Question

I am a board member for a swimming and health club in Bellevue. In the last fiscal year, the clubs membership was over 1700, the revenue was approximately $4.0 million, the profits were approximately $100,000, and their capital expenditures were close to $300,000. The stated objective or mission of this club is to increase the health and wellness of the club members and the community. In order to help the board assess the performance of the club’s director (CEO), what performance measures would you suggest? Explain your choice of performance measures!

Answer 1

We see, the revenue of the club with 1700 members were 4 million dollars ($4000000).

Revenue earned from a member would average at = 4000000/1700 = $2353.

Capital expenditures made = $300000.

Profit realised = $100000.

If the capital expenditures were not made, the profit it could have retained = $300000+$100000

= $400000. (In this calculation, I have assumed capital expenses were made from cash reserves).

Therefore, the profit it could have enjoyed = (400000/4000000)*100% = 10%.

However, we alse see that objective or mission of this club is to increase the health and wellness of the club members and the community.

Therefore, it needs to invest more on its infarstructures in order to accomodate more members and provide more/better services. And, in that case, Capex investments will be able to gain more members in the near future.

As such, even a 5% increase in membership from 1700 to 1785 in a year would be able to generate revenue = $2353 * 1785 = $4200105.((straight-line method)).

The increase in revenue it would enjoy (straight-line method) = $4200105- 4000000 = $200105 (or 5%).

But, it is more realistic to believe that, actually, there would be multiplier effect on the total revenue as more members get enrolled. Hence, the 5% increase can go upto 10-12% invariably (depending on the services).In line with this upmove, it is also expected that the club's profit margin would climb higher, alongwith expanding services to more people.

However, to calculate the realistic data, payback period needs to be carefully studied-upon. Doing so, it would be able to conclude what could be the realistic time taken to add additional members and reach the break-even point of investments. Its historical trend of membership generation (1700 as on date) will act as ready reference in this respect. Basis the historical trend, it would be able to forecast future memberships through various forecasting techniques (exponential smoothing. moving averages, etc.); and, plot the various probable timelines after which capex investments will start fructifying.