Capital Budget in Recreation in Term Paper

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To solve these emerging needs of the company to satisfy the demand in the market, it is necessary to invest into expanding of the services offered and shifting the existing concept of the club. Firstly, it is necessary to expand the space occupied by renting out additional premises and organizing Spa procedures there. This will require also investment into necessary human resources, such as hiring Spa administrative and consultants specialists offering services for both women and men, and for both facials and body treatment to maximize the services mix. Costs for occupying this space, purchasing necessary equipment and hiring adequate staff so can exceed the current costs by ?450,000, so this is the incremental expense from proceeding with this services expansion programs. Cost to organize the fitness and Spa cafe, which is proposed to call at EnerGi Box, will amount to another ?100,000 annually. The final improvement step is investment into hiring a team of personal coaches or consultants which will hold personal training sessions and group seminars with the members of the club, to provide a full range of services. Incremental costs for the club for hiring the team will amount to ?150,000 annually. Thus, the system of improvement needs total ?700,000 additional costs annually. Initial investment into renovation and payment for facilities is estimated approximately in the order of ?150,000. But it is also vital to estimate the possible losses which the club will suffer if it does not forego this program and thus is most likely to lose the clients in the coming one to two years due to appearing competition from other clubs which will offer the new services and will win over the clients, thus causing losses to the City Point Club.

Currently, the club has 4,000 members all having different attendance patterns and being on different payment schemes.

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Generally, total annual income from the membership is approximately ?5,750,000, while the operating costs leave the profit margin of approximately 32% to the owner. Based on preliminary market research, it will be possible to increase standard membership payments by at least 17% if these new steps in the services offered are undertaken, which will lead into total club revenues of ?7,190,000, while the operating costs will increase only up to ?4,610,000, leaving the profit margin of ?2,120,000 which leaves also the margin of 32%, but is better by ?280,000 in financial terms. The initial investment of ?200,000 necessary to be made to consider the program will be paid back also within the first year of running this program, and the second year will bring already more profit to the company. The capital for this initial investment is rather small and can be taken out of the current profits achieved by the company and thus it is not necessary to take out the loans or the like.

As it is impossible to estimate precisely how much business and trading the company would lose if it does not proceed with this program, the assumption is that 25% of the customers will switch, thus making the total club revenues only ?4,315,000. The operating expenses will also decrease, but not at such high rate as 25% as there is a considerable share of fixed expenses within the total operating expenses structure. Assuming that operating expenses will decrease by 20%, and will amount to ?3,130, leaving the profit of ?1,005,000 which is only 25% and clearly reveals the financial sense of considering the expansion of the business and making this investment into it. It is even the only way not to start losing the money because.....

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