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The role of revenues in the restructured balance sheet of a fitness centre

When analysing a fitness centre, one often tends to consider only the operational side of the business, consisting of various factors including courses, equipment, personal trainers and staff management.

However, it is equally important to study what allows the creation of the operational side of a fitness centre, namely the annual budget and the Balance Sheet.

The Balance Sheet

The balance sheet is the accounting document that a company draws up periodically with the aim of ascertaining the financial and asset situation, as well as its economic results.
As often happens in accounting language, this document, essential for operational purposes, is often very difficult to interpret, to the point that many entrepreneurs in the fitness sector produce parallel documents. However, these documents have unreliable values compared to those produced by financial statements.

Restructured balance sheet

Therefore, the only solution to obtain operational value from a balance sheet is to use it as a starting point to analyse your business, first in an analytical way, then grouping in macro items, then in a more synthetic form. In practice, this solution is a restructured balance sheet, which aggregates some of the balance sheet voices and the intermediate results of the income statement, which in turn facilitate the analysis of the indices, thus providing a clearer view of the performance of the company.
It is therefore possible to summarise the advantages of reclassification in five points:

  1. 1. It allows the most significant parameters to be highlighted for an immediate evaluation and analysis of any anomalies or strengths (gross operating margin, operating income, etc.).
  2. 2. If pursued over the years, the restructured balance sheet guarantees an effective comparison with the activity data of previous years. Furthermore, it allows a comparison between companies in the same sector or in different sectors, highlighting the medium and long-term trends.
  3. 3. It separates operating costs and revenues from financial and extraordinary costs and revenues, allowing a rapid understanding of the problems, leading them immediately to specific management.
  4. 4. Isolates any elements of the budget that are necessary for legal purposes, but of little use to management
  5. 5. It is structured to highlight the amounts used to calculate the various margins and indices (such as ROE, ROI, RONA, EBITDA margin, etc.)

The role of revenues in a restructured balance sheet

As far as the fitness sector is concerned, revenues are of primary importance in the restructuring of the balance sheet. Revenues should be divided correctly into macro-items to quickly understand their origin. Revenues are fundamentally what define an enterprise. Therefore, if you do not know revenue sources, there’s the risk of being overwhelmed by the market without knowing the real reasons why.
For example, consider a wellness centre complete with a fitness area (equipment room and music course rooms), swimming pools for water-fitness courses, spas and beauty centres which are open also to non-registered users, and outdoor areas for one or more activities. A well-restructured balance sheet must contain at least 14 items that, together, describe all the revenue sources from operations, i.e. the operating income.

These kinds of data are essential to obtain EBITDA or GOP (Gross Operating Margin), obtained by subtracting fixed and variable costs from revenues. From GOP, subtracting the amortization, it is possible to obtain the RO (Operating Income) or EBIT, from which it is possible to calculate the profit of the activity subtracting finally the expenses of financial management and the taxes.

The unification of the various sources of income offers some cues on how to best use the spaces of a fitness centre. In our example, the fitness area can be used for personal training activities, the spa may host wellness events, the beauty team may not be limited to providing treatments but also to sell products, some spaces can be rented to third parties (such as schools of dance and martial arts) during time slots with lower attendance.
In all this, we must not forget that a well-structured centre is by every means an effective communication media. It is therefore well suited to have a value in the eyes of potential partners and sponsors who, in economic terms or in exchange for goods, go to increase ancillary revenues.

Not all of these items will have important values, and it is up to those involved in developing and interpreting the reclassification to highlight this aspect in order to elaborate subsequent strategies on revenue sources.

In our example, let us assume revenues from renting space to dance and martial arts schools represent 0.2% of the total; it would be almost mandatory to understand whether to cut this revenue stream or to keep it if instead, while not generating a direct business, it creates important advantages over other sales channels.

The final draft of a restructured balance sheet does not necessarily have to maintain high level of detail. On the contrary, it is advisable to provide for a consolidation in the two following macro-items of the various revenue streams:

  1. 1. Primary revenues: represented mainly by subscriptions
  2. 2. Ancillary revenues: represented by all other items
Generally, primary revenues have an average incidence on total revenues of about 70 - 75%, while secondary revenues represent the remaining 25 - 30%.

Although primary revenues represent the income that guarantees the stability of the business, they are also the revenues with the highest marginal costs. In fact, spaces and time slots impose a maximum ceiling of members (therefore primary revenues sources), which would be very costly to increase. For this reason, it is important to work on ancillary services that, in addition to increasing the amount spent by the individual user, attract new customers, even occasional ones, and create new experiential opportunities, increasing the perception of users and therefore positive word of mouth.

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