I'm asked to produce a projected balance sheet. I want to know how I decide what the cash amount will be. I'm given a statement of financial position from the year prior and a statement of earnings. I'm not seeing any relevant information in the case regarding cash changes. Would I just use the last year's cash amount for my new balance sheetjQuery22407502758275567405_1622648744940

Thank you!

NORTHWEST FITNESS: AN EXPANSION OPPORTUNITY

Jessica Welsh wrote this case under the supervision of Ian Dunn solely to provide material for class discussion. The authors do not

intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names

and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the

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Copyright 2019, Ivey Business School Foundation Version: 2019-12-18

On September 1, 2018, David Bryan, owner of Northwest Fitness (Northwest), was analyzing the past year

of operations and planning for the future of the business. Northwest was a fitness studio in London, Ontario

that focused on "functional fitness" training, which could help people improve everyday aspects of their

lives. Bryan had launched the studio with the help of a bank loan and a CA$20,000

1

line of credit. After

three years of success, he wondered if the company was now in a financial position that would allow him

to expand the studio's services.

THE FITNESS INDUSTRY

The fitness industry was in a period of growth. People of all ages had begun to view exercise as part of a

regular weekly routine. Obesity and inactivity-related health issues were on the rise, with more of the

population seeking regular exercise as a preventive measure and a way to maintain health and well-being.

In an effort to reduce spending on obesity-related health care, health insurance companies and businesses

had begun to provide monetary incentives for employees to take part in physical fitness activities. With

both individuals and businesses seeing the importance of regular physical fitness, the industry was expected

to grow at an annualized rate of 3.1 per cent to reach revenues of $3.6 billion by 2022.

2

In Canada, the top fitness trend in 2018 was functional fitness training. Canadians were beginning to see

fitness as a way to improve their everyday lives rather than just as a means to lose weight. Functional fitness

training simulated movements that individuals regularly made, such as carrying groceries.

3

Due to the

working population's limited leisure time, high-intensity interval training (HIIT) was also popular because

it focused on brief high-intensity activities (e.g., sprinting) followed by a short period of rest

4

and promoted

weight loss in less time than other types of workouts.

To become a personal trainer, candidates had to get a certification program recognized by the industrygoverning bodies and insurance companies. Continuing education credits were required to ensure personal

1 All currency amounts are in CA$ unless otherwise specified. 2 "Gym, Health & Fitness Clubs in Canada - Market Research Report," IBISWorld, November 2019, accessed August 9, 2018,

www.ibisworld.com/canada/market-research-reports/gym-health-fitness-clubs-industry/. 3 "Functional Fitness is the New #1 Canadian Fitness Trend Expected for 2018," Canfitpro, August 28, 2018, accessed September

4, 2018, www.canfitpro.com/2018/08/28/functional-fitness-is-the-new-1-canadian-fitness-trend-expected-for-2018/. 4 Susan Scutti, "Interval Training and Group Classes: The Top Fitness Trends for 2018," CNN: Health, March 9, 2018,

accessed September 4, 2018, www.cnn.com/2018/01/03/health/exercise-trends-survey-2018/index.html.

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trainers were kept up to date with the evolving fitness industry. New fitness trends and training methods emerged

regularly; to guarantee quality training sessions, personal trainers were required to be educated on them.

NORTHWEST FITNESS

Bryan had been involved in fitness from a young agefrom taking part in team sports to competing in body

building competitions, he had experience in almost all facets of the fitness industry. After completing his

education in Police Foundations at Fanshawe College in London, Ontario, Bryan joined the Canadian

Armed Forces (CAF) as an artilleryman. Upon leaving the CAF in 2015, Bryan opened Northwest and

turned his passion for fitness into a career.

He completed his personal trainer certification through the International Sports Science Association (ISSA),

a distance-education and certifying agency. Certification from the ISSA was recognized in 91 countries,

offered 12 different fitness certifications, and had certified over 200,000 trainers.5

Wanting to further his

education and differentiate himself from traditional gym personal trainers, Bryan took certification courses

in the United States from the Onnit Academy in Austin, Texas, which focused on unconventional training

for functional strength, conditioning, and agility using alternative tools such as kettlebells, sandbags, steel

maces, steel clubs, and battle ropes.6

Bryan believed that these types of alternative fitness regimens helped

his clients improve functional fitness while adding variety to their workouts and avoiding boredom. Bryan

was the only certified Onnit Specialist in Northwest in London.

Northwest operated out of a private 600-square-foot (approximately about 183 square metres) studio

equipped with all of the aforementioned tools along with dumbbells, barbells, and a large multi-station rig.7

Bryan offered one-on-one personal training, small group personal training, and regularly scheduled group

fitness classes. To avoid hiring an administrative assistant, he used an online appointment scheduler, which

allowed clients to book, cancel, or reschedule their personal training sessions and sign up for fitness classes

using a computer or smartphone.

COMPETITION

The fitness industry was becoming increasingly competitive, and Northwest competed with large established

fitness chains such as GoodLife Fitness, Movati Athletic, and Planet Fitness (see Exhibit 1). Smaller

independent gyms and many specialized fitness classes such as crossfit training and yoga were also

competitors, but these different types of activities often lacked the privacy that Northwest was able to offer

its customers. With new fitness businesses consistently opening, fitness companies were constantly competing

to retain clients. Businesses that were able to offer additional services such as nutritional programs and meal

planning had an easier time retaining clients than those that did not.8

NORTHWEST'S HISTORICAL FINANCIAL PERFORMANCE

While Bryan was happy with the success he had achieved over the last three years, if he did not expand his

location and his services, revenue growth would become stagnant. At the current location, Northwest was

nearing capacity in both space and time. Bryan wanted to add additional services but did not have the space

5 "About the ISSA," ISSA, accessed August 30, 2018, www.issaonline.edu/company/. 6 "What is Onnit Academy?," NN Academy, accessed August 30, 2018, www.onnit.com/academy/onnit-academy/. 7 A multi-station rig was a piece of gym equipment that allowed for a variety of exercises. 8 "Gym, Health & Fitness Clubs in Canada," op. cit.

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110Page 3 9B19B015

to house more fitness equipment. He also wanted to add more fitness classes for those clients who had

become more advanced, but he could not do so without limiting his availability for one-on-one personal

training sessions. If he decided to expand his operations, he would be able to use internal financing for a

portion of it and would need to extend his line-of-credit limit to $50,000.9

Bryan wanted to generate and

analyze the company's statement of cash flows and financial ratios since inception to determine if his

current financial position was healthy enough to take on additional debt (see Exhibits 2 and 3).

FUTURE OUTLOOK

If he were to move forward with the expansion, Bryan was confident that he would see revenue growth of

25 per cent for fiscal 2019. To achieve this growth, however, he needed to increase marketing expenditures

by $15,000 and move to a larger facility. The building where Northwest was currently located had a vacancy

in a larger unit that was available for immediate occupancy for $3,500 per month. The landlord charged

Bryan rent only on the new unit and had agreed to let Bryan continue using his existing unit until he was

ready to run the studio out of the new one. Bryan would immediately need to increase his prepayment of

last month's rent and September 2018's rent. He was confident that with some help from his family and

friends he could have the new unit up and running before the end of September. All preparations for the

move would take place outside of normal business hours, allowing regularly scheduled classes and personal

training sessions to take place in the existing unit without interruption. The new unit would come with

increased utility and insurance costs, making each $250 and $150 per month, respectively.

Bryan had a small group of clients who always paid on credit, and he offered credit terms of net 30. These

clients had been devoted customers of Northwest from the beginning, and they preferred to pay for their

monthly personal training sessions and fitness classes in one lump sum rather than before each session or

class. These clients had consistently represented 10 per cent of all of Northwest's revenue since inception,

and Bryan did not expect that this percentage of total projected revenue would change in fiscal 2019.

He would need to hire an additional personal trainer to facilitate the added personal training sessions and

fitness classes. Bryan estimated that the new personal trainer would be required to work an average of 12

hours per week throughout the year and be paid $25 per hour. He planned to increase his own annual salary

to $80,000.

Bryan would need to purchase new fitness equipment to accommodate the additional services. The new

equipment would cost $65,000 and would be depreciated using the straight line method over a useful life

of six years with no residual value. The existing fitness equipment had a useful life of eight years and the

office equipment had a useful life of four years. Both were depreciated using the straight line method with

no residual value. He would need to renew his industry certifications every two years on August 31 at a

cost of $3,700.

The bank loan was repaid in equal monthly installments with the principal and interest payments due on

the last day of each month. Total interest expenses for the bank loan were projected to be $1,310 for fiscal

2019, and the following expenses would remain unchanged from fiscal 2018: internet and phone, licensing

fees, online scheduler, travel, and website hosting or domain. All other operating expenses were projected

to remain the same percentage of sales as in fiscal 2018.

9 The line of credit carried an interest rate of 9.5 per cent with interest due on the 15th of the following month.

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CONCLUSION

Bryan knew that he would not be satisfied with his work life if he continued with his existing business

operation. He also knew, however, that he would be happy taking on the additional responsibilities of a

growing business only if he could be confident of earnings growth in the future. Bryan wondered if this

growth would be the first step toward a self-sustaining business model. He hoped to eventually own and

manage the studio without being involved in the training sessions. Bryan wanted to project a statement of

earnings and a statement of financial position to determine whether he could achieve these goals. He also

wanted to analyze the company's past financial performance to determine if it was likely that the bank

would increase his line of credit.

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EXHIBIT 1: SELECT FINANCIAL RATIOS FOR PLANET FITNESS INC.

2017 2016

Current ratio 1.6 1.1

Interest coverage 4.2 4.3

Return on assets 5.1% 7.1%

Revenue growth 13.7% 11.7%

Operating expense growth 7.6% 1.6%

Source: Created by the case authors based on Planet Fitness, SEC Filings: 2017, 36-67, December 2017, accessed

September 28, 2018, https://investor.planetfitness.com/investors/financial-information/sec-filings/2017/default.aspx.

EXHIBIT 2: NORTHWEST STATEMENT OF EARNINGS (YEARS ENDING AUGUST 31, IN CA$)

2016 2017 2018

(%) (%) (%)

Revenue 82,500 100.0 137,500 100.0 220,000 100.0

Cost of sales 2,393 2.9 3,988 2.9 6,380 2.9

Gross profit 80,107 97.1 133,512 97.1 213,620 97.1

Operating expenses

Advertising 15,578 18.9 19,473 14.2 27,262 12.4

Amortization 1,850 2.2 1,850 1.3 1,850 0.8

Depreciation 5,875 7.1 7,250 5.3 10,000 4.5

Insurance 565 0.7 600 0.4 650 0.3

Internet and phone 2,280 2.8 2,508 1.8 2,759 1.3

Licensing fees 800 1.0 800 0.6 800 0.4

Miscellaneous 328 0.4 435 0.3 480 0.2

Office supplies 729 0.9 940 0.7 1,032 0.5

Online scheduler 318 0.4 312 0.2 314 0.1

Rent 27,000 32.7 27,000 19.6 27,000 12.3

Salary 48,000 58.2 52,000 37.8 65,000 29.5

Travel 2,144 2.6 2,573 1.9 3,602 1.6

Utilities 2,016 2.4 2,218 1.6 2,439 1.1

Website hosting or domain 331 0.4 334 0.2 341 0.2

Total operating expenses 107,814 130.7 118,293 86.1 143,529 65.2

Net income before interest

and tax (27,707) -33.6 15,219 11.1 70,091 31.9

Interest expense 3,860 4.7 3,105 2.3 2,160 1.0

Net income before tax (31,567) -38.3 12,114 8.8 67,931 30.9

Income tax expense - 0.0 1,817 1.3 10,190 4.6

Net income (31,567) -38.3 10,297 7.5 57,741 26.2

Source: Company files.

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EXHIBIT 3: NORTHWEST STATEMENT OF FINANCIAL POSITION (AS AT AUGUST 31, IN CA$)

2016 2017 2018

Assets

Current assets

Cash 45 (925) 44,074

Accounts receivable 646 1,287 2,133

Office supplies 225 250 375

Prepaid rent 2,250 2,250 2,250

Total current assets 3,166 2,862 48,832

Long-lived assets

Office equipment 2,500 5,500 5,500

Less: accum. depreciation 625 1,875 2,000 3,500 3,375 2,125

Fitness equipment 42,000 47,000 69,000

Less: accum. depreciation 5,250 36,750 11,125 35,875 19,750 49,250

Certifications 3,700 3,700 3,700

Less: accum. amortization 1,850 1,850 - 3,700 1,850 1,850

Total long-lived assets 40,475 43,075 53,225

Total assets 43,641 45,937 102,057

Liabilities and Shareholders' equity

Current liabilities

Accounts payable* 208 294 396

Interest payable - 96 -

Income tax payable - 1,817 10,190

Current portion-bank loan 10,000 10,000 10,000

Total current liabilities 10,208 12,207 20,586

Long-term liabilities

Bank loan 40,000 30,000 20,000

Shareholders' equity

Common stock 25,000 25,000 25,000

Retained earnings (31,567) (21,270) 36,471

Total shareholders' equity (6,567) 3,730 61,471

Total liabilities and shareholders' equity 43,641 45,937 102,057

Note: *Accounts payable charges solely related to internet and phone and utilities charges; accum. = accumulated.