seen as

something that children take; in reality, music lessons are perfect for seniors

because they have more time to practice and are self-motivated.

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The third target market is music teachers; they are an integral part of the business.

As mentioned under “competition”, I will attract them by offering above-industry

compensation and a comfortable, low-stress work environment. Performance Music

School will take care of all business-related items such as recruiting students,

booking and billing. Not having to worry about administration would appeal to

people with not very much experience in the industry, busy people, and ones that

just want a low-stress job. Most of the music teachers I will target are university

students and young adults who have lots of experience through playing music most

of their lives. I will recruit these people through word of mouth, as well as by

responding to their advertisements on Kijiji promising them students if they come

to teach at Performance Music School.

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4.10 Marketing Plan Budget

Below is a breakdown of the marketing budget for the first five years. Kijiji, word of

mouth, and Facebook are free methods of advertising. The cost of posters was based

on a quote from Staples and would be enough to hang posters in one third of

Saskatoon’s churches and schools. I personally made a website last year for an

unrelated project, and it cost approximately $300. I plan to make a similar website,

but have added a $200 buffer in case of unforeseen expenses. The additional

website costs in years two to five account for ongoing maintenance.

Figure 11: Marketing Budget

4.11 Revenue Projections

The revenue projections below are broken down into the three revenue streams:

music lessons, instrument rental, and retail. All three of these are expected to grow

at a rate of 40% per year until Year 6. Based on personal experience, I expect that

half of the students will choose to rent an instrument in lieu of purchasing one.

26


Figure 12: Five-Year Revenue Stream Projections

4.12 Customers Per Week

In the graph below, the horizontal line is the capacity limit, and the sloping line

represents the number of customers in the base case. The capacity limit was

calculated based on the hours of operation in section 2.3, five rooms in the studio,

and each lesson being 30 minutes. The customers increase by 40% per year, and are

expected to cap out in Year 6 at 85% capacity. The actual numbers can be seen in

Appendix A.

Figure 13: Five-Year Projected Customers

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5.0 Financial Plan

5.1 Five-Year Income Statement Projections

See Appendix A.

5.2 Five-Year Balance Sheet Projections

See Appendix A.

5.3 Five-Year Cash Flow Statement Projections

See Appendix A.

5.4 Planned Capital Spending

The schedule below shows the total capital spending for the first five years. I will be

purchasing more instruments every year to accommodate the increased number of

students that wish to rent instruments.

Figure 14: Five-Year Capital Budget

5.5 Financing

Performance Music School will require $24,150 in capital for the first year, as shown

in the above capital schedule. I will contribute $30,000 of my own equity to fund this

project. The nearly $6,000 extra will be used as a buffer in case of unforeseen

expenses, and also for costs to be paid up front, such as the building lease. No debt is

required for this venture.

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5.6 Depreciation

Performance Music School will have two classes of assets to be depreciated. The

first class is leasehold improvements (Class 13), and it will depreciate at a rate of

four percent. The second class is furniture and fixtures (Class 8), including musical

instruments, which will depreciate at a rate of twenty percent.

Figure 15: Five-Year Depreciation Forecast

5.7 Dividend Policy

The dividend policy is based on the amount of cash remaining at the end of the

previous year. Ten thousand dollars will always be held in the account as a safety

net; all additional cash will be paid out the following year in the form of dividends.

5.8 Economic Forecast

There are many economic factors that come into play when forecasting financial

aspects of a business. The expected inflation I have used in the forecasts is 2.5%, and

I have used this figure to estimate the growth in expenses, wages, and product and

service pricing. The projected growth in sales is based on both an increased number

of customers and higher prices. I anticipate the number of clients will increase by

40% per year, based on my personal experiences in growth rates in my own studio.

The prices are raised based on the inflation factor of 2.5%.

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5.9 Ratios

Analyzing ratios are an important part of any business plan because they help in

determining profitability and sensitivity, which help investors decide if it is

something they want to invest in. Below is a list of key ratios for Performance Music

School:

Gross profit margin:

Net profit margin:

Key operating expenses as a percent of sales:

Revenue growth:

Cost per lesson:

Overhead cost per lesson:

5.10 Critical Variables

Performance Music School has two critical variables, one more important than the

other. The most important variable is the number of teachers I can secure. People

who want to be full time teachers and are able to find enough students typically

teach out of their own home so they do not have to give up any income to a studio.

This leaves me with using mostly part time teachers. These would likely have to be

mainly university students, as people not in school usually have full time jobs and do

not take on extra work outside of that. Even though there can be a lot of money in

the music lesson world, people often choose a different career because working

hours tend to be evenings and weekends, when people are available, and when

someone has the option to make a good wage at a different job, they are likely to

choose that instead. Because of these reasons, I do not anticipate having the same

teachers for more than a few years, and they would mostly teach for less than

twenty hours per week. However, if I can offer full time teachers a good wage with

no hassle, I may be able to convince them to work at my studio instead of out of

their home. The second critical variable is the number of students I can secure. I do

not see there being a lack of demand for the most part, but it is possible that

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eventually there might not be more students in the Stonebridge area to grow to

capacity.

5.11 Net Income and Cash Flow

The chart below shows that the projected net income and cash flow are very

healthy, and are positive right from the beginning. They also increase at a good rate.

The cash flow in Year 1 is high because of the extra “buffer” equity contributed at

the beginning. It spikes down in Year 2 because the extra cash will be taken out in

dividends. All of these contributors indicate that this is a feasible and profitable

venture. The actual numbers can be seen under 5.14 Summary of Financial Results.

Figure 16: Five-Year Net Income and Cash Flow

5.12 NPV and IRR

For this type of business with such a small initial capital requirement, NPV and IRR

are not the most accurate predictors of whether or not it is a good investment.

Regardless, I have included these numbers for reference; they show that there

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would be an extremely healthy return on investment. Recall that the equity

investment is $30,000.

NPV: $91,406

IRR: 104%

5.13 Owner’s Compensation

In this type of business with such a small investment, a much more accurate

measure of feasibility is the owner’s compensation. The table below shows the total

owner’s compensation for the first five years. Beyond five years, the compensation

is expected to grow marginally; the main growth would be from inflation only, as by

the fifth year, Performance Music School will be near capacity. The average

compensation over the first 5 years is $74,145.

Figure 17: Five-Year Owner’s Compensation

5.14 Summary of Financial Results

Figure 18 below shows the most important projections in the five-year forecast.

More details and calculations can be seen in Appendix A.

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Figure 18: Five-Year Summary of Financial Results

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6.0 Summary

6.1 The Opportunity

I have seen a significant need for music lessons in Saskatoon, particularly of the old

time fiddling, bluegrass, and country genres. This need has been apparent from my

personal experience of increasing student numbers every year and recent inability

to find replacement teachers. The inability to find teachers is concerning for

Performance Music School, but on the other hand, if I can offer teachers enticing pay

and convenience benefits, I will likely be able to secure new part time teachers.

6.2 The Customers

The majority of the customers will be school-aged children, but their parents will be

paying for the lessons, so it is important to target both groups of people. A smaller

group of customers will be senior citizens.

6.3 The Competitive Advantage

Performance Music School’s competitive advantage is the convenience it offers as

well as the scarcity of the services offered. Scarcity in this context is referring to the

limited availability of lessons in the old time and country music genres.

6.4 People Involved

In this business’s infancy, I will likely be the only staff member required, or I may

seek help from a very part-time administrative assistant and supplementary music

teacher. As the business grows, the school will require many part-time or few full

time music teachers and upwards of one full-time administrative assistant.

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6.5 Risk Analysis

The main critical variable in this business is the number of contractual music

teachers I can secure. Qualified individuals are fairly rare, and it may be difficult to

get a good quantity and variety of teachers in order to match the amount of demand

as well as provide the range of instruments that I would like to, especially for the

rarer instruments such as mandolin and double bass. To manage this risk, I will

focus much effort on recruitment and advertising for teachers. If I simply cannot get

enough teachers, I will likely close the school and teach out of my home again, with

no loss in the company. Figure 19 below shows the number of full-time or

equivalent teachers required for each of the five years. I will count as one full time

teacher, so the number of additional teachers required for each year will be the

number less one.

Figure 19: FTE Teachers Required

The second variable is the number of customers, and I see this as being moderately

critical. The first reason for this is that I see huge demand for these lessons all the

time, indicated by the growth in my own studio. Secondly, the business will turn a

profit even if I am the only teacher, so as long as I can get forty customers per year,

the business will stay afloat.

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6.6 Feasibility – Worth the Risk?

Using the base case projections, Performance Music School will turn a healthy profit

and will offer good owner’s compensation every year in its existence. The return on

investment is definitely acceptable, and the business is quite low risk because it is

not very sensitive to the number of customers, and the number of customers is

completely predictable from week to week. By taking all of these factors into

account, I would say that opening this business is worth the risk. However, by

teaching out of my home, I could earn approximately $100,000 per year with full

time hours, or close to $80,000 with taking summer off, so I would choose to do that

instead. Additionally, I realize that no matter where I teach, the majority of hours

worked would be evenings and weekends, and I think I would choose to find a good,

secure job with more standard hours instead.

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Appendix A: Financial Model

See attached Excel Spreadsheet.

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Reference

Statistics Canada. 2012. Focus on Geography Series, 2011 Census. Statistics

Canada Catalogue no. 98-310-XWE2011004. Ottawa, Ontario.

Analytical products, 2011 Census. Last updated October 24, 2012.

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Documents

Performance Music School - Edwards School of Business Painter... · Web viewPerformance Music School will be a one-stop music school for all ages, focusing on old time and traditional