Case Study – Starting a Business

Case Study – Cortados ‘R’ Us

Introduction and Abstract

Many people regard numbers with the same pleasure as a trip to the dentist to have all their teeth extracted. Frankly, this is a great shame, as the applied use of business data can help owners understand their business so much better and guide them in deciding what products to stock, what pricing decisions to take and when to undertake promotional activity, amongst many others.

To help illustrate how data analysis can help with business decisions, we have developed a very simple business called “Cortados ‘R’ Us”.  In the course of five papers, we show how the owner, Marta González, of the business can apply various numerical techniques to keep her informed both on how her business is progressing and also how to improve her decision-making skills.

In paper 1, Marta gets an overall view of the cost structure of the business.  What proportion of costs are fixed and variable is critical to determining how robust a business case can be, since in times of recession, only variable costs can be tackled in an attempt to reduce overall business costs.

Paper 2 introduces techniques which will help Marta find the most appropriate (i.e. profitable) price for her drinks.  Like many businesses, she faces a good deal of seasonal variation in her business and she is keen to use pricing as a means to improve her profitability.

In paper 3, having been in business for a year, she examines how her demand fluctuates from day to day and whether, over the course of the year, her business has grown and if so by how much. When there is a great deal of fluctuating demand, the paper shows that it is not immediately apparent how well a business is actually performing but presents techniques to help with this problem.

Paper 4 introduces concepts to aid a decision common to many businesses: whether to buy equipment new, second hand or to rent it.  The paper explains how the concepts of discounted cash flow can help Marta in deciding what to do about acquiring an extra espresso machine for her business.

After tirelessly serving nothing but cortados, Marta investigates diversifying into other types of coffee in paper 5. The paper focuses on maximising the profitability of her business with a mix of products, taking into account the constraints on time, labour and materials.

We recommend that the papers are read in strict order, as the business decisions she needs to make are presented in chronological order from paper 1 to paper 5.

February 9, 2015

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