Marvin & Smith's Coffee Shop: Expansion Plan and Financial Analysis

This case study presents the expansion plan of Marvin & Smith's Coffee Shop in Cyprus and justifies the selection of the country based on various parameters. It also analyzes the impact of business decisions on profitability and liquidity of the organization.

Case Study: Marvin & Smith's Coffee Shop

Contents
Introduction...........................................................................................................................................3
Selection of a Country...........................................................................................................................3
Effects on Profitability and Liquidity......................................................................................................5
Conclusion.............................................................................................................................................7
References.............................................................................................................................................8

Introduction
This case study gives a view of expansion plans of coffee shops run by Marvin and
Smith, two veterans of food industry. It selects Cyprus as a new location for their expansion
plans and provides a suitable justification for it on the basis of various parameters. The
second part presents the effect of business decisions on profitability and liquidity of the
organization.
Selection of a Country
Marvin & Smith are two veterans of food industry and catering industry. After taking
into consideration all financial and non-financial factors, Cyprus presents a good opportunity
for expanding their coffee business. Cyprus has a history of coffee culture. Large number of
locals and tourists consider it one of the most important drinks on the island. Coffee shops are
present all around the island and can be found next every second grocery shop. They present
a nice opportunity for family and friends to gather and enjoy their daily conversation. On can
easily find large international coffee chains in Cyprus but traditional coffee shops are best
way to experience local coffee culture. Therefore Cyprus naturally becomes a good market
for coffee industry and shops and ideal location for expansion of their business (Cyprus for
travellers, 2018).
Cyprus is a located in Mediterranean Sea near African continent and has a natural feel
of East African culture. Hank and Patty believe in providing coffee made of high quality
beans sourced from Uganda. They are also interested in delivering to their customer’s world
class tea and herbs from Uganda; and African snacks. Overall they want an East African
experience for their clients and such a culture can be easily replicated in Cyprus. Logistically
it is easier to import and source their raw material from Uganda to Cyprus as compared to
importing them to other EU countries. Transportation costs will be considerably saved as

total distance will be considerably reduced. Distribution, warehousing, logistic facilities are
well developed in this region
Hank and Patty are promoting ethics and fair trade practices at their coffee shops.
Such a culture can be easily found among general public of this region. An atmosphere of
formal behaviour is entrenched in the island’s culture. They are professional in dealing with
elders or when interacting in professional circumstances. Respect of each other’s work and
absence of discrimination of the basis of class, creed and social status will help generating
mutual respect and atmosphere of fair trade (Everyculture, 2018). It has been observed that
more than 60% of companies in the region followed fair trade practices and 86% of business
had printed correct declarations regarding price and quality. Only one fourths of enterprises
paid their bills late. Most of the managers promoted their juniors as their associates
(Krambia-Kapardis & Zopiatis, 2008).
Cyprus has done fairly well in terms of structural challenges for expansion of
businesses. It currently ranks 45th in ease of doing business out of 190 countries around the
world. Although there are problems associated with construction permits and property
registration but initially it will better for Marvin and Smith to rent spaces for coffee shops.
Country scores high on trading across borders, getting electricity supply and paying taxes.
Country provides opportunity to register enterprises as limited liability, therefore mitigating
the risk of seizure of personal belongings of owners. There is also a decent system of getting
credit for starting business in the country. Resolving insolvency is quite easy as compared to
other nations and it ranks 16th on this parameter (World Bank, 2017).
Therefore, Cyprus stands apart from others on various parameters. Cyprus presents
itself as an ideal coffee shop market, has a strategic geographical location and; promotes of
fair trade practices. It ranks among top 50 countries in ease of doing business. Cyprus should
be selected as location for next expansion plans of Marvin and Smith

Effects on Profitability and Liquidity
Financial statement analysis can be carried out to analyse the impact of past and future
business decisions. Profitability and liquidity are two parameters of studying financial
statements with the help of ratio analysis (Fridson & Alvarez, 2011). Enterprises ability to
generate excess sales over and above its cost leads to higher profitability and better
profitability ratios. Organizations ability to meet short term liabilities refers to liquidity.
Various ratios have been calculated for Marvin & Smith’s coffee shop.
A) Profitablity
1 Gross Profit Margin Gross Profit/Sales 57.78%
2 Net Profit Margin Net Profit/Sales 7.44%
3 Return on Equity Net Profit/Capital 25.09%
B) Liquidity
Current Ratio Current Assets/Current
Liabilities
Quick Ratio
Current Assets less
inventory/Current Liabilities
5.71
4.42
FINANCIAL RATIOS
Business decisions can have severe repercussions on various financial metrics of
organizations. New business ventures must be planned after taking into consideration also
cost and benefits associated with them and after proper due diligence (Barrow, Barrow &
Brown, 2012). With Marvin and Smith planning to expand their business, profitability and
liquidity ratios will be affected. Business investment and expansion requires external capital
infusion or using internal cash. Capital in form of external debt may lead to creation of better
facilities at coffee shops but also cause higher interest expenses. During initial period of
expansion at new locations such as Cyprus, sales may be low, profitability may be reduced.
Low sales growth and higher interest expenses may lead fall in net profit margin. However,
they may also plan to issue equity for their business for expansion. In this case also, low sales

growth during expansion period will result less return for owners. This will result in return on
equity falling from current levels. Present practice of maintaining high standards and good
employee remuneration will also reduce profitability.
Apart from upfront expenditure of setting basic infrastructure in shops, recurring
expenditure of increased employee costs, advertisement expenses and routine non-avoidable
costs will put stress on profitability in initial years. But as the business starts to gain
momentum and recognition among the customers in the region, sales will improve and
profitability ratios will increase. Cost of goods sold may be less in regions closer to African
continent such as Cyprus where freight charges for transportation of raw materials will be
reduced. As sales increase, gross profit margin will also be improved. Business margins will
improve because of enhanced planning, by increasing efficiency and better management.
Experience of two veterans will also be a boost for the organization
Liquidity parameter can be judged by assessing current ratio and quick ratio changes.
If the internal cash is used to business expansion, it may lead reduction of cash on balance
sheet and also may cause liquidity crunch in the organization. Current ratio and quick ratio
may be depleted. Therefore, internal cash should be utilised very judiciously. Inventory is an
also important component of current assets. Low sales in initial years of expansion, may lead
to higher inventory levels. Inventory are generally less liquid than other assets, will cause less
liquidity in the organization. At present, Marvin & Smith have only trade payables in current
liabilities. To fund their daily business needs and recurring monthly expenditure, short term
financing may also be needed. This will put stress on liquidity metrics. Similar to probability,
liquidity will also improve as cash inflows increase with time. Marvin and Smith’s policy of
maintaining ethical practices and fair trade with suppliers; and promoting atmosphere of
equality with employees will reap long term benefits. These business decisions will indirectly

help in improving profitability and liquidity in long run and create a brand value for the
company.
Conclusion
This report covers a case study for business expansion plan of Marvin and Smith
Coffee shop and selects Cyprus as new location for expanding their current operations. A
suitable justification has provided for selection of Cyprus on basis of geographical, structural
and ethical factors. Also presented in this report are effects of various business decisions of
profitability and liquidity.

References
Barrow, C., Barrow, P. & Brown, R ( 2012) The business plan workbook. London: Kogan
Page Publishers.
Cyprus for travellers ( 2018) Coffee in Cyprus: what makes it special and where to try it
[online]. Available from http://cyprusfortravellers.net/en/review/coffee-cyprus-what-makes-
it-special-and-where-try-it [Accessed 31 March 2018].
Everyculture (2018) Cyprus [online]. Available from
http://www.everyculture.com/Cr-Ga/Cyprus.html [Accessed 31 March 2018].
Fridson, M. S. & Alvarez, F. (2011) Financial statement analysis: a practitioner's guide. :
New Jersey: John Wiley & Sons.
Krambia-Kapardis, M. & Zopiatis, A. (2008) Uncharted territory: investigating individual
business ethics in Cyprus [online]. Available from
http://ktisis.cut.ac.cy/bitstream/10488/302/1/Unharted%20territory.pdf [Accessed 31 March
2018].
World Bank (2017) Doing business 2017 [online]. Available from
https://openknowledge.worldbank.org/bitstream/handle/10986/25507/109855-WP-DB17-
PUBLIC-Cyprus.pdf?sequence=1&isAllowed=y [Accessed 31 March 2018].