AN IHRSA BEST PRACTICE

CAP EX:

How Much Is Enough?

I

n light of the recession, many club operators have cut back on capital expenditures, accord- ing to Rick Caro, president of Management Vision, Inc, and a frequent speaker at IHRSA events, including the 2009 IHRSA European Congress. “Even if they can’t afford the full

amount, they should be doing something, and they should be planning for when market conditions improve,” he explains.

What is capex?

Capex (Capital Expense) is a real expense—a cash expense. It includes improvements, such as a new yoga studio, additional or replacement fitness equipment, a new front desk design, a new software package, an expansion of the parking lot, etc. It techni- cally is for items that will have a useful life of over one year, for which the club spends over a particular amount (500 to 1,000 Euros) per item. Depreciation, technically, is a non-cash expense

relating to the continually decreasing value of fixed assets by reason of time, wear and tear, and the continually changing nature of every marketplace.

A club’s accountant should advise as to how many years over which to depreciate each asset.

What percent of revenue should be allocated to capex?

A capex budget that will keep a club vigorously competitive over a 10-year period does not follow a straight-line formula. One way to budget capex is by determining the percentage of revenue that needs to be allocated to this expense on an annual basis. Using the “percentage of revenue” method, and allowing for all the factors relating to wear and tear and essential improvements, a sensible capex budget might look something like this:

Year 1 Year 2 Year 3 Year 4 Year 5

www.ihrsa.org n

0% Year 6 3% Year 7 4% Year 8

10-15% Year 9 4% Year 10

SPRING 2010 n

4% 4%

20-25% 4% 4%

Club Business Europe 9

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