Choice Foods

Choice Foods is a multi cuisine A/C family restaurant in Gurgaon. It was started and operated
as a partnership between two friends, Umesh Gandhi and Sachin Bhatt. Both of them were
friends from B-School: MDI, Gurgaon. After completing their MBA, both of them worked in
different companies in NCR for about 2 months until they realized the immense potential that
restaurant and catering business would have in Gurgaon. A corporate hub, Gurgaon was home
to many offices as well as a booming residential area for young, up-market professionals. The
friends estimated that besides table sales at the restaurant, organizing small birthday parties,
sales from home deliveries and providing catering services to corporate offices could also
provide lots of business opportunities. As a thumb rule, it is believed that the restaurant industry
earns approximately 40% gross margins. All these factors prompted Umesh and Sachin to leave
their jobs, pool in capital and start their entrepreneurship venture: Choice Foods. They pooled in
Rs.2,00,000 each and borrowed interest free debt of Rs. 50,000 from a friend, Chetan.
They took restaurant space on 15th July 2014 by paying Rs.1,00,000 as security money with a
condition to pay rent from August 2014. They purchased furniture Rs.75,000; spent Rs.42,000
on interior work; Rs.20,000 on Air Conditioner; Inverter Rs.15,000; Motor pump Rs 5,000; Flex
board Rs.5,000 and Rs.20,000 on wall colouring. Sachin contributed a second air-conditioner
that was lying unused at his home. It was estimated to have a value of Rs.15,000 at the time.
They also spent Rs.10,000 on advertising materials such as pamphlets, and menu leaflets to
publicize their home order and office order businesses. They purchased Kitchen equipments for
Rs.60,000 for cash and acquired the starting raw material of Rs.30,000 through credit card,
which had to be paid for within a month. Choice Foods was ready for operation by the 1st of
August.
After completion of a months operations they found sales much below expectations. Before the
start of business, they expected table sales to be around Rs. 10000-12000 per day, but their
sales figures were Rs. 6,000 per day on average. Constrained for working capital from internal
cash accruals the partners had to look for alternate sources of financing. For the first fifteen
days, they delivered home orders using a friendly neighbors bike but they had to purchase a
bike for Rs.40,000 using cash borrowed from Chetan that was to be repaid later.
The average monthly sale of the restaurant from September 2014 through April 2015 was Rs.
1,90,000. This revenue primarily comprised table sales, birthday parties and home orders. On
an average the monthly expenses of the restaurant were: Rent- Rs 50,000; Staff Salary- Rs.
35,000; Gas- Rs.9,000; Telephone- Rs. 8,000; Stationary - Rs. 3,000; Transportation- Rs. 6,000;
Electricity 35,000 and Raw Materials- 40% of Gross Sales on an average.
It was time they tapped the office crowd and catering opportunity. After hectic negotiations, they
managed to get orders from three offices in Cyber City. They would cater afternoon lunch for
employees of these offices and the bill would be cleared on the first of the following month.

This supply started on the first of May 2015 and revenues increased by Rs. 1,20,000 per month.
Sachin was faced with a domestic emergency and needed immediate cash. On 1st April 2015,
he decided to withdraw Rs.50,000 of his share of capital in the business. To manage the cash
crunch and fund the growing business, the firm borrowed Rs 80,000 from a local moneylender
@18% p.a. the same day. Monthly interest on the loan had to be paid on the first of every
month. In the month of June 2015, they bagged two more office contracts which would bring
them business of Rs 95,000 each from July 2015 onwards. The payments would be received in
the month following.
After completion of one year both friends wanted to know the performance and health of the
business. On 31st July 2015 they found cash balance Rs 3000, raw materials in the store Rs
45,000, creditors for raw materials Rs. 80,000 and interest paid to the money lender until then to
be Rs 3000. The owner of the restaurant space had deferred rent for 2 months i.e. June and
July 2015 due to some issues with the latters bank account.
What comments would you make to the partners regarding the restaurants progress to date?