case study

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Fitness Business Be prepared "to think of accounting primarily in terms of its usefulness to a company's management, rather than in terms of reporting to shareholders and other outside parties." 1. Rosemary does need to keep records that will allow the easy preparation of a tax return. But her primary concern should be in maintaining systems records that allow her to manage the business effectively. A.) What does it include? B.) What issues inight be raised as problematic from your observation? 2. What are two main problems for Rosemary's business? 3. What Rosemary should do with Kate Private Fitness, Inc. I don't know how much money I might have lost tor and use of the club during prime time. During because of Kate. She is a long-time friend whom I slower times (between 9.00 a.m. and 4.00p.m.) the thought I could trust, but I guess that trust was mis- price was $35 per hour. The price per student for placed. Now I've got to decide whether or not to fire each hour-long fitness class was $12. Some quan- her. And then I've got to figure out a way to make my tity discounts were offered to clients who prepaid. business work effectively without my having to step Unlike the large health clubs, Private Fitness did in and do everything myself. not offer memberships for open access to fitness Rosemary Worth was talking about the conse equipment and classes. quences of a theft that had recently occurred at the Prior to starting Private Fitness Rosemary had business she owned, Private Fitness, Inc. Private been working as an aerobics instructor and fitness Fitness was a small health club located in Rancho model. She had won many local fitness competi- Palos Verdes, California, an upscale community tions and was a former finalist in the Ms. Fitness located in the Los Angeles area. The club offered USA competition. She wanted to go into business personal fitness training and fitness classes of for herself to increase her standard of living by cap- various types, including aerobics, spinning, body italizing on her reputation and knowledge in the sculpting, air boxing, kickboxing, hip hop, step and growing fitness field and to have more time to pump, dynamic stretch, pilates, and yoga. Personal spend with her two young children. Private Fitness training clients paid $50 per hour for their instruc- had been operating for six months. This case was prepared by Professor Kenneth A. Merchant. Copyright 2001 by Kenneth A. Merchant. Private Fitness, Inc. a To open the club, Rosemary had to use almost all As the quote cited above indicates, however, of her personal savings, plus she had to take out a Rosemary gradually realized that Kate Hoffman bank loan. The building Rosemary rented, located was stealing from the club. On one occasion when in a convenient strip mall with ample parking, had Rosemary came to the club she noticed $60 in the formerly been operated as a fresh food market. cash drawer, but she noticed when she was leaving Rosemary spent about $150,000 to renovate the that the drawer contained only $20. She asked Kate facility and to buy the necessary fitness equipment about it, and Kate denied that there had been $60 The club was comprised of five areas: an exercise in the drawer. Rosemary.wondered if other cash room, a room containing aerobic equipment (e.g. amounts had disappeared before they had been de- treadmills, stair climbers, stationary bicycles, cross-posited at the bank. While some clients paid by credit country ski machines), a room containing weight card or check others, particularly those attending machines and free weights, men's and ladies' locker fitness classes, often paid cash. rooms, and an office. Rosemary became very alarmed when, during Rosemary contracted with five instructors she casual conversation with one of the other instructors, knew to run the classes and training sessions. The the instructor happened to mention to Rosemary instructors were all capable of running personal train- some surprising "good news." The good news was ing sessions, but they each tended to specialize in that Kate had brought in a new private fitness client teaching one or two types of fitness class. Rosemary who was working out in the 1.00-2.00 p.m. time herself ran most of the spinning classes and some of period on Monday, Wednesday, and Friday. Kate the aerobics classes. The instructors were paid on was doing the training herself. However, Rosemary commission. The commission, which ranged between checked the records and found no new revenues 20% and 50% of revenue, varied depending on the recorded because of this new client. She decided to instructor's experience and on whether the instruc- come to the club during the period to see if this tor brought the particular client to Private Fitness. client was indeed working out. Since the client was As manager of the business, Rosemary hired there and no revenue entry had been made, she Kate Hoffman, one of the instructors and a long. confronted Kate. After first explaining that she time friend. Kate's primary tasks included market. had not yet got around to making the bookkeep- ing, facility up-keep, scheduling of appointments, ing entry, Kate finally admitted that this client and record keeping. Kate was paid a salary plus a had been writing her checks out to Kate directly, commission based on gross revenues. During normal in exchange for a discount. Kate said that she was business hours when Kate was teaching a class one very sorry and that she would never be dishonest of the other instructors, or sometimes a part-time again. clerical employee, was asked to staff the front desk Rosemary realized she had two major problems. in return for an hourly wage. Private Fitness was First, she had to decide what to do with Kate. Kate open from 5.30 a.m.-9.00 p.m., Monday through was a valuable instructor and a long-time friend, Friday. It was also open from 6.00 a.m.-noon on but her honesty was now in question. Should she Saturday and noon-3.00 p.m. on Sunday. forgive Kate or fire her? Second, Rosemary also Rosemary was still in the process of building the realized that she had an operating problem. She did volume necessary to operate at a profit. Typically not want to step in and assume the managerial role one or two private fitness clients were in the herself because she had significant family respons- facility during the prime early morning and early ibilities to which she wanted to be able to continue evening hours. A few clients came in at other times. to attend. But how could she ensure that her Classes were scheduled throughout the times the business received all the revenues to which it was club was open. Some of these classes were quite entitled without being on-site at all times herself? popular, but many of them had only one or two Should she leave Kate, who promised not to steal students, and some classes were cancelled for lack again, in the manager position? Or should she hire of any clients. However, Kate's marketing efforts one of the other instructors, or perhaps a non- were proving effective. The number of clients was instructor, to become the manager? And in either growing, and Rosemary hoped that by the end of case, were there some procedures or controls that the year the business would be earning a profit. she could use to protect her business's assets? 21