Choosing Between Two Shops: Profit, Vacation Risk and Working Capital
Neha has finished her Praveen (Retail) course and has ₹4,00,000 of savings and a ₹2,00,000 loan sanctioned at 11% per annum. She has shortlisted two 300 sq ft shops near a Jaipur college. Shop A is inside the campus gate: rent ₹28,000 a month including electricity, expected 120 customers a day, average bill ₹85 and gross margin 28%; other fixed costs are ₹35,000 a month. Shop B is on the main road 400 m away: rent ₹45,000 a month, expected 220 customers a day, average bill ₹70 and gross margin 25%; other fixed costs are ₹42,000 a month. Either shop needs about ₹2,50,000 for stock and fixtures, and landlords ask for a three-month rent deposit. The college closes for two months each year; in those months footfall at A falls to about 35 customers a day and at B to about 150. Assume 30 selling days a month and that loan interest is the only financing cost.
1. Compute the break-even customers per day and the expected monthly profit for each shop. Show every step.
Read the worked answer
Step 1 - Contribution per customer = average bill × gross margin.
- A: ₹85 × 28% = ₹23.80
- B: ₹70 × 25% = ₹17.50
Step 2 - Monthly fixed cost, including the loan interest the shop figures omit. Interest = ₹2,00,000 × 11% ÷ 12 = ₹1,833 a month.
- A: ₹28,000 + ₹35,000 + ₹1,833 = ₹64,833
- B: ₹45,000 + ₹42,000 + ₹1,833 = ₹88,833
Step 3 - Break-even.
- A: ₹64,833 ÷ ₹23.80 = 2,725 customers a month ÷ 30 = about 91 a day
- B: ₹88,833 ÷ ₹17.50 = 5,076 customers a month ÷ 30 = about 169 a day
Step 4 - Profit at expected footfall.
- A: 120 × 30 = 3,600 customers → 3,600 × ₹23.80 = ₹85,680 − ₹64,833 = ₹20,847 a month
- B: 220 × 30 = 6,600 customers → 6,600 × ₹17.50 = ₹115,500 − ₹88,833 = ₹26,667 a month
Step 5 - Margin of safety.
- A: (120 − 91) ÷ 120 = 24%
- B: (220 − 169) ÷ 220 = 23%
On a normal month B earns about ₹5,800 more, but the cushion is almost identical - B is not the 'safer' big shop, it is the higher-turnover shop carrying higher fixed cost. Note also that B's break-even needs 169 of 220 expected customers (77% conversion of forecast), while A needs 91 of 120 (76%): both forecasts must be close to right.
2. Including the two-month college vacation, which shop should Neha take? Consider her capital position and recommend terms and safeguards.
Read the worked answer
Vacation months:
- A: 35 × 30 = 1,050 customers × ₹23.80 = ₹24,990 − ₹64,833 = −₹39,843 a month, i.e. −₹79,686 over two months.
- B: 150 × 30 = 4,500 × ₹17.50 = ₹78,750 − ₹88,833 = −₹10,083 a month, i.e. −₹20,166 over two months.
Annual profit:
- A: 10 × ₹20,847 − ₹79,686 ≈ ₹1.29 lakh
- B: 10 × ₹26,667 − ₹20,166 ≈ ₹2.47 lakh
B wins on the normal month, on the vacation month and on the annual total, and its downside is roughly four times smaller. A's risk is structural: the campus gate is a single customer source that switches off for two months, while B's main-road trade only thins.
But profit is not the decision - capital is. Total funds ₹6,00,000. Commitments at B: stock and fixtures ₹2,50,000, three-month deposit ₹1,35,000, first month's rent and utilities in advance, plus the ₹20,166 vacation loss and a fit-out contingency. That is roughly ₹4.4 lakh before the first sale, leaving about ₹1.6 lakh - under two months of B's fixed costs.
Recommendation: take Shop B, with these safeguards:
- Negotiate a two-month deposit, a rent-free fit-out period, or a stepped rent for the first six months - landlords of vacant units usually have room.
- Ring-fence at least ₹1,80,000 as working capital that is never spent on stock depth.
- Use the vacation months deliberately: stock-take, deep clean, refresh the range toward school/college supplies and local demand, and build WhatsApp/pre-order sales to nearby households.
- Pay herself nothing for the first quarter - her own salary is a fixed cost that is missing from both sets of figures and would push B's break-even to about 178 customers a day.
- Review the forecast against actual footfall weekly for the first eight weeks; if conversion is below 70%, the fixed-cost structure, not the marketing, is the problem.
3. Name five numbers Neha should review weekly in her first quarter and explain what each one tells her that the others do not.
Read the worked answer
1. Footfall and conversion (bills ÷ people entering). If 220 people walk in and she bills 150, the problem is selling, not location - and 70% conversion is the number to beat. This separates a traffic problem from a selling problem.
2. Average bill. At B's 25% margin, a ₹5 increase on a ₹70 bill is a 7% lift in sales for the same rent and staff; it is the cheapest profit lever she has. This isolates basket-building from traffic.
3. Gross margin % by category, not blended. A 25% blended margin can hide a 12% category that is being bought or priced badly. This is the only number that shows whether her buying decisions are working.
4. Stock turnover / dead stock (units not sold in 45 days). With ₹2,50,000 tied up in stock, moving from 60-day to 45-day turnover releases about ₹60,000 of cash - the buffer she needs before the vacation. This measures cash locked in shelves, which the profit figures do not show.
5. Daily cash and POS reconciliation, with monthly shrinkage. Everything above can look healthy while cash leaks. This is the control number, not a performance number.
Why weekly: a month is too long to correct a footfall or margin problem - by the time a monthly report is read, four weeks of trading decisions have already been made on the wrong assumption. Footfall, conversion and average bill are the levers she can move this week; margin, turnover and cash are what decide whether the shop survives its first vacation.