Getting Health Clubs Into Shape

In the past two decades, health clubs have sprung up across the country, but in many cases these facilities disappear within a year or two. The cause often is cash flow problems resulting from faulty accounting methods. As controller for a large national health club owner and operator, CPA Frank Nusko must ensure that his clubs observe proper accounting conventions to maintain sound financial health. His story is an informative one for CPAs whose organizations acquire and do business with much smaller entities that fail to observe traditional accounting standards.

AN INDUSTRY OF SMALL FACILITIES
Tennis Corp. of America (TCA), which owns or operates health, racquet, corporate fitness and wellness facilities in the United States and in Canada, oversees a variety of clubs, from ones that were once owner-operated to centers at General Motors and McDonald’s corporate offices. Nusko, who is responsible for all accounting functions in all locations, has a staff of about 25. During his 13 years on the job, he has spearheaded an effort to raise accounting standards and bring consistency to the company’s 40 facilities.

To attain these goals, the company has taken steps that set it apart in the industry. What makes TCA unique is that we have centralized all the accounting and human resource functions, says Nusko. We have national-scale operations, while many other companies in the industry with multiple locations are overseen locally. TCA believes its approach brings not only consistency but also greater control, more timely reporting and efficiencies of scale.

Although there are a few national giants in this field, the fitness industry is dominated by small operators. In the United States, Nusko says, if there are about 12,000 clubs, there are about 10,000 owners. The consolidation you have seen in a lot of other industries has not come to ours. In small, shoestring operations, the owners may have kept the books themselves; for a CPA, that can make for some interesting reading. My greatest challenge comes when we take on new locations, because the accounting is always unique. You often see misrepresented financial statements. In many cases, you won’t even see GAAP accounting, says Nusko.

When the company takes over a new club, it typically invests capital to expand the club’s offerings. For Nusko and his staff of CPAs, it can take several months to unravel a facility’s financial status, depending on the size of the club and the complexity of its operations. We look at the balance sheet, figure out what’s recorded, then find out all the things that aren’t recorded, he says. The staff does a detailed audit of every line item and interviews existing site employees to learn more about operations. When problems arise, deferred revenue is the main culprit. Many locations sell multiyear contracts but record all the revenue up front. When you look at the balance sheet, there’s no deferred revenue, but when you talk to the owners, you find out that future cash flow will be a lot less than anticipated because many members already have paid and the revenues have been recognized.

The job of pinpointing actual profit and loss is made more difficult for potential buyers dealing with worried club staff. If people are concerned about retaining their jobs after you buy the club, they don’t want to tell you all of their mistakes or that they fudged the financial statements. The auditors take steps to build rapport with employees, ensuring them that TCA will offer training and support. We let them know we’re here to help them, Nusko says.

If Nuke’s company is purchasing a club, it examines the books carefully to gain a thorough understanding of the state of its operations before the sale. If it is to operate the club for another owner, we assume that the financial situation will get worse before it gets better. We build that assumption into our projections.

THE BATTLE FOR CENTRALIZATION
After he sorts through a tangled set of books, Nusko’s next goal is to bring the facility’s recordkeeping up to standard. Nusko cites the SEC decree that any company going public in the industry must adopt a deferred method of accounting for initiation fees. It’s a conservative approach that will give more credibility to our industry, which is something we need. Nusko is one of a team of CPAs and others in the field who collaborated on Uniform System of Accounts for the Health, Racquet and Sportsclub Industry , published by the International Health, Racquet & Sportsclub Association. The book offers guidelines intended to establish consistent financial reporting and to allow for accurate comparison among and analysis of clubs.

Most of the larger national clubs already have changed their reporting structures to conform with standards, Nusko says, but in many states, health clubs are high on the lists of consumer complaints, because they take people’s money and then can’t operate because they have no continuing cash flow. In his battle to improve reporting, Nusko believes his best decision was to centralize accounting. When Nusko arrived at the company, financial decision making was more widely dispersed, and change wasn’t easy. It was a struggle to get a local club manager to relinquish that power to send out a check. Nusko and his staff, however, presented the transition not as a change of power but as an opportunity that would instead free local club managers from routine administrative tasks so they could concentrate on their core business of running quality clubs and selling memberships. People understand this intellectually, but viscerally it’s hard to give up control, he observes.

The auditors point to other clubs that have successfully gone through similar transitions to reassure local club staff about the benefits of TCA’s intentions and approach. In most cases, control over finances can be shared. For example, local club managers retain the power to approve invoices before they are paid, but Nusko’s central office staff cuts and sends the checks. Now we have more timely, accurate and consistent financial reporting, he says. The regional managers have seen the benefits and have in fact become advocates for the system. When we had some success in one club, the managers there would tell colleagues in other facilities that we were reliable and could be counted on.

Under the new system, when expenditures are made, all invoices are routed to the central office in Chicago, where checks, payables and payroll are processed for all locations. Because the conversion to the new approach has been a lengthy one, Nusko regrets not having started it sooner. At first, I tried to work with local managers to see if I could bring the location up to an acceptable standard. When a club couldn’t conform to expectations, we brought it into the centralized system. In the end, we found that none of them could conform on their own. Because centralization was not initiated across the board immediately, the process ultimately took nearly five years.

A CLEAR IMPROVEMENT
Today, when a new club comes under TCA’s control, Nusko’s department implements centralization immediately. First, the central office accounting staff corrects revenue reporting problems, largely in terms of dues collection, since this item constitutes 75% of a club’s revenues. TCA also installs its own billing and payroll systems. Next, it investigates accounts payable, which can be a complicated process since new clubs often are in financial trouble, so credit must be reestablished. When centralization was first introduced, Nusko, who had worked with TCA as a client in an earlier job at a CPA firm, relied on support from top management to make it work, although some managers had to be won over because of the newness of his approach. His advice to CPAs making changes everywhere is to have confidence in their plans. If you believe it’s the right thing to do, push forward and do it. We moved too slowly, too cautiously. Although it can be painful to make changes, when we were done, everyone realized it was better.