Note: Sample below may appear distorted but all corresponding word document files contain proper formattingExcerpt from Essay:
Franchise Opportunities with Snap Fitness: A Cost Assessment and Financial Feasibility Analysis
Owning a business can be a ticket to financial independence and the freedom that comes with not having a boss, but before this level of success can be reached a great deal of hard work and careful planning are necessary. A franchise can help to simplify or outright solve many of the problems involved in starting and maintaining one's own business, but even with a franchise there must be care taken in the planning and execution of the business in order for costs to be controlled and profitability to be achieved. The following pages present a brief cost analysis and overview of opening a Snap Fitness franchise, based on information given in a case study and available on the Snap Fitness website. Through this information, as well as through estimations and calculations made based on this information, a cost and revenue analysis makes it clear just how much care a franchise can take.
A cost-volume-profit or CVP analysis is one basic way to determine what will be necessary for keeping a franchise in operation. The spreadsheet attached as Appendix A contains the basic calculations necessary for this type of analysis, as described here and based on figures that were provided in the case study. This case study stipulates that fixed operating expenses are $4,000 per month, equipment leases run $2,000/month, membership fees ate $26/month per member, and that 300 members will allow the business to break even (BYP19-7).
From this information, and given knowledge of the equations necessary for a CVP analysis, the average monthly variable costs -- at least, the variable costs at the level of 300 members -- can be calculated. First, adding together the $4,000 in operating expenses and the $2,000 in equipment leases per month yields a total of $6,000 in fixed monthly costs for the running of a Snap Fitness franchise. Revenue for the month at 300 members would be 300 multiplied by the member fee for each member, or $26, which is a total of $7,800 (which breaks down to a cost of $6 per member per month). If 300 members allows the franchise to breakeven, then the revenue generated by 300 members ($7,800) would be equal to the fixed costs plus the variable costs, so subtracting the total monthly fixed costs ($6,000) from the revenue provides the variable costs that would exist with 300 members. 7800 -- 6000 = 1800, so the variable costs for a Snap Fitness franchise with 300 members would run about $1,800 per month. Fixed costs remain the same no matter how many members there are (thus the term "fixed"), and variable costs often hold a direct proportion with the number of units produced (in this case, the number of members at the franchise) increase, therefore increasing the number of members would not only increase revenue, but would also increase the profit margin. As 300 members is the breakeven point, the profit at this point is zero, and revenue in excess of $7,800 is necessary to make this venture worthwhile.
Net income is simply the revenue a company generates less the expenses it incurs in generating this revenue. In the case at hand, the costs for a Snap Fitness franchise each month include the $6,000 in fixed costs and the $6 per member in variable costs; any revenue in excess of these costs would be net income. This can be expressed as an equation thusly:
(Unit Revenue x Units) -- (Variable Costs x Units) -- Fixed Costs = Net Income
Given a target net income for the Snap Fitness franchise of $10,000 per month and the other information given and calculated above yields the following equation, with X standing in for the remaining unknown element -- the number of units necessary to generate a net income of $10,000:
26x -- 6x -- 6,000 = 10,000
This equation can easily be rearranged, simplified, and solved for x, yielding the number of units (i.e. members) necessary to reach the target net income of $10,000:
26x -- 6x = 10,000 + 6,000
20x = 16,000
x = 800
As shown in the spreadsheet in Appendix A, the 800 members that a Snap Fitness franchise would need to generate a net income of $10,000 would generate a total revenue of more than twice this amount. This demonstrates the relatively low profit margin this business has at this level of operation (remembering that net income is not the same as profit -- there are still taxes and depreciation to consider, although the latter might matter less in a franchise situation).
Variable Cost Examples
There are many different potential variable costs that any business might face, and certain specifics can easily be imagined for a fitness club such as the hypothetical Snap Fitness franchise being discussed herein. As briefly described above, variable costs include all costs that can be assessed on a per-unit basis, or in other words they are costs that increase when the number of units produced increases (Drury, 2007). For the Snap Fitness Franchise, "units produced" means "members," effectively, and though it has already been determined quantitatively that the variable costs associated with each member of a Snap Fitness franchise are $6 per month (assuming the variable costs are constant) there has been no assessment of where these costs might come from. By entertaining some though in this area more of the complexities and contingencies in operating a franchise will be brought to light.
One of the key variable costs that this business, like many businesses, will incur is the cost of labor. In almost any business, the number of labor hours needed increases as the number of units to produce increases and decreases as units decrease, which seems a matter of common sense but is often overlooked (Drury, 2007). The same would be the case at a Snap Fitness franchise; there are likely safety requirements regarding the ratio of staff to current patrons at any given time, and there will generally be an increased need for staff when the number of members in the franchise increases. Members requiring assistance, administrative tasks, and other jobs will need to be filled or expanded to accommodate growing membership rolls.
Equipment maintenance will also need to increase as membership increases. This is another common variable cost, as any business that involves machinery will find that their machinery wears down and breaks more frequently when it is used more heavily (Drury, 2007). Though the equipment at the Snap Fitness franchise will be leased, it is almost certain that the franchise itself would have to bear the costs of repairing the equipment to a reasonable degree and making sure that it is suitable for use by the members of the franchise. With more members using the equipment, breakdowns can be expected to occur more frequently and maintenance costs will therefore go up. Many standard pieces of fitness equipment also depend on electricity -- treadmills, most modern exercise bikes, stair-climbers, etc. -- and thus heavier use will mean heavier power draws and higher electricity bills. As the number of members increases, so will the utilities that have to be paid for, and though much of these utilities such as lighting, heating/cooling, etc. will be fixed there is definitely a variable component through the use of such equipment.
Water use and expense will also vary depending on membership. More members means more toilets being flushed, more showers taken, and more water coming out of the drinking fountains. All of this has to be paid for and represents a "unit cost" to the business (Drury, 2007). Even something as simple and mundane as the membership cards that will likely be issued to each member represent a variable cost -- though it might…[continue]
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