Start a serious discussion about capital investment in your clubIf just one rule could be instituted in every club boardroom with the goal of making the entire industry healthier, it would be this… Every time a Board member is tempted to bring up the subject of F&B profitability, they have to stop themselves and replace that topic with two critical questions:

  • What are our future capital needs?
  • What are our projected capital resources?

Capital planning is at once the biggest challenge and the best opportunity for improvement in clubs, and yet few clubs seem to fully recognize its importance.

There are two easily calculated measures that managers and boards can use to gain keen and immediate insight into their club’s capital situation: Net Worth (owner’s equity in a for-profit club and unrestricted net assets (UNA) in a not-for-profit club) and the Net Available Capital to Operating Revenue Ratio.

Understanding the club’s Net Worth over time begins by assembling ten years of audited financial statements. Search the documents for “Owner’s Equity” if you’re a for-profit club or “Unrestricted Net Assets” (UNA) if you’re a not-for-profit club. Enter the number for each of the ten years into a spreadsheet and plot a simple line graph using that data. The resulting graph shows your club’s net worth over time and clearly illustrates whether your UNA is increasing, going sideways or declining.

The chart below shows a real-life example of UNA or Net Worth over time, plotted in this case by Carmel Country Club in North Carolina. The club’s impressive growth, from a net worth of about $12 million in 2004 to more than $30 million in 2016, is a direct result of a strong commitment to capital investment on the part of club’s Board and Management. The club’s consistent cycle of investment has, over time, produced amenities that increase the value of being a member of the club. Strengthening the club’s value proposition supports increases in initiation fees and dues and as a result, the club’s UNA is on a very healthy upward trajectory..

Plot the net worth of your club over timeThe second exercise, calculating your Net Available Capital to Operating Revenue Ratio, draws on the financial statements you gathered to study Net Worth. Using data from the financial statements, calculate your club’s earnings before income taxes, depreciation and amortization (but after covering expense of interest on debt). The result of that calculation is called Net Available Capital. It is the money remaining at the end of each year that can be used to pay down debt, make capital investment or put money in the bank.

Analysis of industry data shows that the healthiest clubs generate Net Available Capital equivalent to between 12% and 15% of total operating revenue every year. The number may be slightly lower in very small clubs. One quarter of clubs generate 5% or less (capital starved clubs) and at the high end of the spectrum, a quarter of all clubs generate more than 17% (capital rich clubs). Half of all clubs aren’t generating the necessary capital over time. If your club’s Net Available Capital is below 11% and especially if you are near the 5% to 6% range, you are very likely feeling the stress of too little capital – you may even see the evidence when you look at your physical assets.

Return on equity is measurable in private clubs

Those two quick, but critical, ratios will yield great insight. Now let’s address how to use the ratios as a catalyst for constructing a plan. There are three key points related to capital planning and aligning a Board and membership on this important issue.

  1. Industry data shows that clubs investing continuously over time have a higher rate of return on equity than clubs restricting investment. Capital investment is a momentum game, meaning the more you invest, the more money you will generate for further investment, through higher capital income. The less you invest, the less money you will generate because you won’t be attracting members willing to pay a reasonable initiation fee to join the club. During the last financial meltdown, many of the clubs that reduced or eliminated their initiation fee are now capital starved clubs.
  2. Every club should have a capital reserve study that looks out at least ten years. We believe that study should be conducted by an experienced 3rd party, professional firm. The study becomes the basis for your club’s needs over time which will allow you to focus on determining where the resources will come from to meet the needs.
  1. Club Benchmarking data shows clubs must focus on a tangible value proposition by continuously investing to create value if they are to succeed over time. If a club is focused only on cost cutting and not the value proposition, the data shows those clubs are likely to get swept into a cycle of decay that will be difficult if not impossible to reverse.
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by Robert A. Sereci, GM/COO Medinah Country Club
 Guest Author and Club Benchmarking SubscriberMedinah Food Truck.jpg As most club managers do, I try to spend our capital dollars in the most prudent way possible. When the idea struck me to obtain a food truck and brand it with our logo, I kind of figured that I was going to get some raised eyebrows along with some direct questioning. Once the interrogation was over, the end result was surprising and very gratifying.

Medinah Country Club has three golf courses and two halfway houses. The membership has been clamoring for a new on-course facility for years. The problem was that the best location for this new amenity was in an area far away from the needed utility infrastructure, and the cost for such a small structure was going to be astronomical for the project scope.

One day, I was traveling around the club neighborhood and I spotted a food truck parked and in full operation; the light bulb immediately illuminated. Considering that our golf season is only about six to seven months long, coupled with the fact that we have a very busy shooting lodge in the off-season with limited food and beverage (F&B) facilities, and we are currently building racquet facilities and a golf performance center with no F&B facilities, the idea of utilizing a food truck seemed very practical.

As luck would have it, I have a good friend who is a F&B manager for a major league baseball team, and when I surveyed the idea with him he told me that it was my lucky day; they had a relatively new food truck that they weren’t using as much as they thought they would and they were eager to sell for a very reasonable price.

Game on; now all I had to do is sell the idea to our board of directors. As expected, I was met with resistance, specifically, a sort of knee-jerk reaction along the lines of “Are you sure that is appropriate for our club?” And I get it, this is Medinah Country Club we are talking about, after all! Home of seven national golf tournaments and seven major golf championships; eight, if you count the upcoming BMW Championship in 2019. “Isn't that something for smaller clubs of less renown?” they asked.

Well, if truth be told, you don’t find food trucks at other country clubs; in fact, I only know of two other clubs in the country that have one. Knowing that this was not going to be a slam dunk, I came prepared with all the benefits and reasons why we should own such an asset:

Halfway House – With a food truck, we benefit by having a seasonal F&B outlet that is used all year round to serve our members for about 8% of the cost of what new “bricks and mortar” would cost.

A Unique Wedding Offering – We are very fortunate to have a breathtaking clubhouse (recently we are ranked the sixth in “The 18 Most Iconic Clubhouse in Golf” by golf.com). But today’s brides are looking for that trendy new thing, that special offering that other venues don’t have that makes their wedding unique. Food truck are just that! The “awesome” thing they can share with their guests.

Tournaments and Club Events – Our property consists of over 600 acres of land, on which we host events and tournaments that require F&B service. A Food Truck allows us to access almost any location and set them up in a more efficient way. A little extra help from a Food Truck on Labor Day, Memorial Day and Independence Day is a massive help in alleviating the pressure of the small snack bar not built or equipped to handle the massive influx of business.

F&B Offerings on Demo Days: Our Demo Days on the Practice Facility benefit from a more festive mood once we pull a Food Truck and the party begins.

Brand Ambassador: Limited advertising for private, member owned clubs? No problem, when we do job fairs and park the truck at our recruitment site and display this very visible backdrop.

Public Relations & Community Support: Unfortunately, every community is exposed to natural disasters (tornado, fire, etc.) and when these moments do occur here, we’ll take our truck to the area in need to provide goodwill assistance and charitable support of food and water.

When the board heard my rationale, they were immediately able to appreciate the benefits. Once we began, the most challenging aspect of bringing it to fruition was obtaining the proper health permits. But we are ready to roll now, and even though our first event is still two weeks away, our members are already bragging to their friends outside the club about our new state-of-the-art Food Truck at Medinah Country Club. We haven’t sold one “street taco yet and it’s already yielding benefits. As this enterprise develops, I will keep you posted.  

The real take-away from this story is not that food trucks are great and every club should obtain one. The moral is that as club managers, our tendency to play it safe causes us to avoid reaching for what is unique, even if there is a strong benefit in doing so. So many times, clubs are interested in “keeping up with the Joneses,” or not taking a chance of doing something different because of how it may be perceived by others, both inside and outside your club community. Your club is what your members want it to be. Yes, we have a food truck… it’s the best darn food truck in the city. If you feel that you have a great idea, then work the plan, present it well, and see what sticks. Don’t be afraid to show your board and your members that your wheels are turning.

By the way… did I mention that we have a chicken coop?

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Which Mode are You In?

Building_Value_for_Your_Club.jpgClubs share a common business model, but when it comes to more qualitative aspects like culture, each individual club is truly unique. At the highest level, a club’s culture is defined by factors such as history, mission, traditions, member demographics, location and the mix of amenities enjoyed by its members.

Below the surface, there is another very important but less obvious factor at work that influences the member experience on a daily basis and ultimately shapes the club’s future; the operational mindset. Are the club’s board, management and members focused on value creation or are they operating in a mode of extreme cost control?

In a culture of value creation, club leaders seek to continually add to the benefits of being a member. The focus is on things like innovative programming that considers every member type, diverse offerings within the club’s physical environment that go beyond the basics, a careful balance of exciting new events and longstanding traditions. In a culture of value creation, the emphasis is on growing and evolving the member experience.

Cost control mode is exactly what it sounds like. Instead of seeking opportunities to enhance the member experience and boost revenue through increased dues revenue and activity, leaders search for an ever diminishing lowest common denominator where members are just satisfied enough. They’re literally attempting to cut their way to health. Over time, a culture of cost control leads to chronic dissatisfaction among existing members, an inability to attract new members and expanding financial stress.

In a strong economy and fertile member market, maintaining a culture of value creation comes naturally for most clubs. But what happens when the business environment weakens? In challenging times, clubs without a clear understanding of their own business model and financial drivers are vulnerable to making poor decisions that cause them to shift away from value creation into the cost cutting mode.

Over the last seven years of studying club industry data, we’ve learned that benchmark analysis reveals a club’s story and we can get a pretty clear picture of what’s going on just by looking at the data. Key Performance Indicators (KPIs) can be used to assess financial sustainability, show the impact of the choices or decisions the club has made and identify the telltale signs that a club’s culture is focused on either value creation or on cost cutting.

There are two key measures from the Club Benchmarking Executive Dashboard that are particularly revealing and easy to calculate; the Dues Ratio and the Net Available Capital Ratio.

The Dues Ratio
Picture a two-cylinder engine where one cylinder is the number of full member equivalents and the other is the dues amount each full member pays to belong to the club. We refer to that as the club’s dues engine and every club has one. Under the influence of a weak dues engine, clubs commonly slide into negative patterns like extreme cost control. They focus on treating the symptoms and ignore the root cause, which is too few members and/or dues rates that have not kept up with annual cost increases.

You can assess the health of your dues engine by calculating the Dues Ratio (total dues revenue as a percentage of operating revenue). It’s a critical measure since dues is the club’s most powerful financial driver with a margin of 100 percent. In the industry overall, the median Dues Ratio is 48 percent. Looking at the middle 50 percent of the industry (all clubs between the 25th and 75th percentile) the Dues Ratio ranges from 41 percent at the low end to 54 percent at the high end. Clubs with a healthy dues engine (indicated by a Dues Ratio at or above the median) are in a much better position to have money available to support value creation even after fully funding operations.

Net Available Capital Ratio
The ability to reinvest to replace aging assets and enhance the physical plant defines whether a club is or is not financially sustainable. Insufficient capital triggers a spiral of gradually decaying and out of date facilities which leads to an inability to attract new members and higher than normal attrition of existing members.

While a comprehensive capital reserve plan is required to fully determine a club’s capital needs, you can calculate your Net Available Capital Ratio by taking Net Available Capital (net operating result plus capital income minus lease payments) as a percentage of your total operating revenue to determine where your club is relative to the industry median of 12 percent. Clubs well above the median are considered capital rich and those well below the median are considered capital starved. The more capital rich a club, the more readily a healthy culture of value creation can be nurtured and sustained.

Running these two basic calculations—Dues Ratio and Net Available Capital—is an important first step in assessing your club’s operational mode and aligning the board and management around a fact-based view of your position on the cultural spectrum of value creation to cost control. If you would like to schedule an online session to review and discuss your benchmarks with one of our trained analysts, send an email to [email protected] 

Learn More About Value Creation in Clubs

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Focus_into_focus
Capital Generation KPIs Bring the Future into Focus

In Part 1 of our Executive Dashboard series we introduced the idea of key questions for club leaders, the measures that can be used to answer those questions and the first section of the Club Benchmarking Executive Dashboard -- key performance indicators related to operating finance.

The “Capital Generation” section of the Executive Dashboard is comprised of three Key Performance Indicators that correlate directly to a club’s future. Healthy capital generation supports ongoing investment in the kind of facilities and amenities that a club must have to attract and retain members in an increasingly competitive market. Inversely, inadequate capital generation can lead to deterioration of the club’s offerings, declining membership and over time a financial and operational spiral that is difficult to reverse. This section of the Executive Dashboard helps club leaders assess the current state of their capital generation “engine” and determine what if any adjustments are needed to move the club toward the desired future outcomes.

Key Question #1
How much capital income did we produce?

KPI: Total Capital Income

Calculation: 
Total Capital Income = Net Initiation Fee Income + Capital Dues + Capital Assessments + All Other Capital Income (Property Sales, Net Profit from Tournaments, Gifts and Donations, Other)

Why It Matters:  Total Capital Income (TCI) is the income from all capital sources. The “capital engine” of a club is the key to having the money necessary to continuously make the capital investments necessary to maintain and upgrade the club’s facilities and amenities. Updated and compelling facilities and amenities are the heart of any club’s value proposition and are critical to maintaining and growing a vibrant, sustainable membership.
Common capital income sources include initiation fees, capital dues or assessments, sale of property, investment income, or any operating surplus (positive Net Available Cash). Given that capital needs are fairly consistent, clubs must strive for capital income that is also consistent over time. It is one of the most critical aspects of a Board’s governance and a management team’s duty to assure that capital income matches capital needs into the foreseeable future. Predictability in capital income is necessary and may drive clubs to consider capital dues as one key source of predictable capital income. The chart below shows that for fiscal year 2014, the median club had Total Capital Income of about $609K.

Total_Capital_Income
Key Question #2
How much capital is available after adjusting for operating loss or gain?

KPI: Net Available Capital

Calculation: Net Capital Available = Total Capital Income + Net Available Cash – Lease Payments

Why It Matters: Net Capital Available is ultimately more important than Total Capital Income. NCA is the amount of capital available for investment or debt reduction AFTER any possible operating subsidies as a result of negative Net Available Cash and after covering equipment lease expenses. Operating deficits (negative Net Available Cash) must draw money from capital income decreasing Net Capital Available. Conversely, an operating surplus contributes to the NCA.
 
Clubs with relatively low NCA must determine whether the weakness is caused by low TCI or by cannibalizing from capital to shore up operating deficits (negative Net AC). If the former is the case, implementing or increasing capital dues should be considered. If the latter is the case, focus should be on eliminating the operating deficit. Consistently strong NCA has a cumulative positive effect on a club by allowing continuous investment in the club. Consistently weak NCA has a negative effect over time which manifests as outdated and poorly maintained facilities and amenities.

Just as a clear view of NCA over time is mandatory, so is a capital reserve study. Clubs with a strong strategic plan and strong governance foundation understand the key to long term success is continuously matching Net Capital Available with capital needs year after year. A capital reserve study is the accurate view of the needs without which it is impossible to gauge the capital resource requirements of any club. The chart below shows that fiscal-year 2014 median NCA for all clubs in the CB database is about $631K.

Net_Available_Capital

Key Question #3
Do we produce sufficient capital?

KPI: Available Capital to Operating Revenue Ratio

Calculation: Net Capital Available Ratio = Net Capital Available/Operating Revenue

Why It Matters: The Net Capital Available Ratio is simply the Net Capital Available divided by the club’s operating revenue. Significant analysis has led to the conclusion that a sustainable level of Net Capital requires a Net Capital Available Ratio of approximately 12 percent. While clubs below the 25th percentile on this measure tend to be capital starved a capital reserve study is always necessary to precisely determine a club’s actual capital requirements. The chart below shows that fiscal-year 2014 median is 11 percent for all clubs in the CB database.

Net_Available_Capital_Ratio
To learn more about the Club Benchmarking Executive Dashboard, CLICK HERE

FROM OUR VIDEO LIBRARY: 

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Capital spending club industryA Proactive Approach
to Capital Income

You know it when you see it. A private club facility that looks tired and outdated can leave you with the feeling that the club’s leadership either doesn’t care or can’t afford to make improvements. It’s not an impression anyone wants to make on current or prospective members. Unfortunately for many clubs, in today’s sluggish membership market, the flow of initiation fees typically used to fund capital improvement projects has become extremely inconsistent and unpredictable. A proactive understanding of this strategic aspect of your club’s finances is the key to avoiding the dangerous downward cycle we call Capital Starvation. It starts with three key questions.

Are You Asking the Right Questions?

#1. How much capital does the club need?
It isn’t unusual for clubs to ask “how much do we have in the capital reserve account?” That question usually comes up right after something major breaks—like the irrigation system or the HVAC system. Some clubs take a slightly less reactive approach by attempting to save at a rate that will at least cover depreciation. In a truly proactive approach to capital income, the question becomes “How much do we need and when are we going to need it?” How much money a club needs to address its capital projects is not a mystery. The number can be predicted and many clubs commission a Capital Reserve Study to get a clear picture of their long-term capital needs. Naturally, capital needs vary from club to club.

Chart Shows Data for All Clubs
Capital_Fund_Balance.png

#2. Are you producing enough capital to meet the club’s needs?
About 63 percent of clubs say they have a capital income account, but for roughly 25 percent of those clubs, the balance of the account is zero. You either are or are not currently producing enough capital to keep up with projects as they come along. Remember that in a proactive approach, the focus is on understanding what the club’s needs will be over the long term. How much is “enough” varies from club to club, but for scale, we like to look at capital generation in relation to the club’s total operating revenue. Industry data shows clubs at the median produce an amount equal to about 11 percent of their total operating revenue. At the 25th percentile, the number is 6 percent, which is a position we consider somewhat Capital Starved. About 15 percent of clubs are in the dangerous position of having either zero money for capital improvement or worse, depleting capital funds to support the club’s operational needs.

Net_Available_Capital_Ratio.png

#3. Are the club's sources of capital predictable and consistent?
The three most common sources of capital are Initiation Fees, Capital Dues and Capital Assessments. In larger clubs, surplus from operations can be a significant source of capital income. Smaller clubs tend to lean more heavily on capital dues and capital assessments. Capital Dues represent about 33% of Total Capital Income for the average club.

Sources_of_Club_Capital.png
With no real way to predict how many members will join the club in any given month, depending on initiation fees from new members as a sole source of capital income is risky. To smooth things out, many clubs (about 60 percent) use Capital Dues to serve as a baseline for choppy Capital Income. In that scenario, initiation fees become an additive to capital dues, giving the club a much more reliable and predictable flow of funding for projects, replacements and improvements.

Benefit of Capital Dues

Understanding your club’s capital needs and managing its sources of capital income proactively is the key to avoiding capital starvation and keeping your club on a healthy, sustainable path.

WATCH THE VIDEO
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