Conquering Club Collections and Bad Debt in Your Health Club

Cash flow is important to any business but it is the lifeblood of health clubs, here is how to properly manage it…

By Mike Chaet

As an independent health club operator, you do many things.

Boiled down, you provide some of the best products and services in the world. You allow people the opportunity to feel better, look better, indeed, to actually be better, stronger, healthier and happier.

What business can claim such wondrous results?

You work hard to provide these products and services. The money you charge is yours. You deserve it. You obviously also need it to successfully function and prosper. After all, that's the whole reason for getting up in the morning is to make money. To build a successful business that provides what's promised. So why is that that clubs show such an across-the-board weakness and timidity when it comes to managing their collections and bad debts?

With sound collection management, you can have more cash in your checking account and less receivables.

Selling the membership is pretty much useless it gets paid. It is therefore imperative that managing collections and bad debt is not a casual, haphazard process. Bad debt occurs in all business and, although there may be thousands of different reasons that people don't pay or live up to their contractual obligations, there is a new, structured system that can handle all situations. It can turn your collections management into an effective tool for success instead of a costly recurring headache.

Take a lead from Balleys' annual statement. The very first page had the following simple, down-to-earth quote: "Our job is to sell memberships and collect our money." That's their mission statement they put out to potential investors. Precise, concise and ultimately profound. Normally a mission statement for a fitness center, health club or athletic club (as you probably all know) will revolve around the delivery of the product, the importance of fitness and the lifestyle of members.

Not Balleys'. "Our job is to sell memberships and collect our money." That is your job as well. Ultimately, prevention is the main key to preventing bad debts. And if you have a good, solid system with accountability and a straightforward administration of that system, that particular process will prevent the bad debts and runaways on essential receivables. It's very important.

In addressing the collections issue, we'll share some interesting examples, letters and systems that can be adjusted to your particular club in regards to the number of people you have working for you, size of membership, the square footage of your club and other individual factors. It all starts with closely measuring and managing your accounts receivables. Before moving on to the specific systems, Let's begin with a few standards. Build an ongoing chart that measures the aging of your accounts receivables. Most of your computer software packages already have that capability, if not, just put it on a spreadsheet.

At the top, list the percentage of current debt. This consists of what you billed this month and what is not yet 30-days old. Then list your percentage of 30-day debt, percentage of 60-day, and percentage of 90-days and more. Here's some target percentages that will work very well if you can reach them. A high percentage of EFT helps you reach these targets even quicker. That circumstance of high EFT is, in fact, the biggest part of the secret in successfully managing your receivables.

Under percentage of current debt, we'd like to see you have 90% of all payments current. Percentage of 30 days, no more than 7% (with EFTs, part of that may be returns that need to sent be through again). 60 days is starting to get into the danger zone, don't find yourself at more than 2%. 90 days or more, 1%. These are target goals. If those numbers exceed the targets, you'll need to go back and evaluate your particular process and find out how it's working.

Cash Flow Management and the Cash Flow Cycle

Describing the cash flow cycle underlines the importance of collecting your money as fast as possible for your memberships. And of course, any debt that's owed to you... there may be many other products and services that you're selling to your members and it's the speed at which you collect your money that needs to be emphasized.

We have a couple of issues here: volume of sales plus speed of collections. In considering this cash flow cycle, start with your basic financial resource, what's called your "cash on hand" or your "cash drawer". Money moves out of that cash on hand to conduct your operation of the club. This money covers everything, from payroll, fixing things, marketing, to buying new equipment and so much more.

With your cash on hand, you then have to decide on how to spend it.

When you spend, you're doing so to supply your service. In our case of a health club, we're supplying services to our customers - the members. We use our cash drawer to operate the club. We're delivering the product to our end users. That end user then, in some shape or manner, is billed or charged for that particular service. That billing or charge is called a receivable. The receivable is paid by the member, and, in turn, that payment gets put back into the cash drawer to feed the cycle once again.

So the basic cash operations are delivery of product, receivables and payments. The reason this is emphasized is that it is the speed at which the system works that is the most critical part of collections management. Slow collections can be easily measured by the chart just discussed. If we're allowing our customers to pay slow, we're extending an unfair grace that clubs cannot enjoy.

"Adopt this reality rule: the more rapid the cash flow, the less working capital is required to operate. "

Regardless of the cash flow, clubs still have to pay their bills. That ties up valuable capital. When you tie up your capital, (you may even be short on capital and be forced to go borrow some) that costs you money. Tying up capital also slows down future innovation.

You're hindering the chance at a complete marketing program, taking the risk of not having enough money to pay for the appropriate service employees, and the whole cycle starts to move in slow motion and become crippled. For any of you who have been low on cash but high on receivables, you know this is not a good feeling. Adopt this reality rule: the more rapid the cash flow, the less working capital is required to operate. An efficiently working club with members are paying on time, allows that club to use their money in an effective way to run the business, develop the product, provide service, and essentially do all the things that are expected by members in an efficient and effective way.

Thus, your product can be perceived as a good product. The club is seen as high service. Well-kept. Innovative in the development of programs and equipment.

Isn't that how we all strive to be perceived?

An important way to achieve that is to collect your money as fast as possible. The foundation is a simple concept: fast payment = strong operation. Slow payment = weak operation.

We're talking about management here, as opposed to sales, marketing and other tasks. Managing your receivables is a very important part of the operation because it affects everything else. That's something needs to be understood. As we move forward in the system and procedures, the idea is for you to turn the receivables collections to a very high priority in what you're doing in your business if you're the operations director, the manager, the owner... move it up there fairly high and establish a system which clicks right along and works toward the ultimate goal of speeding up the process of collections.

This is diametrically opposed to what's observed in quite a few of small operations where clubs just short of let it the cards fall where they may and then just get worried about it when it starts to interfere with operations. By then, it's probably too late.

Credit Policy & Procedures

Maintain the philosophy and that a loose collection policy makes absolutely no sense at all. If you have a loose collections policy, your members are going to take natural advantage of that.

By allowing members not to pay their dues on time and it's not pursued in an aggressive way with penalties, phone calls or mail-outs, then the reputation that's engendered is one of: "Well, they're really nice people and if you don't pay your dues it really doesn't matter a lot because..." any number of reasons that can be imagined. With a reputation of being loose, members may think you're wealthy, sloppy operators; they may assume it's just your philosophy of operation. It's inevitable that some are going to take advantage.

So if a loose policy makes no sense, a tight policy is critically important and should be enforced as such. A strong policy provides a clear statement at the time at which the people buy their memberships that explains the exact how and why of collections - how members are supposed to pay for their membership. If you do pay for your membership, these positive things will happen. If you don't pay for your membership, these negative things will happen.

It's amazing how many times club owners and operators have expressed timid collections policies on multiple occasions, all along the lines of "Well, we're a small town and we don't want to get a bad reputation in town by telling somebody they have to pay for their contract when they wanted to drop out; or they made two or three payments and we don't want to take them to small claims court or collections. We don't want to get a bad reputation in town because they'll start talking about us."

Well, yes, they will talk about you... either way. If you have a loose policy, that's going to get out and eventually define what you are. If you have a tight policy, and everything is defined and strictly enforced, you'll get the reputation actually of being a good, no-nonsense business person. <

Here's an example of what would be called a reasonably-tight policy:

On day one, let's assume you do your EFT at the first of the month or send out an accounts statement, some of the higher-end clubs still do that and that's understood. So you process EFT or account statements. That money is essentially due on the date processed. Of course, this is the huge advantage of EFT. You get all the money you're going to get on the first day, right away…or at least in the first couple days.

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