Tom and Marie are thinking of opening a fitness centre with facilities for aerobics, weight training, jogging and lap swimming, as well as diet and injury consultation. They plan to buy land and build their facility near the new shopping centre. They want to employ a director, an assistant director, experts to supervise members in each fitness area, and numerous consulting dietitians and sports medicine professionals. They hope to have the entire facility, including an outdoor all-weather track and an indoor swimming pool, completed by the end of the year. They also believe that it will be important to have the facility fully equipped and staffed before they begin taking memberships. Although their estimates indicate that the fitness centre can be profitable if they can establish a growing membership over the first five or six years, many small businesses in town have failed because of ‘cash flow problems’ (excess of cash payments over cash receipts). Before committing themselves to this venture, Tom and Marie have come to you for advice and for help in preparing a cash budget.Required: Write Tom and Marie a memo explaining why they might have cash flow problems during their early periods of operations. Show them how they can identify these cash flow problems through careful cash budgeting. Make a few suggestions that might help them reduce such problems if they do decide to open the fitness centre.
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