103335887 Private Fitness LLC Case Analysis

Ronald B. de la Cruz ID No. 080066

Case Analysis: PRIVATE FITNESS, LLC I.

SUMMARY Private Fitness LLC is a small health club located in Rancho Palos Verdes, California, an upscale community located in the Los Angeles area. The club offers personal fitness training and fitness classes of various types including aerobics, spinning, body sculpting, air boxing, kickboxing, hip hop, step and pump, dynamic stretch, Pilates, and yoga. The following services and fees per hour are collected by Private Fitness LLC: With personal trainers/instructors Prime Time (bet. 5:30-9:00am & 4:00-9:00pm) Lean Time (9:00am – 4:00pm) Students Discounts for prepayments

$50/hr $50/hr $35/hr $12/hr

Private Fitness LLC is owned by Rosemary Worth, a former finalist in the Ms. Fitness USA competition. She had been working as an aerobics instructor and fitness model before starting Private Fitness. To open the club, Rosemary had to use almost all her personal savings, plus she had to take out a bank loan. She spent $150K to renovate the facility of her club and acquire the necessary fitness equipments. Rosemary hired Kate Hoffman as a business manager. Kate’s primary tasks included marketing, facility upkeep, scheduling of appointments, and record keeping. Kate was paid a salary plus a commission based on gross revenues. Kate was proving to be an effective marketing manager because the number of clients was growing, and Rosemary hoped that by the end of the year the business would be earning a profit. However, Rosemary became suspicious of Kate and gradually realized that Kate was stealing from the club. One time, a $60 was replaced with $20 in the cash drawer. Rosemary

asked Kate but the latter denied that there had been $60 dollars in the drawer. Rosemary became very alarmed when, during a casual conversation, one of the instructors mentioned about the “good news” about Kate bringing in new private fitness client but no new revenue was recorded. Kate finally admitted that the client has been writing her personal checks directly. Rosemary realized she had two major problems: the theft of cash and the unrecorded revenue. These are internal control issues that Rosemary need to address. She did not want to step in and assume the managerial role herself because she had significant family responsibilities to which she wanted to be able to continue to attend to.

II.

STATEMENT OF THE PROBLEM What should Rosemary do with Private Fitness LLC’s lack of internal control system?

III.

OBJECTIVES a) To effectively minimize loss from theft and related internal control problems. b) To increase company profit. c) To properly segregate employees’ duties and responsibilities to make them more effective and efficient. d) To achieve a healthy balance between family and business.

IV.

AREAS OF CONSIDERATION 1. There is no proper recording of revenues. Revenue is dependent on the number of clients attending classes and private workouts. There is however no recording system to properly monitor the clients and number of workout attendees. 2. There is no proper recording of operating expenditures.

Basic operational expenses like electric and water bills, rent, bank interest, light, telephone and communications need to be paid on time. These expenses need to be recorded and tracked accurately in order to come up with reliable financial report and facilitate monitoring of trends. 3. No scheduling system for instructors and employees. What instructors, and other employees, should be on duty at what hours are not defined. Same with schedule of classes, there is no assigned time and venue for purposes of the different classes. The capacity utilization is not properly identified to maximize space to revenue mix. There is also no cleaning and maintenance schedule to be followed. 4. Payroll system is inexistent Most of the compensation is commission-based, paid as a percentage of revenue associated with the instructor’s activities. How do employees commissions are paid correctly when revenue recording is inexistent? The same with the manager Kate Hoffman, who is also paid a salary, 5. Fixed asset system The facility and fitness equipments’ costs should be allocated over time periods and reflected as expense in the income statement. 6. Rosemary’s family related concerns Rosemary is serious about her family duties that she is hesitant to take full control of the company’s operations. 7. Funds are limited Rosemary’s operating funds appears limited given the fact that she had spent her resources in the upkeep of the club and acquisition of fitness equipments. Also the fact

that she is unable to properly track the revenues and expenses means she is unable to keep a good record of her actual finances.

V.

ALTERNATIVE COURSES OF ACTION 1. Relegate Kate Hoffman to permanent fitness instructor and hire a competent manager to oversee the daily operations of Private Fitness LLC. Kate Hoffman wasn’t very helpful and trustworthy being a manager of the club. She demonstrated this by pocketing money off the cash drawer and not remitting revenues from her personal training callss with clients. The new manager will be heavily involved in monitoring the activities of employees and instructors including setting and defining specific duties and responsibilities of each employee. He/she will also be responsible with the overall upkeep of the facilities, making sure they are well maintained. He/she shall also act as a marketing employee that will help generate more revenues for Private Fitness LLC. She will be paid on fixed salaries plus 20% commission based on monthly revenues. Advantages: a) Business operations will be properly and effectively handled b) Better scheduling of fitness instructors and employees c) Fitness facilities are better maintained d) Growth in customer base can be reasonably expected Disadvantages: a) There is added cost of hiring a new manager b) Kate Hoffman may take the action against Rosemary, straining their friendship c) Hiring new manager may not necessarily result in immediate turnaround of Private Fitness LLC

2. Hire the services of an accountant to keep track on the business finances. Accountant will address some core internal control issues facing Private Fitness LLC: from revenue system to payroll and expenditure monitoring system. Advantages: a) Tracking revenues and expenses will help Rosemary reliably assess the income she’s making out of the fitness business. b) The accountant will act as an early warning system for incoming bills and bank amortizations to be paid by Rosemary. c) Monitoring the revenue and expenses trends will help spot and avert potential frauds. d) More reliable commission incentives to instructors and employees. e) Accountant will assist Rosemary with tax related matters. Disadvantages: a) There is added cost of hiring a accountant b) Hiring a accountant may not necessarily mean the business will make more money. 3. Private Fitness LLC should invest on CCTV security system. CCTV systems are widely used security infrastructure to mitigate varied risks from theft to crimes to other petty issues within and outside the establishment. Advantages: a) Improves the security of the facilities and equipments b) Reduces the potential for employee fraud and thefts c) Enhances Private Fitness LLC’s business image by making the area safer and secured Disadvantages: a) High cost for CCTV security systems b) There may be issues on effectiveness as some CCTVs have limited range.

4. Rosemary to personally supervise Private Fitness LLC’s daily operation and keep accounting records. Advantages: a) Reduces the potential for employee fraud and thefts b) Her active managerial role will likely portray a positive image to customers about her seriousness and commitment to the business Disadvantages: a) She will significantly reduce her time spent on family b) Pressures both from work and family could take a toll on her health 5. Close Private Fitness LLC, sell its facilities and concentrate on family duties. Advantages: a) Rosemary can best handle his family duties when she is free from Private Fitness LLC’s daily demands. b) Pressure to make the business profitable is off c) She spend her time and concentrate on other activities Disadvantages: a) Source of steady income is lost b) Proceeds from sale may just be enough to satisfy bank loan and may not fully secure her family for years to come. VI.

RECOMMENDATION Based on the alternative courses of actions above and through careful analysis of its pros and cons, I recommend that Rosemary implement alternative course of actions 1, 2 and 3.

VII.

PLAN OF ACTION

Phase I: Initiate the hiring process for a competent new manager to address management control issues. Rosemary can ask for referrals from friends in the fitness circle in order to match talent and experience with her business requirement. Simultaneously, Rosemary will negotiate the transition of Kate Hoffman from manager/fitness instructor to purely fitness instructor. Stealing was a result of weak control measures. Given tighter measures and better incentive schemes, Kate Hoffman will not have the opportunity or the appetite to repeat her stealing habit. Phase II. Hire the services of a reputable accountant. This will address mostly accounting control issues. The lack of revenue and expense recording systems has deprived Rosemary with a clear and reliable estimate of the actual income Private Fitness LLC is making. It also encouraged Kate Hoffman to misappropriate cash revenues out of Rosemary’s daily income. Phase III: Once the business is earning a profit, Rosemary should start investing in basic CCTV security system to further tighten her control of the business. This will further discourage employees to steal money and cart off facilities out of the club while enhancing the effectiveness of her monitoring system. Most CCTV systems are remotely controlled through the use of internet so she can monitor the facilities from the confines of her home. Also most fitness customers typically patronize fitness centers with ample security measures so this will help Rosemary convince people to visit Private Fitness LLC.