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 ancho Palos !erdes" Cali#ornia" an

u$scale community located in the Los An%eles area. &he club o##ers $ersonal #itness trainin% and #itness classes o# various ty$es includin% aerobics" s$innin%" body scul$tin%" air bo'in%" (ic(bo'in%" hi$ ho$" ste$ and $um$" dynamic stretch" Pilates" and yo%a. &he #ollo)in% services and #ees $er hour are collected by Private Fitness LLC: *ith $ersonal trainers+instructors Prime &ime .bet. -:/001:00am 2 3:0001:00$m4 Lean &ime .1:00am 5 3:00$m4 6tudents Discounts #or $re$ayments Private Fitness LLC is o)ned by ,-0+hr ,-0+hr ,/-+hr ,78+hr

osemary *orth" a #ormer #inalist in the 9s. Fitness :6A osemary had to use almost all her $ersonal

com$etition. 6he had been )or(in% as an aerobics instructor and #itness model be#ore startin% Private Fitness. &o o$en the club" savin%s" $lus she had to ta(e out a ban( loan. 6he s$ent ,7-0; to renovate the #acility o# her club and ac<uire the necessary #itness e<ui$ments. osemary hired ;ate =o##man as a business mana%er. ;ate>s $rimary tas(s included mar(etin%" #acility u$(ee$" schedulin% o# a$$ointments" and record (ee$in%. ;ate )as $aid a salary $lus a commission based on %ross revenues. ;ate )as $rovin% to be an e##ective mar(etin% mana%er because the number o# clients )as %ro)in%" and by the end o# the year the business )ould be earnin% a $ro#it. =o)ever" osemary became sus$icious o# ;ate and %radually reali?ed that ;ate )as osemary osemary ho$ed that

stealin% #rom the club. @ne time" a ,60 )as re$laced )ith ,80 in the cash dra)er.

as(ed ;ate but the latter denied that there had been ,60 dollars in the dra)er.

osemary

became very alarmed )hen" durin% a casual conversation" one o# the instructors mentioned about the A%ood ne)sB about ;ate brin%in% in ne) $rivate #itness client but no ne) revenue )as recorded. ;ate #inally admitted that the client has been )ritin% her $ersonal chec(s directly. osemary reali?ed she had t)o maCor $roblems: the the#t o# cash and the unrecorded revenue. &hese are internal control issues that osemary need to address. 6he did not )ant to ste$ in and assume the mana%erial role hersel# because she had si%ni#icant #amily res$onsibilities to )hich she )anted to be able to continue to attend to.

II.

STATEMENT OF THE PROBLEM *hat should osemary do )ith Private Fitness LLC>s lac( o# internal control systemD

III.

OBJECTIVES a) &o e##ectively minimi?e loss #rom the#t and related internal control $roblems. b) &o increase com$any $ro#it. c) &o $ro$erly se%re%ate em$loyees> duties and res$onsibilities to ma(e them more e##ective and e##icient. d) &o achieve a healthy balance bet)een #amily and business.

IV.

AREAS OF CONSI ERATION 7. &here is no $ro$er recordin% o# revenues. evenue is de$endent on the number o# clients attendin% classes and $rivate )or(outs. &here is ho)ever no recordin% system to $ro$erly monitor the clients and number o# )or(out attendees. 8. &here is no $ro$er recordin% o# o$eratin% e'$enditures.

Easic o$erational e'$enses li(e electric and )ater bills" rent" ban( interest" li%ht" tele$hone and communications need to be $aid on time. &hese e'$enses need to be recorded and trac(ed accurately in order to come u$ )ith reliable #inancial re$ort and #acilitate monitorin% o# trends. /. No schedulin% system #or instructors and em$loyees. *hat instructors" and other em$loyees" should be on duty at )hat hours are not de#ined. 6ame )ith schedule o# classes" there is no assi%ned time and venue #or $ur$oses o# the di##erent classes. &he ca$acity utili?ation is not $ro$erly identi#ied to ma'imi?e s$ace to revenue mi'. &here is also no cleanin% and maintenance schedule to be #ollo)ed. 3. Payroll system is ine'istent 9ost o# the com$ensation is commission0based" $aid as a $ercenta%e o# revenue associated )ith the instructor>s activities. =o) do em$loyees commissions are $aid correctly )hen revenue recordin% is ine'istentD &he same )ith the mana%er ;ate =o##man" )ho is also $aid a salary" -. Fi'ed asset system &he #acility and #itness e<ui$ments> costs should be allocated over time $eriods and re#lected as e'$ense in the income statement. 6. osemary>s #amily related concerns

osemary is serious about her #amily duties that she is hesitant to ta(e #ull control o# the com$any>s o$erations. F. Funds are limited osemary>s o$eratin% #unds a$$ears limited %iven the #act that she had s$ent her resources in the u$(ee$ o# the club and ac<uisition o# #itness e<ui$ments. Also the #act

that she is unable to $ro$erly trac( the revenues and e'$enses means she is unable to (ee$ a %ood record o# her actual #inances.

V.

ALTERNATIVE COURSES OF ACTION 1. ele%ate ;ate =o##man to $ermanent #itness instructor and hire a com$etent mana%er to oversee the daily o$erations o# Private Fitness LLC. ;ate =o##man )asn>t very hel$#ul and trust)orthy bein% a mana%er o# the club. 6he demonstrated this by $oc(etin% money o## the cash dra)er and not remittin% revenues #rom her $ersonal trainin% callss )ith clients. &he ne) mana%er )ill be heavily involved in monitorin% the activities o# em$loyees and instructors includin% settin% and de#inin% s$eci#ic duties and res$onsibilities o# each em$loyee. =e+she )ill also be res$onsible )ith the overall u$(ee$ o# the #acilities" ma(in% sure they are )ell maintained. =e+she shall also act as a mar(etin% em$loyee that )ill hel$ %enerate more revenues #or Private Fitness LLC. 6he )ill be $aid on #i'ed salaries $lus 80G commission based on monthly revenues. Advanta%es: a4 Eusiness o$erations )ill be $ro$erly and e##ectively handled b4 Eetter schedulin% o# #itness instructors and em$loyees c4 Fitness #acilities are better maintained d) Hro)th in customer base can be reasonably e'$ected Disadvanta%es: a) &here is added cost o# hirin% a ne) mana%er b4 ;ate =o##man may ta(e the action a%ainst Private Fitness LLC osemary" strainin% their #riendshi$ c4 =irin% ne) mana%er may not necessarily result in immediate turnaround o#

2. =ire the services o# an accountant to (ee$ trac( on the business #inances. Accountant )ill address some core internal control issues #acin% Private Fitness LLC: #rom revenue system to $ayroll and e'$enditure monitorin% system. Advanta%es: a) &rac(in% revenues and e'$enses )ill hel$ she>s ma(in% out o# the #itness business. b) &he accountant )ill act as an early )arnin% system #or incomin% bills and ban( amorti?ations to be $aid by osemary. c4 9onitorin% the revenue and e'$enses trends )ill hel$ s$ot and avert $otential #rauds. d) 9ore reliable commission incentives to instructors and em$loyees. e4 Accountant )ill assist Disadvanta%es: a) &here is added cost o# hirin% a accountant b) =irin% a accountant may not necessarily mean the business )ill ma(e more money. /. Private Fitness LLC should invest on CC&! security system. CC&! systems are )idely used security in#rastructure to miti%ate varied ris(s #rom the#t to crimes to other $etty issues )ithin and outside the establishment. Advanta%es: a4 Im$roves the security o# the #acilities and e<ui$ments b4 educes the $otential #or em$loyee #raud and the#ts secured Disadvanta%es: a4 =i%h cost #or CC&! security systems b4 &here may be issues on e##ectiveness as some CC&!s have limited ran%e. c4 Inhances Private Fitness LLC>s business ima%e by ma(in% the area sa#er and osemary )ith ta' related matters. osemary reliably assess the income

3.

osemary to $ersonally su$ervise Private Fitness LLC>s daily o$eration and (ee$ accountin% records.

Advanta%es: a4 educes the $otential #or em$loyee #raud and the#ts seriousness and commitment to the business Disadvanta%es: a4 6he )ill si%ni#icantly reduce her time s$ent on #amily b4 Pressures both #rom )or( and #amily could ta(e a toll on her health 5. Close Private Fitness LLC" sell its #acilities and concentrate on #amily duties. Advanta%es: a4 osemary can best handle his #amily duties )hen she is #ree #rom Private Fitness LLC>s daily demands. b4 Pressure to ma(e the business $ro#itable is o## c4 6he s$end her time and concentrate on other activities Disadvanta%es: a4 6ource o# steady income is lost b) Proceeds #rom sale may Cust be enou%h to satis#y ban( loan and may not #ully secure her #amily #or years to come. VI. RECOMMEN ATION Eased on the alternative courses o# actions above and throu%h care#ul analysis o# its $ros and cons" I recommend that osemary im$lement alternative course o# actions 7" 8 and /. b4 =er active mana%erial role )ill li(ely $ortray a $ositive ima%e to customers about her

VII.

PLAN OF ACTION

Phase I: Initiate the hirin% $rocess #or a com$etent ne) mana%er to address mana%ement control issues. osemary can as( #or re#errals #rom #riends in the #itness circle in order to osemary )ill match talent and e'$erience )ith her business re<uirement. 6imultaneously"

ne%otiate the transition o# ;ate =o##man #rom mana%er+#itness instructor to $urely #itness instructor. 6tealin% )as a result o# )ea( control measures. Hiven ti%hter measures and better incentive schemes" ;ate =o##man )ill not have the o$$ortunity or the a$$etite to re$eat her stealin% habit. Phase II. =ire the services o# a re$utable accountant. &his )ill address mostly accountin% control issues. &he lac( o# revenue and e'$ense recordin% systems has de$rived osemary )ith a clear and reliable estimate o# the actual income Private Fitness LLC is ma(in%. It also encoura%ed ;ate =o##man to misa$$ro$riate cash revenues out o# osemary>s daily income. Phase III: @nce the business is earnin% a $ro#it" osemary should start investin% in basic

CC&! security system to #urther ti%hten her control o# the business. &his )ill #urther discoura%e em$loyees to steal money and cart o## #acilities out o# the club )hile enhancin% the e##ectiveness o# her monitorin% system. 9ost CC&! systems are remotely controlled throu%h the use o# internet so she can monitor the #acilities #rom the con#ines o# her home. Also most #itness customers ty$ically $atroni?e #itness centers )ith am$le security measures so this )ill hel$ osemary convince $eo$le to visit Private Fitness LLC.