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Posted on July 31st, 2012, by

The development of business is impossible without the permanent improvement of the professional level of the personnel of the company. At the beginning stages of the development of a company, it is possible to achieve positive results on the basis of the enthusiasm of employees and their knowledge and experience. However, in the course of time, as a company grows it is necessary to increase the qualification level of employees that implies the necessity of the acquisition of new skills and abilities and enlargement of the existing professional knowledge.

In the contemporary business environment it seems to be practically impossible to develop a company without the effective decision making strategy. It is very important that a company could react adequately on changes that take place in the business environment and in the market. In this respect, it is necessary to underline the importance of accounting that can create the basis for the development of a company and its progress. Even though traditionally accounting was not viewed as an essential component in the development of financial and market forecasts concerning the further development of companies, nowadays, it is obvious that, without accounting and the ability of the managerial staff of a company to effectively use accounting in their financial and business forecasts, a company can hardly achieve positive results, especially if it is a growing company, such as the Fitness Forever. It is worthy of mention the fact that the accounting theory also progresses in accordance with the changes of the current business environment and new theories emerge, which meet the major needs and demands contemporary companies impose on accounting. In this respect, the positive accounting theory may be viewed as one of the most perspective because it helps to use accounting information in forecasting the future development of a company and, in fact, accounting information, may provide researchers with important data concerning not only the current trends but also perspectives of a company in the market. At any rate, with the help of accounting, including positive accounting theory, it is possible to develop financial forecasts concerning short-term perspectives of a company in the market.

Question 1

In order to forecast the development of a company in the nearest future, it is very important to assess and analyze adequately its current position in the market and its financial position. In fact, the financial analysis can help consistently assess the potential of the company and its further perspectives. This is why it is very important to take into consideration the major financial ratio, which contribute to the formation of the objective and sufficient view on the financial position of a company, though it is worthy of mention the fact that accounting information cannot be viewed as the only source of valuable information about the current situation in the company and in the market, but still it provides ample opportunities for the quantitative analysis of the position of the company.

Consequently, in order to better understand the current situation in the Fitness Forever (Cardiff) it is necessary to take into consideration its major financial ratios and compare it to the performance of the most profitable club.

Basically, it should be said that one of the major constituent elements of the financial analysis is the operating profits and operating sales ratio, which may be defined through the comparison of operating profits of the company and its operating sales, i.e. operating profits/operating sales * 100. In case of the Fitness Forever this ratio will constitute 26.04%. Basically, this ratio is lower than in the most profitable club, but it is still quite high that provides the company with a perspective of the further growth. At any rate, relatively high operating profit ratio opens opportunities for the investment into the enlargement of business or even creation of new clubs.

The operating profit and sales ratio is also very important and it may be defined through the comparison of operating profit and sales, i.e. operating profit/sales * 100. In such a way, it is possible to define this ratio for the Fitness Forever as 7.5%. This figure is also lower compared to the most profitable club, which operating profit and sales ratio constitutes 10%, but it is necessary to take into consideration that the Fitness Forever is a developing company that is a relatively new player in the market and, therefore, it is quite normal that its profitability does not hit the ceiling.

At the same time, the sales and operating assets ratio of the Fitness Forever is comparable to the ratio of the most profitable club. This ratio is defined through the comparison of sales and operating assets and it constitutes 3.4 * 240 pounds for the Fitness Forever and 3.6 * 278 pounds for the most profitable club. In this respect, both the Fitness Forever and the most profitable club are similar and, in spite of relatively worse ratio, the basic trend for the Fitness Forever is quite good that indicates to the possibility of the further growth of the company in the future and, at this point, accounting information provide very important data for the financial analysis and forecasts of perspectives of the company.

Not less important is the expenses and sales ration that may be defined through the comparison of expenses of the company and its sales, i.e. expenses/sales * 100. Basically, the expenses and sales ratio for the Fitness Forever constitutes 92.4% that is higher compared to the most profitable club, but stilly this figure is not really threatening to the financial position of the company. In fact, it is quite normal that the expenses of the company are higher at the moment compared to the most profitable company in the industry because the Fitness Forever needs to develop and progress that naturally need additional investments and expenses. In addition, the company still needs to find reliable suppliers who could provide the company with products and materials of the high quality and at lower price.

Also, the sales and fixed assets ratio is very significant for the assessment of the financial position of the company. It should be pointed out that for the Fitness Forever this ration, which is defined through the comparison of sales and fixed assets, constitutes 3.46 * 238 pounds. This ratio is lower compared to the most profitable club but still the basic trend is quite positive. At any rate there are no significant disparities in this regard.

Furthermore, it is necessary to define the sales and current assets ratio. This ratio may be defined through the comparison of sales and current assets of the company. In fact, this ratio constitutes 33 * 25 pounds for the Fitness Forever, while for the most profitable club this ratio constitutes 41.7 * 24 pounds. Obviously, in this regard the position of the most profitable club is more preferable compared to the position of the Fitness Forever, but this difference in the sales and current assets ratio may be explained by the different experience of companies and the different current position of companies in the market.

At the same time, the Fitness Forever seems to be in an advantageous position compared its sales and stock ratio to that of the most profitable club. To put it more precisely, this ratio may be defined through the comparison of sales and stocks and it constitutes 206.25 * 6.85 pounds for the Fitness Forever and 181.8 * 5.5 pounds for the most profitable club. This is why it is possible to estimate that, at this point, the Fitness Forever has certain advantages compared to the most profitable club and, therefore, it has opportunities for the further growth and development. At any rate, the company is viewed as quite attracting for shareholders.

The similar trend is typical for the sales and debtors ratio, which is defined through the comparison of sales and debtors. In fact, this ratio constitutes 117.9 * 3.6 pounds for the Fitness Forever and 153.85 * 6.5 pounds for the most profitable club. In such a way, it is possible to estimate, judging from this ration, that the current financial position of the Fitness Forever is stable and, therefore, it can gradually continue the market expansion and enlargement. The same conclusion may be said on the basis of the analysis of its sales and bank ratio compared to that of the most profitable club. For the Fitness Forever this ratio constitutes 137.5 * 3 pounds while for the most profitable club it is 83.3 * 12 pounds.

Finally, it should be said that current ratio, quick ratio and gearing ratio also demonstrate positive trends in the development of the Fitness Forever. For instance, the current ratio with the help of which it is possible to define whether the company is able to pay its debts within the next 12 months is sufficient for the Fitness Forever and constitutes 1.36:1, while for the most profitable club this ration constitutes 1.8:1. Obviously, the current ratio for the most profitable company is substantially higher that indicates to its better financial position, but even though the current ratio for the Fitness Forever is lower, it does not threat to the stability of the position of the company in the market, at least within the following 12 months. The same may be said about the quick ratio and gearing ratio, which constitute 1:1 and 20% respectively for the Fitness Forever and 1:1 and 25% for the most profitable club.

Question 2

 Basically, the Fitness Forever is the club which has different centre which have different costs and different profitability. At the same time, it should be said that such a situation is quite normal and it is even possible to estimate that such a policy of the administration of the club is correct because the company can provide its customers with a variety of services satisfying the needs of a larger number of customers. Obviously, this can contribute to the growing popularity of the club and the larger interest of the public to its products and services. On the other hand, it should be said that, while planning the further development of the club it would be erroneous to count on the profitability of absolutely all centres. Even at the present moment the profitability and costs of different centres are characterized by significant disparity. To put it more precisely, while some centres are more profitable others are not very popular, but, it is necessary to remember about the fact that interests of the customers may vary in the course of time. For instance, it is obvious that table is not very profitable while main pool and gymnasium are the most profitable at the moment. However, it is only current performance, which may be changed in the future. For instance, the profitability of the licensed bar may decrease if the number of the target customers of this centre, i.e. people at the mid and late twenties, decreases, while in the case of the contrary trend it will definitely increase. Or else, its profitability may decrease in case of possible changes in preferences of customers in favour of the healthier lifestyle. In addition, the potential of the children’s pool may be underestimated because potentially the number of its customers and therefore its profitability may increase, taking into consideration the fact of the growing popularity of the club among parents and toddlers, which may be potential target customers of the children’s pool in the future.

Speaking about the extent of the profitability proper, it should be said that the first cost centre, i.e. the main pool, brings the club 37.500 pounds of net profit; the second cost centre, i.e. the children’s pool ”“ 12.500 pounds; the third ”“ 2.500 pounds; the fourth, licensed bar, – 6.250 pounds; the fifth, gymnasium, – 50.000; the sixth ”“ 6.250 pounds; the seventh ”“ 3.750; and the eighth ”“ 6.250 pounds. It should be said that the general profitability is relatively high.

Nevertheless, it is quite probable that some cost centre will be unable to maintain its positive performance and they will not be very profitable in the future. For instance, as the administration of the company needs to increase its professional level and probably new employees will be needed than this will naturally increase administrative costs that directly or indirectly will affect all centres. Furthermore, the costs of the main pool, for instance, may also vary depending on the season. To put it more precisely, the costs of fuel and power may increase in winter as more power will be needed to maintain essential temperature in the pool that will lead to the decrease of its profitability. In contrast, the finding of better suppliers for the snack bar, which is highly probable, may lead to the decrease of costs on snack supplies and therefore, this can increase the profitability of this centre. At the same time, the organization of some completion, such as the table tennis can contribute to the popularization of this sport that may increase the interest of customers to the table tennis centre. In such a situation, it would be quite logical to presuppose that the larger interests will increase the profitability of the centre.

Question 3

However, the variations of demand on services of some centres of the club or increasing costs on repairing and maintenance can influence the development and profitability of the company but they cannot totally define its future financial performance, at least in the short-run. In this respect, it is necessary to underline that the introduction of a more effective accounting system and decision making process may improve the performance of the company consistently.

In fact, nowadays, the introduction of new technologies may improve the performance of the company but the introduction of a system of budgetary planning and control at the company can also bring positive changes.

However, speaking about the introduction of the system of budgetary planning and control at the Fitness Forever, it should be said that its effect may be dubious.

On the one hand, the budgetary planning and control can contribute to the increasing effectiveness of the use of funds of the company. The new system will apparently minimize the share of the unreasonable financial losses which can occur at the moment because of the lack of the control over the use of funds. In fact, the new system can provide the company with the clear plan of its further development with the definition of major directions of financing and investments. For instance, the budgetary plan can define the priorities in financing certain centres which need the larger support or which need certain improvements at the moment and which can bring higher profits in the future.

This system will also increase the responsibility of the personnel due to the increased control over the expenditure of the company’s funds.

On the other hand, the introduction of the system of budgetary planning and control may be accompanied by certain difficulties, among which it is possible to name the lack of experience of the personnel. This means that the company needs to organize training for employees that needs time and funds, and it is hardly possible to expect that the personnel will be able to work perfectly well after the introduction of the new system because, as any innovation, it may evoke certain opposition to the change within the company and it can be simply difficult for employees to implement.

Question 4

The development of the Fitness Forever and its further market expansion will apparently need the more effective use of financial sources and, what is more, it will need finding new sources of finance in a long-run. In this respect, it is possible to focus on the development of the customers loyalty to the company’s services. To put it more precisely, it is possible to develop the system of discounts for loyal customers and the longer a person uses the services of the company the more beneficial for him/her the services of the company should be. In practice this means that the customer could get the membership which allows him/her visit the Fitness Forever during a year. If the person prolongs his/her membership he/should get wider access to services of the company, which is more preferable for the company, or get some discount. In such a way, the customer will get benefits from the membership and will attract his/her friends or family to the services of the company. In such a way, the company will get the basis for the long-term development

Question 5

Budgeted Profit ad Loss Account for the period 01/10/07 ”“ 30/09/08

Assumptions Pounds Pounds
Revenue 5% 909.563
Expenses
Rates and Insurance 4% 130.037
Fuel and Power 1% 50.500
Repairs and Maintenance 0 37.500
Chemicals 20% 18.150
Security 15% 28.815
Cleaning Materials 0 12.500
Salaries 4% 257.500
Salary related costs 4% 65.019
Depreciation 0  20.000
Snack Bar Supplies 5% 52.500
Licensed Bar Supplies 5% 42.000
Head Office Overhead 4% 78.300 895.126
14.437

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