Fitness Forever is a chain of Leisure/sports Centre’s that has sprung up
in the UK over the last 5 years. More sport on TV, the Government’s
health awareness campaign and other health initiatives have created a
huge demand for leisure/sports centres. Public provision could not keep
up with demand and Don Brennan the Managing Director and founder of
Fitness Forever built his first centre 5 years ago. There were now 6
centre’s operating across the UK and more were being planned. Cardiff is
the newest having opened its doors to the public almost 1 year ago.
Demand had been so strong and growth so fast that the accounting systems
have been quite rudimentary and confined primarily to keeping financial
accounts. Don Brennan knew that his company was making a profit and in
the early days that is all that mattered. The cash flowed in, and the
profitability of one centre allowed him to raise more finance to build
the next.
Other entrepreneurs had however, also spotted under supply in this market
and competition was increasing. More centres were being built offering a
more sophisticated service to a public who were becoming more discerning.
Don realised that each centre would have to be treated like a separate
business and that within each centre individual activities would also
have to be measured for their profitability.
Six months ago he had commenced a staff development programme for his
centre managers. Being enthusiastic about sport was no longer going to
be a formula for success. Centre Managers would need to be good with
people, be sensitive to the local market and have accounting knowledge.
During the first staff development session some of the centre managers
were quite taken aback at the thought of having to be responsible for
planning, budgeting, profitability etc. The Cardiff Centre Manager was
Alison Street, she was a first class gymnast and loved all sorts of
sports, but her strength had never been with figures. The lecturer for
the accounting sessions was Geraint Abbo a Professor from the Glamorgan
Business School. He had quickly put the class at ease and Alison was
pleased to see that planning and budgeting was not all about figures but
also about coordination, team work and good management. As the class
progressed the more Alison looked forward to the challenge.
On returning to work she decided as preparation for planning for next
year she would collate some information.She needed to:
1.Look at last years Profit & Loss Account & Balance Sheet and use this
as a starting point (Table 1).
2.Identify cost/profit centres within the Sports Centre. (Plan of Leisure
Centre Fig 1).
3.Draw up an organisation chart of the Centre (Figure 2).
4.Brief all activity managers within the Centre of their role in the
planning process. Geraint Abbo would attend the first session to provide
moral and technical support. This would also be all new for them.
5.Make a start at the planning process prior to the meeting in (4) above
by trying to predict cost and revenues for the first 6 months of the new
financial year (Table 4). This would give the Activity Managers
something to focus on and start the ball rolling.
6.Alison also wanted to look at the profitability of each profit centre
“Why don’t you use 2007 as a base “said Geraint “This will enable you to
set targets for 2008 and compare your budget with last years programme”.
“What a good idea” thought Alison. “Don Brennan will be impressed at the
next Managers meeting at the progress I have made”.
Each centre is based on roughly the same model, local variations in
demand etc being taken into account The Cardiff Centre has two swimming
pools and a large gymnasium which includes badminton courts, several
squash courts and a table tennis room. The main pool is primarily for
adults and is equipped with diving boards and a water slide. The smaller
pool which is shallower and kept at a higher temperature, is reserved for
children and learners. The table tennis room is next to the snack bar
and the Management of the Centre has founded a Youth club to encourage
young people to make use of the facilities, both during the day and in
the evening. There is a licensed bar near the squash courts. The
licensed bar and the squash courts are frequented mainly by people in
their middle to late twenties.
The gymnasium and badminton courts are well used through the day and
evening particularly early evening when members come straight from work.
In addition to holding aerobic, boxercise, circuit training and step
classes in the gymnasium the centre also holds twice weekly “Gymkids”
sessions there for parents and toddlers which have proved very popular.
Table 1
Profit & Loss Account for Fitness Forever (Cardiff) for the period ending
30/09/2007.
£ £
Revenue 1,650,000
Expenses
Rates & Insurance 250,000
Fuel & Power 100,000
Repairs & Maintenance 75,000
Chemicals (for swimming pool) 30,000
Security 50,000
Cleaning Materials 25,000
Salaries 500,000
Salary related costs 125,000
Depreciation 40,000
Snack Bar Supplies 100,000
Licensed Bar Supplies 80,000
Head Office Overhead 150,000
1,525,000
Net Profit before Interest & Tax £ 125,000
Balance Sheet for Fitness Forever (Cardiff) as at 30/09/2007
Fixed Assets £ £
Land & Buildings 386,000
Machinery 75,000
Vehicles 15,000 476,000
Current Assets
Stock 8,000
Debtors 14,000
Cash 28,000
50,000
Current Liabilities
Trade Creditors 12,000
Taxation 24,000
36,000
Net Current Assets 14,000
Total Assets less Current Liabilities 490,000
Long Term liabilities 10,000
Net Assets 480,000
Financed by:-
Share Capital 280,000
Reserves 75,000
Profit & Loss 125,000
480,000
Table 2
Split of Staff Salaries and Revenue for Financial Year 2007
Cost Centre Staff Salaries (£) Revenue
1 (19%) 95,000 500,000
2 (6%) 30,000 120,000
3 (35%) 175,000
4 (7%) 35,000 240,000
5 (9%) 45,000 250,000
6 (5%) 25,000 150,000
7 (7%) 35,000 60,000
8 (12%) 60,000 330,000
500,000 £ 1,650,000
Table 3
Cost Centre Asset
Value Area (sq metres) %
1 30% 1,750 43.73
2 10% 350 8.75
3 2% 400 10.00
4 5% 80 2.00
5 40% 750 18.75
6 5% 250 6.25
7 3% 260 6.50
8 5% 160 4.00
100% 4,000 100
Table 4
Forecast Profit & Loss Account for 6 month Period 01/10/07 – 31/03/08
Assumptions £ £
Revenue + 5% 866,250
Expenses
Rates & Insurance + 3% 128,750
Fuel & Power + 1% 50,500
Repairs & Maintenance 0 37,500
Chemicals + 10% 16,500
Security + 2% 25,500
Cleaning Materials 0 12,500
Salaries + 3% 257,500
Salary related costs + 3% 64,375
Depreciation 0 20,000
Snack Bar Supplies + 5% 52,500
Licensed Bar Supplies + 5% 42,000
Head Office Overhead + 2% 76,500
784,125
£ 82,125
Table 5
Cost Centre % of Total Users *
1 20
2 10
3 0
4 10
5 25
6 10
7 5
8 20
100 %
* Some users will in one visit participate in a number of activities e.g.
swim and go the licensed bar.
The above table of total users is a weighted average of all visits to all
centres.
The week following the budget meeting Dennis Young was talking to Fred
Hold who supplies “exercise steps” to leisure centres. He had known Fred
for years and admired him for his energy and drive. He has built up his
business single handed and was now reaping the rewards as evidenced by
the brand new 4 x 4 Honda Mountain Motor in which he had swept into the
Leisure Centre car park.
Fred’s business had expanded remarkably and he had plans for further
expansion in the future. He was so excited about his proposals that he
outlined his current financial position to Dennis. “I am looking at
various options open to me” he explained to Dennis. “I am sure” if I
lowered my price I could increase my sales and market share”. “Where
does he get his energy from” thought Dennis looking at his watch and
thinking that he only had another two hours to go before going home.
Table 6
Fred’s current position
£
Sales (£25 per unit) 600,000
Expenses
1. Materials 110,000
2. Labour 240,000
3. Overheads 150,000
500,000
Profit £ 100,000
1. 100% variable
2. 50% fixed and 50% variable
3. 80% fixed and 20% variable
REQUIREMENTS
The following questions need to be answered in a business report format,
not exceeding 3,000 words.
Question 1
The key financial ratios for the most profitable club in the Fitness
Forever group for the financial period ending 30/09/2007 are shown below.
(Table A).
Table A
Key Financial Ratios
1 Operating Profit
Operating Assets 36%
2 Operating Profit
Sales 10%
3 Sales
Operating Assets 3.6 x
£278
4 Expenses
Sales 90%
5 Sales
Fixed Assets 3.94 x
£254
6 Sales
Current Assets 41.7 x
£24
7 Sales
Stock 181.8 x
£5.5
8 Sales
Debtors 153.85 x
£6.5
9 Sales
Bank 83.3 x
£12
10 Current Ratio 1.8:1
11 Quick Ratio 1:1
12 Gearing Ratio 25%
a) Calculate for Fitness Forever (Cardiff) 12 ratios (as above to
enable a comparison to be made between performance of the most profitable
club and the Cardiff club for the financial period ending 30/09/2007.
b) Produce a comprehensive with a critical analysis of Fitness
Forever (Cardiff) and the most profitable club highlighting areas of
strength, and identifying any weakness that will need to be addressed.
Question 2
Using the figures in Table 1 of case study (Profit & Loss Account for the
period ending 30/09/07), Tables B & C and any other information available
allocate and apportion the expenses to the identified cost centre’s and
calculate the profitability of each profit centre. Write a report to
Alison critically commenting on key issues in your results. Consider if
it is good policy to expect every profit centre to make a profit?
Table B
Split of Revenue between Profit Centre’s for Financial Year 2007
Profit Centre Revenue
1 500,000
2 120,000
4 240,000
5 250,000
6 150,000
7 60,000
8 330,000
£ 1,650,000
Table C
Division of Asset Value within the Sports Centre
Cost Centre Asset Value
1 30%
2 10%
3 2%
4 5%
5 40%
6 5%
7 3%
8 5%
100%
Question 3
Critically outline the benefits that could result from the introduction
of a system of budgetary planning & control at Fitness Forever (Cardiff)
Question 4
Write a report for Don Brennan on long term sources of finance which he
may wish to consider when thinking about possible future expansion of the
Fitness Forever group. Your report should highlight the relative
advantages and disadvantages of each potential source and the issues
which should be considered in the relative percentage of each source.
Question 5
When Alison showed them her attempt at a forecast profit and Loss Account
for the first 6 months it generated the debate she was hoping for. They
discussed each item in turn and she was amazed at the points they raised
and the information they had that was not in the records and she had no
idea of. As the discussion progressed she made the following notes:
Using her six months figures as a base ( Table 4) unless instructed
otherwise construct a budgeted Profit and Loss Account for the period
01/10/07 – 30/09/08.
a) Glenys Cooper informed the meeting that another new centre was
being planned and due to this increased competition revenue would only
increase by an extra 2 % in the second half of the year.
b) Rates and insurance would increase by a further 1% in the second
half of the year Glenys Cooper had already received information
concerning this increase.
c) Repairs and Maintenance and Cleaning materials would remain as in
2007.
d) John Rowe said that the chemicals used previously had been
withdrawn as a result of health warnings. The new chemical, which would
have to be used from 01/10/07, was expected to be 20% more expensive than
in the year 2007.
e) The insurance increase had been kept to 1% because Denise Young,
who deals with this area, had ensured the insurance company that security
would be increased. His prediction, therefore, for 2008 was 15% higher
than 2007.
f) The National Association of Leisure Centre Employees had just
completed negotiations with the Federation of Leisure Centre Owners and
salary would increase a further 4% from 01/04/08.
g) No significant change expected in depreciation although Denise
Young had reported that her staff, Aled Walters and Judith Loaf, were
concerned at the deterioration and consequent life expectancy of some of
the equipment.
h) Will Smith always the optimist was convinced he could find a
lower cost supplier for both Snack Bar and Licensed Bar. He had met with
a number of new representatives in the last few weeks and was convinced
the supplies for both Snack and Licensed Bars would not increase in cost
in the second half of the year.
i) Moans and groans had gone up around the table when Alison
announced she had received a letter from Head Office informing her that
in the second half of the year their contribution to Head Office
Overheads would increase by a further 4%.
j) John Rowe looked after Fuel and Power, because as the Head of
Pool Activities his area was the greatest user. He was pleased to report
that he expected no additional percentage increase in cost for the second
half of the year.
Solution
The solution to all the questions are provided along with an excel sheet that has the calculations. The written report has the exhaustive answers to all the questions. A detailed financial analysis specific to the questions are presented.
No. of Words:
3,413 words
References:
n/a
|