Tom and Marie are thinking of opening a fitness centre with facilities for aerob

Question

Tom and Marie are thinking of opening a fitness centre with facilities for aerobics, weight training, jogging and lap swimming, as well as diet and injury consultation. They plan to buy land and build their facility near the new shopping centre. They want to employ a director, an assistant director, experts to supervise members in each fitness area, and numerous consulting dietitians and sports medicine professionals. They hope to have the entire facility, including an outdoor all-weather track and an indoor swimming pool, completed by the end of the year. They also believe that it will be important to have the facility fully equipped and staffed before they begin taking memberships. Although their estimates indicate that the fitness centre can be profitable if they can establish a growing membership over the first five or six years, many small businesses in town have failed because of ‘cash flow problems’ (excess of cash payments over cash receipts). Before committing themselves to this venture, Tom and Marie have come to you for advice and for help in preparing a cash budget.

Write Tom and Marie a memo explaining in 200 words why they might have cash flow problems during their early periods of operations. Show them how they can identify these cash flow problems through careful cash budgeting. Make a few suggestions that might help them reduce such problems if they do decide to open the fitness centre.

Explanation / Answer

Tom And Marie may face cash flow problem due to the elaborate arrangement they are planning from the beginning. In fact buying the land and making the infrastructure near a shopping centre itself will require a good amount of investment. They also want to keep the venture fully staffed with health and fitness professionals and admin staffs from day one , but as per their estimate it will take 5-6 years to establish a growing membership. So they will have committed fixed expenditure from infrastructure investment (loan interest and principal payback assuming loan to be taken for the land and building) and the staff costs apart from incidental admin and advertisement costs.

But the receipt side will be variable and very littely chance that they will have sufficient membership in intitial years to recover the fixed costs. So in all probability they will face cash flow problem mainly due to the elaborate full arrangements from day one.

To reduce such problems , they may think of adopting some strategy like;

1. If the infrastructure is available on operating lease, it would be best for initial years as they can save the initial huge investment. When the operation grows bigger, they can think of having own infrastrusture. Even if the rented facility not available, they can start with the basic infrastructure and then start adding as per the demand.This will also save some initial burden.

2. Instead of recruiting full staff like Directors and Asst Directors, Dieticians and Health and sports medicine specialists from the beginning, they can start with minimum no of dieticians and health and sports medicine professionals. As the the demand grows , they can always add to the staff. They can also keep the Admin staff at the bare minimum and add as per requirements later on.

Thses two steps should greatly minimize the fixed cash outflow. Still they may need some cash for which they have to line up a short trm credit facility to have bridge loans for short periods to make up for any cash shortfall at least for the initial years.

They nay also go for some aggressive advertisement and campaigning to increase the footfall as early as possible so that the break even level is reached quickly.

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