Dave’s Health Food Shop
Dave Murphy had been thinking about setting up a health food shop for three or four years. Many of his family members and friends cautioned him against such a risky move. They argued he would be foolish to resign from his secure job in retail management in order to be an entrepreneur running his own enterprise. They pointed to the high failure rate of start up businesses, the intense competition from the major supermarkets, and the fact that he would be risking his hard earned savings.
One of his closest friends suggested that if Dave was determined to set up in business he might consider buying a franchise, since this would provide Dave’s shop with the benefit of a well known name, and guidance on operating the enterprise. His other friends also pointed out the need to borrow money to finance the venture, and the fact that this would impose a liability on the business in the form of interest payments.
Dave listened politely to these well meaning friends, but he was determined to set up his own business enterprise. He also rejected the idea of setting up a franchise. He decided to establish his shop in the town of Westleigh. Although Westleigh had branches of two of the major supermarket chains, it lacked a specialist health food store. Dave felt he could occupy a gap in the market and, with a suitable location, would prosper in this niche.
Dave found a suitable location for his shop which he intended to lease. He knew that he would have little difficulty in recruiting staff and had sufficient contacts in the retail trade to obtain the stock. All he needed now was a bank loan of £30,000 to start the business.
Dave submitted his loan application to this bank manager. The application contained a well written business plan, including cash flow forecast and budgeted accounts. Dave’s forecast for the first year of operation showed the following:
£000s
| |
Sales revenue
|
66,000
|
Cost of sales
|
20,000
|
Labour costs
|
19,000
|
Other expenses
|
12,000
|
The bank manager was impressed by Dave’s qualifications and experience, and by the formulation of objectives and strategies for the business. “I am pleased to see your emphasis on adding value and your identification of a niche in the market. This should increase the chances of success in this venture” said the bank manager. “However, your market research is the weak element in the application. It is entirely based on secondary sources. You do need to undertake market research to collect primary data using a valid sampling method.”
1] What is meant by the term 'enterprise'? (2 marks)
2] What is meant by the term 'adding value'? (2 marks)
3] What is the opportunity cost to Dave of opening his health food shop? (3 marks)
4] Dave’s bank manager believes that the identification of a market niche will increase Dave’s chances of success. To what extent do you agree with this view? (15 marks)
Based on: APT’s Qualified Questions for AQA GCE Business – AS U1: Planning & Financing a Business – Sample. Visit: http://www.apt-initiatives.com/
