Strategic Accounting for Decision-Making

Strategic Accounting for Decision-Making
Introduction
Today, the development of fitness centres, such as Fitness First, opens large prospects for the successful business development. The modern society grows more and more concerned with health-related issues and healthy lifestyle. In such a situation, the development of fitness centres providing clients with fitness services opens the opportunity for stable revenues and profits because people are likely to use fitness services, while in the future this trend will grow even stronger. At the same time, it is impossible to develop business successfully without careful planning and effective decision-making process. In this regard, Fitness First should focus on the careful analysis of its current performance, use its accounting information and financial performance data to forecast the further development of business in a short-run and long-run perspective. On the ground of the detailed analysis it will be possible to make adequate decisions concerning the further development of the company, whereas today the company has good prospects for a steady growth and expansion its market share on the condition of the effective management and decision-making process.
Twelve ratios
In actuality, the financial performance of Fitness First is characterized by a steady growth. In this regard, it is possible to refer to key ratios (see App. Table 1), which shows that the company keeps growing in 2009. In this regard, it is possible to forecast the ongoing growth of the company and its key ratios in 2010. To put it more precisely, the operating profit and operating assets of the company is likely to grow by 34% in 2010. The operating profit sales is likely to grow by 9%. The sales operating assets of the company are likely to grow by 3.2 x J278. Furthermore, the expenses sales are likely to stay at the same level as used to be in 2009, i.e. 90%. Similarly, sales of fixed assets are not likely to change compared to 2009 and they will comprise 3.94 x J 254 in 2010. The sales of current assets are likely to increase to 43 x J 25 in 2010. The ongoing development and growth of the company is likely to lead to the rise of the sales stock of Fitness First to 185 x J5.8 in 2010. At the same time, the sales debtors can also increase insignificantly to 154.25 x J 6.6 in 2010. The sales bank of Fitness First will increase slightly to 84.5 x J 12. The current ration of Fitness First will comprise 1.85:1 in 2010. As for the quick ratio, it may stay unchanged and comprise 1:1 as in 2009. Finally, the gearing ratio may increase to 17% in 2010. In such a way, the company can grow steadily in 2010 but it is still necessary to take into consideration certain risks, such as the change in the current business environment, the economic development and other external as well as internal factors that may influence the organisational and marketing performance of Fitness First. Nevertheless, the company has good opportunities to improve its marketing position compared to its rival, although it is hardly possible to speak about the fast market expansion and defeat of its major rivals. In fact, the next year is likely to be a challengeable year, in the course of which the company should hold the stable position and improve it to prepare the ground for the further market share expansion.
Critical analysis of Fitness First: strengths and weaknesses
The development of Fitness First is accompanied by the steady growth of the company, which attempts to expand its business. Nevertheless, the development and market expansion should be grounded on certain assets and strengths which put the company in an advantageous position compared to its rivals. In this respect, the land and buildings of the company comprise the major market assets. At the same time, Fitness First has to develop its infrastructure and facilities to maintain its assets attractive and increase their market value even more. In addition, the improvement of the infrastructure and facilities will attract new clients to the fitness centres’ services. Therefore, the company will be able to increase its sale rates and to expand its market share. In addition, the investments into the development of the company’s facilities and infrastructure are likely to increase the market value of its assets. Furthermore, the development of the infrastructure and facilities contribute to the expansion of the scope of services the company can deliver to its customers. As a result, the company can count for new customers and, what is more important, under certain circumstances, especially if the company manages to create unique facilities and infrastructure, the company can offer its clients unique services. The latter will put the company in an advantageous position compared to its major rivals. Therefore, the company has the potential for the further growth. In addition, the company employs well-qualified professionals which comprise an important part of the company’s market assets. In the contemporary business environment, human resources play a particularly important role and the high professional level of employees gives Fitness First a strategic advantage over its rivals. In addition, the company has relatively low liabilities, especially long-term liabilities that open prospects for increasing its liabilities to raise funds for the development of the company, its infrastructure, facilities and promotion.
On the other hand, the company still has a number of weaknesses. The company has a number of weaknesses. First of all, the company still faces a strong competition from the part of its rivals. Secondly, the company needs to develop positive company-customer relationships and to create a positive public image. At the moment, the company suffers from the relatively low attention from the part of consumers. In this regard, the low buying power of consumers may be one of the reasons for the relatively low attention of consumers to the company’s services. Another weakness the company has to deal with is the elimination of the departmental mentality because employees working in Fitness First focus on their fitness centre primarily, whereas interests of the entire company turns out to be secondary for them. Therefore, the company has to tackle this problem and stimulate the development of its centres in close cooperation, instead of severe competition. To meet this goal, it is possible to practice the personnel transfer and development of team work.
Profitability
The profitability of Fitness First is relatively high, although the company does not have excessive or exorbitant profits. In this respect, it is important to lay emphasis on the fact that the profitability of its departments vary consistently (See App. Table 2-3). To put it more precisely, some departments have 40% of the total profitability of the company, whereas other have only 2-3% of the total profitability. Naturally, such distinct gaps in profitability of departments raise the problem of the unequal position of the departments. Nevertheless, the company should not expect each profit centre to make profit on the regular basis.
In this regard, it is important to dwell upon the profitability of the company’s centres. In actuality, the 1st centre proves to be the most profitable although its asset value comprises only 30% of total assets. At the same time, the 5th centre is twice less profitable although its asset value comprises 40% of total assets. In fact, this means that difference centres within the company have different profitability and the asset value of each centre is not the key to the high profitability. Instead, it is obvious that the location, infrastructure, facilities, promotion, customer relations management and a number of other factors have a significant impact on the profitability of each centre. In other words, the profitability of centres depends on a number of factors but not on the asset value of the centre alone. Therefore, Fitness First should analyze carefully the reasons of success of the 1st centre as well as other successful centres to understand what changes the company has to introduce in other centres to improve their performance and to increase their profitability.
On the other hand, the company should be aware of the fact that it is impossible to make each profit centre profitable. What is meant here is the fact that the profitability of each centre depends on a number of factors which are not always dependent on the centre or the company itself. For instance, the different location of centres can have a different impact on consumers’ choices. For instance, a centre located in a residential zone with a perfect infrastructure will attract a large number of consumers and, therefore, will have a higher profitability, than a centre located in outskirts with the population with the low level of income. In this regard, it is possible to identify a variety of external as well as internal factors that influence profitability but it is impossible to maintain profitability in all profit centres. Anyway, some centres need a reconstruction or changes to be introduced that naturally decrease their profitability but next year such investments can increase profitability. Therefore, profitability depends on both external and internal factors and it cannot be constant.
Benefits of the system of budgetary planning and control in Fitness Forever
The system of budgetary planning and control is very efficient, especially when the company has low liabilities and aims at the steady market expansion. Using the system of budgetary planning and control Fitness Forever can develop a short-run as well as a long-run strategy of its development focusing on key issues, defining its priorities and resources the company is going to spend on the strategically important issues. In fact, the company can plan its expenses as well as sources of revenues and its profits accurately and, thus, develop its business plan on the ground of its system of budgetary planning and control.
However, the practical implementation of the system of budgetary planning and control turns out to be quite controversial. On the one hand, the system has a number of benefits mentioned above. On the other hand, the system of budgetary planning and control makes the organisation and organisational development quite rigid because the company needs always take into consideration its budgetary plan with little opportunities to increase funding of innovative projects, technologies and other innovations that can bring considerable profits to the company in a long-run perspective.
Nevertheless, the system of budgetary planning and control is worth implementing because its potential benefits outweigh drawbacks, which may arise in the course of the system’s implementation. In this regard, it is worth mentioning such benefits as the reliable and planned funding of existing projects and facilities that allows the company to develop a long-run strategy because it counts for a stable funding of its projects without unexpected changes in its budgetary policies. In addition the control over the budgetary system increases the effectiveness of using the budgetary funds. Therefore, the budgetary control contributes to the maximisation of effectiveness of using the company’s funds. As a result, the implementation of the system of budgetary planning and control brings considerable benefits to Fitness Forever.
Report for Dan Brennan on sources of financing
In actuality, it is possible to use different sources of funding of the company’s expansion. Basically, it is possible to distinguish three, the most efficient and reliable sources of funding: bank loans, the effective use of financial resources of the company, and partnership. All these sources of funding have their advantages and disadvantages but, on analyzing all these sources, it is possible to define the most effective one.
The bank loan is probably the easiest source of funding the company can get. At the moment the company has low liabilities. Therefore, the company can borrow money from banks to expand its business. On the other hand, the company will have to pay off interests to the bank for using loaned money. However, if the company succeeds in its expansion, its future revenues can cover the interests and bring considerable profits to the company in a relatively short period of time.
The use of financial resource of the company is the least expensive source of funding. However, this source of funding limits consistently the cash flow of the company and opportunities for using its funds to cover current expenses. As for the partnership, this source of funding is convenient but the company will need to share its market value and profits with a partner. Therefore, this source of funding is not ideal.
Thus, it is possible to recommend using bank loans to fund the expansion of the company because the company will be able to get sufficient financial resources in a short-time and cover bank interests after the completion of expansion. Anyway, this source of funding is reliable and available to the company, taking its low liabilities.
The forecast of profit and loss account
On analyzing the profit and loss account of the company, it is possible to presuppose that the company will keep growing and increase its profits. In this respect, it is possible to refer to the following table containing the forecast of profit and loss account:
Sales turnover +3%
Cost of sales +2.5%
Gross profit +3.5%
Revenue expenses +3%
Profit before interests and tax +4%
Tax 20%
Profit after tax +3.2%
Retained profit C/F +2.5%
Thus, the company can keep growing but it is important to implement its expansion strategy that has been started. In fact, the expansion strategy can help the company to improve its marketing position and to increase its revenues. However, profits of the company will not be exorbitant because the company needs to maintain the existing assets and to invest money into the development of new projects. The implementation of new projects, in its turn, will help the company to develop its business and increase its profits.




References:
Benfari, R. C. (1999). Understanding and changing your management style. San Francisco: Jossey-Bass.
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Breneman, D. W., & Taylor, A. L. (eds.). (1996). Strategies for promoting excellence in a time of scarce resources. San Francisco: Jossey-Bass.
Heilbroner, R. L. and W. Milberg. (2000). The Making of Economic Society. New York: New Press.
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Appendices:

Table 1. Key Financial Ratios

1 Operating Profit
Operating Assets 36%
2 Operating Profit
Sales 10%
3 Sales
Operating Assets 3.6 x
Ј278
4 Expenses
Sales 90%
5 Sales
Fixed Assets 3.94 x
Ј254
6 Sales
Current Assets 41.7 x
Ј24
7 Sales
Stock 181.8 x
Ј5.5
8 Sales
Debtors 153.85 x
Ј6.5
9 Sales
Bank 83.3 x
Ј12
10 Current Ratio 1.8:1
11 Quick Ratio 1:1
12 Gearing Ratio 15%

Table 2
Split of Revenue between Profit Centre’s for Financial Year 2009

Profit Centre Revenue
1 500,000
2 120,000
4 240,000
5 250,000
6 150,000
7 60,000
8 330,000
Ј 1,650,000


Table 3
Division of Asset Value within the Sports Centre

Cost Centre Asset Value
1 30%
2 10%
3 2%
4 5%
5 40%
6 5%
7 3%
8 5%
100%


Table 4

Forecast Profit & Loss Account for 6 month Period 01/10/09 – 31/03/10


Assumptions Ј Ј
Revenue + 5% 866,250

Expenses
Rates & Insurance + 3% 128,750
Fuel & Power + 1% 50,500
Repairs & Maintenance 0 37,500
Chemicals + 10% 16,500
Security + 2% 25,500
Cleaning Materials 0 12,500
Salaries + 3% 257,500
Salary related costs + 3% 64,375
Depreciation 0 20,000
Snack Bar Supplies + 5% 52,500
Licensed Bar Supplies + 5% 42,000
Head Office Overhead + 2% 76,500 784,125

Profit Ј 82,125

Strategic Accounting for Decision-Making 9 of 10 on the basis of 3525 Review.