Many health clubs have a life expectancy that's as short as their members' fitness resolutions. But Town Sports International, a $35-million chain of health clubs based in New York City, has averaged 30% annual growth rates in both revenues and net income, says CEO Marc Tascher. His secret? He keeps a close watch on a key financial ratio: operating costs as a percentage of revenues.
Every month, Tascher monitors the performance of each club (and of the corporation) according to that ratio, so that as clubs mature and membership growth slows, Town Sports' cost-to-revenue ratio remains constant. The ratio is also used to make sure that expansion projects make financial sense. "I've got three main costs -- marketing, space, and payroll -- and I won't consider expanding into a new club unless its projected cost ratio works," says Tascher (who discloses only that a successful club should bring in a 40% pretax margin.)
Tascher uses the ratio for the whole company to help gauge how much cash to keep on hand when building new clubs -- a risky phase, but one in which risks are offset by the predictability of the other clubs' receivables. "At a time like this, when we've got four clubs under construction, our cash reserves are higher because I know there are uncertainties about how much cash we'll need and how long it will take for those clubs to get going. But as soon as those uncertainties are reduced, it will be better to spend down reserves if we need cash, rather than rely on our credit lines."* * *