"Accounting First" team project

Editor's Notes

• #2: IntroductionHello, and welcome to our evaluation of City Racquet Club. During the next 10 minutes our firm, Accounting First, will evaluate City Racquet Club’s, or CRC’s, new membership plan and fee structure.Audio Presentation: http://my.brainshark.com/Team-1-Group-Project-385735595
• #3: OverviewIn this evaluation, we will address the following questions and concerns:What are the key factors that CRC should consider in its evaluation of the new membership plan and fee structure and why are these factors important?A review of a developed revenue budget (Schedule 1) and cash receipts budget (Schedule 2) based on the new membership plan and fee structure. Will CRC’s new membership plan and fee structure improve its ability to plan its cash receipts? Why or why not?What other types of analyses, beyond the Schedule 1 and 7 budgets, (both strictly financial and strategic) would we offer to perform for CRC in order for them to make a complete evaluation of the new membership plan and fee structure? Explain how CRC’s cash management would differ from the present if the new membership plan and fee structure were adopted.From a strategic perspective, what are the advantages and disadvantages to implementing this membership plan and fee structure? Given the importance of the potentially clashing goals of better cash management, and increased revenue, would you recommend CRC go forward?
• #4: BackgroundCRC offers racquetball and other physical fitness facilities to its members. There are four of these clubs in the metropolitan area. Each club has between 1,800 and 2,500 members. Revenue is derived from annual membership fees and hourly court fees. The current annual membership fees are $40 per individual, $25 per student and $95 per family. The hurly court fees vary from $6 to $10 depending upon the season and the time of day (prime versus nonprime time).The peak racquetball season is considered to run from September through April. During this period, court usage averages 90 to 100 percent of capacity during prime time (5:00-9:00 p.m.) and 50 to 60 percent of capacity during remaining hours. Daily court usage during the off-season (i.e., summer) averages only 20 to 40 percent capacity.Most of CRC’s memberships have September expirations. A substantial amount of the cash receipts are collected during the early part of the racquetball season due to the renewal of the annual membership fees and heavy court usage. However, cash receipts are not as large in the spring and drop significantly in the summer months.CRC is considering changing its membership and fee structure in an attempt to change its cash receipts. Under the new membership plan, only an annual membership fee would be charged, rather than a membership fee plus hourly court fees. There would be two classes of membership, $250 per individual and $400 per family. The annual fee would be collected in advance at the time the membership application is completed. Members would be allowed to use the racquetball courts as often as they wish during the year under the new plan.All future memberships would be sold under these new terms. Current memberships would be honored on the old basis until they expire. However, a special promotional campaign would be instituted to attract new members and to encourage current members to convert to the new membership plan immediately.The annual fees for individual and family memberships would be reduced to $200 and $300, respectively, during the two-month promotional campaign. In addition all memberships sold or renewed during this period would be given a credit toward the annual fee for the unexpired portion of their membership fee, and for all prepaid hourly court fees for league play that have not yet been used.CRC’s management estimates that 60 to 70 percent of the present membership would continue with the club. The most active members (45 percent of the present membership) would convert immediately to the new plan, while the remaining members who continue would wait until their current memberships expire. Those members who would not continue are not considered active (i.e., they play five or less times during the year). Management estimates that the loss of members would be offset fully by new members within six months of instituting the new plan. Furthermore, many of the new members would be individuals who would play during nonprime time. Management estimates that adequate court time will be available for all members under the new plan.If the new membership plan is adopted, it would be instituted on February 1, well before the summer season. The special promotional campaign would be conducted during March and April. Once the plan is implemented, annual renewal of memberships and payment of fees would take place as each individual or family membership expires.
• #5: Evaluation - #1,Key factors that CRC should consider in its evaluation of the new membership plan and fee structureHow does a higher up-front cost change consumer demand?CRC must consider how the its existing customers usage of it facilities could change under the new fee structure. Membership fees are generally considered sunk costs and therefore should have no baring on the demand or usage (Dick & Lord, 1998). However, we have seen that consumers who pay a higher membership cost will tend to use the services more frequently in the first half of the membership fee period (Dick & Lord, 1998). Will CRC still have the capacity to provide court usage to it members if there is a shift in their usage patterns? What will the usage be now that the consumer has unlimited access to the courts?What is the effect on the membership level?By changing its membership structure and organization could increase membership numbers and revenue (McDaniel, 2010). On the other hand it is possible that the same organization could end up alienating its current customer base. Therefore, it is important for CRC to evaluate how its membership level is going to be affected by the fee structure change. Ultimately, a change in the membership fee structure could cost CRC members but, they could reach a new demographics of customers. This needs to carefully analyzed before making a decision on what if any changes to make to there membership fees.How will staffing levels at CRC be affected?A change in membership fees could effect the number of members currently enrolled at CRC which will have an effect on the staffing needs (McDaniel, 2010). With a potential in an increase of members CRC may need to hire additional staff to maintain the service that they are providing to their customers. The opposite is also true, if CRC is to see a decrease in members the current level of staffing may not be necessary.What will the new fee structure do to the revenues?All of these areas must be considered and evaluated but, the changes in revenue to an organization is most likely the most important factor to consider before making any changes. A more inclusive fee structure provides more benefits for the members of the organization which in turn offers a boost in revenues (McDaniel, 2010). Does the analysis on the fee structure for CRC stay in line with this hypothesis? Based on the analysis of the new membership fee structure what will the effect be on the revenues of CRC be if the fee structure is implemented?
• #6: Evaluation - #2, Schedule 1 & 7: CRC’s new membership plan and fee structure improvements in cash receiptsIn the Schedule 1 revenue budget, we made the following assumptions: CRC has 2,150 members CRC currently has equal number of individuals and families 65% of the members will continue with the club 45% will convert immediately and the rest 20% will convert between August-January 35% will be fully replaced by new members in the first six months 500 of the new members are individuals and 252 are familiesExplanation:45% (968 members) will convert in the first quarter of which 484 are individuals and 484 are families and taking advantage of the introductory rate.35% (752 new members) will join in the first six months. 250 individuals and 126 families will join in the first quarter and the same will happen in the second quarter. 20% (430 members) will renew their membership between August and January. 150 individuals and 150 families will renew in the 3rd quarter and 65 individuals and 65 families will renew in the 4th quarter.
• #7: Evaluation - #2 (Continued)The new membership plan will improve CRC’s ability to plan its cash receipts. Under the new membership plan, CRC only has one source of revenue (annual membership fee) which means every member only pays once a year as their membership expires. With this new plan, the company knows the number of its members that will have to renew their membership every quarter and so they know the expected cash receipts. Although the expected cash receipts cannot always be accurate due to lost membership and new members joining the club but the company can still make reasonable estimates. This helps adequate financial planning.
• #8: Evaluation - #3, Other types of analyses we offer to perform for CRC in order for them to make a complete evaluation of the new membership plan and fee structureCost Behavior AnalysisAnalyzing revenue & cost behavior at the location level is critical to understanding the financial consequences of operating decisions for CRC. Leveraging the knowledge of the operating managers at each location can improve accuracy when classifying revenues & costs into fixed, variable and semi-variable components in relation to sales volume. Semi-variable revenues & costs can then be broken-down into their fixed and variable proportions than allocated to the main fixed and variable groups. This process will enable CRC to validate initial budget projections and assess any impact on profit based on alternative scenarios, such as changes in prices and costs, sales volume and business mix, (Graham, Harris, 1999).Profit sensitivity analysis The analysis of cost behavior facilitates the use of profit sensitivity analysis to further improve business decision making (Kotas, 1978). Profit sensitivity analysis measures changes to dependent variables in relation to changes made in related independent variables. For example, if a CRC memberships increase, a independent variable, the additional capacity of courts required to absorb this increase, a dependent variable, can be calculated. Contribution margin is the selling price of a membership minus the variable costs of selling it. Profit Multiplier Profile AnalysisBy determining the profit multiplier profile of CRC it is possible to measure the impact of key changes (price, membership levels, court availability) on profit. This analysis helps to quickly assess the businesses health, profitability and the effectiveness of budgeting methods (Kotas, 1986; Harris, 1992; Graham, & Harris, 1999).
• #9: Evaluation - #3 (Continued)Marginal Cost AnalysisThe entry of new firms occur in a competitive market when price is above average cost for the existing firms because the opportunity to profit exists. The simple fact that when profitability exists in the market it will encourage new firms to enter and when the opportunity costs favor one market over another firms will shift towards the greater opportunity (new competition for CRC). The greater the excess profits the more likely competition will enter the market. As new firms enter the market the supply curve will shift to the right and at the same time the market price will begin to decline. The market will eventually trend towards a “perfect competition” type of environment where marginal costs equal their marginal revenue helping to determine the market price. Eventually a state of long run equilibrium will persist until other influences drive change. This will close the gap between the market price and marginal cost reducing overall profit margins for firms competing in the segment over time (Y, J.D, 2003). If too many new firms enter the market the “shutdown rule” will apply as the market price will fall below firms average cost and any production/sales will result in negative profits for the firm. Understanding CRC’s marginal costs and assessing the potential for competition to enter the market and shift the demand curve resulting in shrinking profit margins is critical to pricing decisions.Market Share AnalysisA strong relationship can exist between a firm’s market share and their average costs in a competitive market. While market competition leads to the erosion of margins (Uninterruptible Power Supply, 2011) by effectively reducing the market price of services sold in the market by the competition the individual firms have more control to manipulate their average costs and thus profit margins to produce advantages over the competition. Firms that have a larger market share can leverage economies of scale to their advantage. Average costs for departmental functions such as purchasing, production, and marketing can be further diluted over more unit sales leading to larger profit margins given a similar market price because of lower average cost advantages. Leveraged negotiations to reduce the average costs of raw materials and supplies can also be linked to purchasing volumes which increase with greater market share. Market share can lead to market power through lower average costs and a firm may have influence in controlling the market price (particularly lower to ward off competition). The operating environment can greatly moderate the effects of market share on average cost but, generally greater market share will lead to economies of scale allowing a firm to reduce average costs to their advantage (BOULDING, STAELIN, 1993). CRC’s pricing and growth strategy must factor in advantages of increased market share and the ability to reduce expenses and not singular focus on increasing revenue.Price Elasticity AnalysisCRC’s understanding of price and income elasticity measures as it relates to the services they offer to customers is significantly important in determining product pricing to maximize their sales revenue. Understanding the marketing environment dynamics and the external influences including economic conditions and seasonality of demand are important factors in determining price to maintain demand and profits (Jazayeri, Ali, Narjes, 2011). Services that are considered necessities have demands that are less affected by price changes (Inelastic products). Services that considered more of a “want” than a “need” have demands that are much more sensitive to price changes (elastic). In many situations competition factors such as substitute availability will greatly affect CRC’s pricing strategy (Shankar, Bolton, 2004). To avoid giving away revenue firms should hold prices firm or even increase prices on inelastic services as consumer demand should remain relatively unchanged even during periods of economic downturn. During times of economic recovery prices for these services can be increased more rapidly without fear of decreasing demand. CRC must closely monitor demands for their services with high elasticity in times of economic change (downturn or upturn) and adjust prices accordingly to maintain healthy streams of revenue. To do this it is critical that a CRC understand their minimum price (cost) and a maximum threshold (highest price) within the market. CRC can use market research to determine the optimal cost giving the current environment to maximize profits by finding equilibrium where the price/demand point maximized revenue/profits.
• #10: Evaluation - #3 (Continued)Analysis of Unequal Cash FlowsUnequal cash flows affect the future value of an investment (business like CRC) by complicating our ability to accurately determine the future value (Tsao 2012). Manually calculating the future value of an unequal cash flow is difficult and often results in unreliable valuation. Using Microsoft excel “solver” or other programs wecan simplify the process and improve accuracy however the results will not be a certain as a known stable annuity type of cash flow (Nurre Unknown). We must first attempt to understand all of the variables and what effect they have CRC’s cash flow before it can be committed to for budgetary purposes (Pasdo 1985). Not understanding the variables effecting cash flow and to what extremes they could reasonable effect cash flow can greatly affect the accuracy of our future value calculation and thus lead investors/corporations into taking undo risk. This is important for CRC to consider into their pricing as volatility in their membership levels resulting from pricing changes could impact revenue flow consistency that overtime result in a devaluation of their business and ultimately increasing their future cost of capital. Variance AnalysisVariance analyses is important to many different levels of management, including operations managers. Variance analysis can be used to determine the cost of unused courts within CRC facilities (Yahya-Zadeh, 2012). Variances between planned and actual costs might lead to adjusting business goals, objectives or strategies (Hilton, 2009). The utilization of variance analysis within CRC will allow them to compare budgeted production and actual production and can assist in the budgeting process for future time periods. In addition it can provides CRC with more information to efficiently plan and utilize company resources (Yahya-Zadeh, 2012).
• #11: Evaluation - #4, Explanation of how CRC’s cash management would differ from the present if the new membership plan and fee structure were adoptedThe proposed membership and fee structure would change the cash flows of the club and the concentration of cash in the club. Furthermore, it would eliminate uncertainties in cash collection by the Club. The new membership and fee structure would see the collection of the annual fees in advance. As a result, the City Racquetball Club finance department will not expect to collect any additional amount from the members during that year. This would mean that the planning for the receipts in the company will be done annually depending on the number of members (Checkley, 2002). This differs from the previous process whereby the finance department expected to collect court fees from the members depending on the hourly court charges. The club will be able to concentrate huge amounts of cash as a result of the new system, unlike previously when it had an uneven distribution of funds depending on the season. The finance department will be able to predict the optimal cash balances in the club. Using the current membership and fee structure it would not be possible to evaluate the optimal cash balances because of the variability in cash collected. As such, the club would be able to plan on the amount of costs. In addition, the management will be able to determine the adequate liquidity position that is necessary to meet all the obligation of the club.
• #12: Evaluation - #5, Strategic advantages and disadvantages to implementing this membership plan and fee structureThe new membership plan has various advantages. The payment of an annual membership fee with no hourly court rates means that the members will maximize their utility with no time and budget constraints. As such, the club will have an advantage of attracting more members due to the new membership plan. The club will be able to predict its financial outcome effectively with the new membership plan. The fact that the club will concentrate a lot of funds at once will enable it to undertake more projects that will have higher capital outlays. According to the new plan the club will have adequate court time for all members. As such, the club will optimize on the usage of its available resources. After the implementation of the new strategy, the club’s management will shift its focus to increasing membership of the club. If the number of members increases, the club will significantly increase its revenues (Reider, 2003). Moreover, the new membership plan will lead to effective cash management. The chances of misappropriation of funds will be reduced because membership fees will be paid annually with no hourly rates.
• #13: Evaluation - #5 (Continued)Cash management is an exceedingly important function of the City Racquetball Club management. Cash management involves handling receipts and payments in an efficient manner (Coyle, 2000) . There are some disadvantages in implementing the new membership plan. The club will lose a huge amount of revenue that would have been earned during prime time. In addition, the club would lose some of its members and would incur costs during the promotional campaign to attract new members. Some members may observe the new membership fees to be very high.
• #14: SummaryConsidering the impact of the new membership plan on the cash management and the fact the revenues will stabilize, Accounting First recommends City Racquetball Club should implement the membership plan. In conclusion, Accounting First also recommends CRC develop a new marketing strategy for the implementation of the new membership plan an fee structure. This strategy should be designed to retain current members and attract new ones. Further, in accordance with our findings, CRC should work on a revamped budget that will be incorporating the changes brought about by the new pricing strategy. Thank you for your time. This concludes our evaluation.