Accounting and Financial Practices
The scale of financials for an individual will differ greatly when compared to a health club owner. This will therefore affect how one structures the financial operations and procedures of a business.
Individuals who are self-employed may work in the capacity of a sole trader, in which the individual is responsible for personal income, and will pay tax based on earnings.
Some fitness professionals may register the business as a separate entity and form a CC or incorporated company. In this instance the individual will need to issue regular financials (at least twice a year), which will need to be audited by an accountant.
Once a fitness business has been up and running for a period of time, the Health club/ Fitness Centre Manager will need to produce a financial statement. The financial statement provides a summary of the state of the organisation. It is the job of the Health Club Manager to review the financial statements, and determine strengths and weaknesses of the business.
Income
Income (or revenue) is any monies which is received due to ales of a product or service.
Expenses
Expenses include any cost to company for example rent, cleaning, water and lights etc. In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs.
An income statement is usually produced to reflect the profit/ loss of a business over a short period of time e.g. a month, quarter or year. The income statement simply compares revenue with expenses.
Cash flow statement
In a cash flow statement, expenditures are divided into operating, investing, and financing expenditures.
• Operational expense – e.g. salary for employees
• Capital expenditure– e.g. buying equipment
• Financing expense – interest expense for loans and bonds etc.
An important issue in accounting is whether a particular expenditure is classified as an expense, which is reported immediately on the business’s income statement; or whether it is classified as a capital expenditure or an expenditure subject to depreciation, which is not an expense e.g. gym equipment.
The most common interpretation of whether an expense is of capital or income variety depends upon its term. Viewing an expense as a purchase helps alleviate this distinction. If, soon after the “purchase”, that which was expensed holds no value then it is usually identified as an expense. If it retains value soon and long after the purchase, it will be viewed as capital with life that should be amortized/depreciated and retained on the Balance Sheet.
It is advisable that one work with an accountant in establishing the type of expense and how it affects one’s tax deductions.
The cash flow statement is intended to:
1. Provide information on a firm’s liquidity and solvency and its ability to change cash flow in future circumstances
2. Provide additional information for evaluating changes in assets, liabilities and equity
3. Improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods
4. Indicate the amount, timing and probability of future cash flows
Sample cash flow statement template
| (Your business name) | |
| Statement of Cash Flows | |
| For the year ended __ / __ / ____ | |
| R | |
| Cash flow from operating activities | |
| Receipts from customers | |
| Payments to suppliers | – |
| Payments to employees | |
| Interest payments | |
| Interest received | |
| Taxes paid | |
| Net cash flow from operating activities | Total of above figures |
| Cash flow from investing activities | |
| Purchases of equipment | – |
| Purchases of property | – |
| Proceeds from sale of equipment | |
| Proceeds from sale of property | |
| Net cash flow from investing activities | Total of above figures |
| Cash flow from financing activities | |
| Proceeds from borrowings | |
| Payments of borrowings (repayment of principal) | |
| Investment into business | |
| Drawings from business investment | |
| Net cash flow from financing activities | Total of above figures |
| Net increase (decrease) in cash held | Total of above 3 total figures |
| Cash at beginning of period | |
| Cash at end of period | Net increase cash at beginning |
Financial statement analysis
Revenue is a crucial part of financial statement analysis. A company’s performance is measured to the extent to which its asset inflows (revenues) compare with its asset outflows (expenses).Net Income is the result of this equation.
Once financials have been assessed and reviewed, Club Managers and owners will usually develop budgets based on business strategy. It is a good idea to rather over estimate expenses, and under estimate revenue when planning a budget. Below is an example of an income statement:
The following should also be considered when budgeting:
• Break even analysis: This is determined by calculating the minimum revenue needed to meet expenses.
• Worst case scenario: What will happen if expenses exceed revenue? The
Fitness club owner/ Manager needs to have a plan in place for the worst-case scenario.
Along with the Cash flow statement and income statement, a Balance Sheet is one of the most important aspects of a business plan. The aim of the balance sheet is to provide one with a snapshot of how the business is doing at a particular time. The following is a breakdown of what a typical Balance sheet should contain:
| (Your Business Name) | ||
| Balance Sheet | ||
| as at __ / __ / ____ | ||
| R | ||
| Current Assets | ||
| Cash at bank | ||
| Inventory | ||
| Accounts Receivable | ||
| Other current asset | 0 | |
| Other current asset | ||
| Total Current Assets | Add all current assets | |
| Non-Current Assets | ||
| Equipment and Machinery | ||
| Land and Buildings | ||
| Other non-current asset | ||
| Other non-current asset | ||
| Total Non-Current Assets | Add all non-current assets | |
| Total Assets | Current assets non-current assets | |
| Current Liabilities | ||
| Accounts Payable | ||
| Interest Payable | ||
| Other current liability | ||
| Other current liability | ||
| Total Current Liabilities | Add all current liabilities | |
| Non-Current Liabilities | ||
| Mortgage payable | 0 | |
| Other non-current liability | 0 | |
| Other non-current liability | 0 | |
| Total Non-Current Liabilities | Add all non-current liabilities | |
| Total Liabilities | Current liabilities non-current liabilities | |
| Net Assets | Total assets – total liabilities | |
| Equity | ||
| Business Owner, Capital | ||
| Retained Profits | ||
| Other Equity | ||
| Other Equity | ||
| Total Equity | Add all equity accounts | |
| Note: Net Assets should equal Total Equity |
In order to draw up a budget it is recommended that one follow these steps (Fried 2004):
• Gather all information
• Forecast sales
• Project profit and loss
• Compare with industry norms
• Determine capital needs
Accounts receivable
Most business owners will tell you that cash flow is imperative to the success of any business. Health clubs are no different!
An aged trial balance is an effective means of monitoring payments by members. Most age analysis systems will provide a breakdown of debtors and outstanding balances over 30/ 60/ 90 days etc. Once debtors have been identified the organisation should have a sound Credit collection policy in place. Some businesses may have in-house administrators that deal with outstanding balances, whilst others outsource this service. It is important that the policies show a good balance between generating the pressure needed to obtain the payment, without jeopardizing future relations with the client