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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Finding Common Ground Through the Language of Finance
communication gap.jpgThe most successful private club executives are in a class of their own when it comes hospitality. They are experts at delivering an extraordinary club experience and managing large teams of people, but we’ve only met a handful that would be comfortable calling themselves experts in accounting or finance. While that’s not surprising since the skillsets are so different, it does present a challenge.

In the club boardroom, even strong managers can find themselves at a disadvantage when they come face-to-face with business owners, hedge fund managers, CPAs, private equity managers—people who are extremely well-versed in finance and business.  In that scenario an imbalance of power exists, due in large part to the vast difference between the way finance is discussed in the outside business world and the kind of discussions that take place inside the club boardroom.

It's a serious communication gap and it leaves many managers struggling to explain the club's results in a way that satisfies the board. The language of business is finance and it is certainly the native language of your board. Our goal is to help managers learn to speak the language of finance so they can feel more confident in the boardroom and communicate with their boards more effectively. 

Business people, like those who populate club boardrooms, understand financial modeling and they know the key performance indicators for their own businesses. They know their gross margin; they understand their fixed expenses as a proportion of revenue; they understand return on equity. Business owners explain their business using numbers every single day. For private club managers, knowing the club’s numbers, putting them into context and presenting them with confidence is the key to getting the board’s full attention and advancing their understanding of the club business.

Let’s look at just one example of how numbers and context can be used to address questions and explain an important aspect of the club business:

Explaining Club Payroll: Focus on Data and Context

  • “What are all these people doing here?”
  • “We have way too many people.”
  • “Our payroll is way too high.”

Every manager has heard those statements. They’re uttered every day in clubs across the country, in the boardroom and by members in the 19th hole. Absent data and context, those statements amount to little more than conjecture and responses like “We need all of these people” or “We have a smaller staff than XYZ Club up the road” are equally unproductive and unsatisfying. Thus, the debate continues.

The question boards and managers should be asking (and answering) is this: “Are we staffed at a level that balances the club’s financial results and our member service expectations?” The first step in answering that question and introducing numbers and context to the great payroll debate is to calculate the club’s payroll ratio (total “loaded” payroll as a percentage of total operating revenue).

The chart below shows the Payroll Ratio for clubs with golf using club industry data for fiscal year 2015. As you can see, the median Payroll Ratio for this data set is 56 percent. For half the clubs in the set (those between the 25th percentile and the 75th percentile) the Payroll Ratio ranges from 53 percent to 58 percent. It's a small spread but as you can see from the overlay of median operating profit, the impact of a few points is significant.

The blue dot in the lower quartile (payroll ratio of 49%) represents a real club – one that was, until recently, stuck in the payroll debate. A small contingent of the membership was actively working to convince others that the club had “too many people” and that those people were being paid too much. Clearly, having the number (payroll ratio) and putting it in the context of hundreds of other clubs via a comparison set is powerful. What the chart confirms is that this club has a payroll ratio lower than 88 percent of the other clubs in this data set.

Payroll Ratio FOF.png

In the example above the number was well below the median, but some clubs may find that their Payroll Ratio is at or above the median. Whatever the case, it’s important to remember that the number itself is not a conclusion but rather a starting point and foundation for a fact-based discussion about financial realities, club culture and choices. As an example, adjusting a higher-than-typical Payroll Ratio back toward the median is ultimately a matter of choices. Are members happy with current service levels? Would they be open to a reduction in staffing levels or service hours? Is the financial impact of the Payroll Ratio such that the board must make difficult decisions regardless of the members’ preferences? Without numbers and context, the payroll debate is bound to continue as a contentious guessing game. Armed with numbers and context, managers are equipped to bridge the divide and discuss the club's business with the board in their native tongue—the language of finance.

WATCH THE VIDEO

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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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General Manager’s Perspective

collaboration_square.jpgThe private club industry in the United States has been a work in progress for more than 200 years. Clubs are deeply grounded in history and tradition, which may help to explain why the pace of change tends to be slower than in other industries. The evolution of clubs over the last few decades is apparent in areas such as social and culinary trends, but not as easy to recognize on the business side of things, so we turned to a veteran club management professional to get his perspective.

EXECUTIVE PROFILE:
Jim Butler, CCM, PGA
President & General Manager
Grey Oaks Country Club, Naples, FL

As a college student in 1985, Jim Butler took his first club job as a seasonal employee at The Forest Country Club in Fort Myers, FL. Three decades later, he’s moved through the ranks and navigated some significant challenges along the way: golf course and clubhouse renovations, new golf course construction, a transition from developer to member ownership. He currently manages Grey Oaks Country Club in Naples, FL and its two related property associations. In addition to learning the club management ropes from the bottom up, Butler holds an undergraduate degree in chemistry and a MBA in real estate development and finance.

Q: Over your 30-year career, what changes have you seen in the world of club management?

A: I’d say education and research – those areas have advanced since I started in the club business. Today, the education is available to help managers operate the business enterprise and we understand the business from a holistic point of view as opposed to a silo-view. 

Q: Your degrees are in chemistry, real estate development and finance. How does that translate to your career in club management?

A: I enjoy digging into things to understand how they work and that’s been my approach to the club business. Data and research have always been extremely important to me and that’s particularly true at this club. The leadership, meaning the original owners and my board members, are all very smart, business-oriented people. So are the members. They expect to have fact-based discussions about the club, just as they do in their own business environments. As a manager, I have a vested interest in making sure they get the right kind of data – it needs to be relevant to whatever it is we’re working on. I’ve found that when we incorporate data into the decision-making process, it’s easier to maintain a strategic focus and that moves the club forward.

Q: What kind of information is important to you and your board?

A: We rely on all kinds of research. We use the club’s internal financial and operational data as well as a variety of regional and national market research and club industry data. That information definitely wasn’t as accessible early in my career as it is now. What has been done in the club industry in terms of research over the last decade or so has really been transformative. Groups like McMahon, RSM, Club Benchmarking, and Global Golf Advisors have all played a role in progressing the industry to catch up with the rest of the business world.

Q: In your opinion, what have those groups done to move the industry forward?

A: In terms of having an impact, I’d say each group has brought something game-changing to the table. RSM was really the first to do club-on-club analysis by region and club size. They are an audit partner for a lot of clubs in the Florida chapter and their annual trend reports are highly regarded. It’s a comparison on prior year and year-over-year data that we all use and refer to. The Florida chapter considers them an important part of the local industry.

McMahon Group has broadened their approach to include lifestyle and strategic management and research is a key component of that effort. They’ve been working with research scientists like Dr. Jim Fisher for more than 20 years. When you can take a scientific data-driven approach to something as critical as a facility improvement plan, that’s powerful. Clubs are able to make informed decisions with the data. It’s much harder for emotions and politics to get in the way and derail the process.

Club Benchmarking has introduced a level of sophistication in the way we think about our clubs by framing a business model for the industry and bringing it to my desktop. I can access the analytics easily and I use them on a daily basis. My board and I can dig in and really study our business now and being able to filter our comparison sets allows us to look at it from a variety of different angles.

CB also created a level of education that helps managers who maybe don’t have a background in accounting or finance discuss core concepts with their boards. When a question about something like golf course labor expense can be answered with data, it takes emotion out of the discussion. I know my board appreciates the use of key performance indicators that include standard strategic business terms like gross profit and gross margin. That by itself has been one of the most significant changes I’ve seen.

Global Golf Advisors is focused on the industry at a global level and they recognize the need for the private club sector to think outside traditional boundaries. Henry DeLozier is a tremendous advocate for and teacher of strategic management with an emphasis on utilization of data and research. The fact that we’re seeing those concepts taught at the entry level, as young managers start learning about club finance and eventually working toward their certification is certainly a positive shift.

Q: Where do you think all of this is headed?

A: It’s the private club industry, so maybe change doesn’t always happen as quickly as we’d like it to, but it is happening. We’ve made a lot of progress just in the last decade. Boards and managers are already starting to come together around these business concepts in a way that benefits their clubs and that’s going to improve the overall health and stability of the industry.  

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Charting a New Course for Your Club

Charting_Your_Course.pngEvery business charts the course for the coming year through the annual budget process, and private clubs are no exception. For many, the experience can be drawn out, difficult and fraught with struggles over tactical items, but we believe we’re seeing a positive change on the horizon as more clubs recognize the need for a strategic, fact-based approach to budgeting.

Try to imagine going into the boardroom to present next year’s budget and walking back out, mission accomplished, in under an hour. That’s the inspiration for a story we’d like to share about a club where a shift toward data-driven, strategic decision making has transformed the budget process. For the sake of anonymity, we’ll call it Anytown Club.

The Background 
By industry standards, Anytown is a relatively small club – in the bottom 25 percent in terms of annual operating revenue with less than 300 members. The board is made up of high-powered individuals; a few with names you might recognize, many holding memberships in a dozen or more clubs and all with an equal supply of business acumen and opinions. On a small ship, every move makes a ripple and the GM of this club (we’ll call him John) is well aware of how quickly things can veer off course when emotion seeps into the decision-making process.

Historically, John would prepare his annual budget and deliver it to the finance committee prefaced by several pages of notes on individual line-items he thought might require additional clarification. The approach is not unusual and clubs using it know the end result can sometimes be budget discussions that digress down into the tactical line-item details. Even though a manager clearly understands the relationship between the budget and the club’s overall strategic objectives, the board doesn't always grasp the same high-level perspective.

The wind and the waves are always on the side of the ablest navigator.
Edmund Gibbon

The Change 
After joining Club Benchmarking in 2014, John made an important change to his budget process. He replaced the tactical, line-item notes he'd been using with eight or nine charts from his Club Benchmarking Executive Dashboard reports. The charts showed industry norms for high level key performance indicators and the club’s position on each curve was clearly marked. He chose carefully, focusing on strategic ratios like gross margin, dues and capital.

The finance committee spent some time studying the charts and asked just a few questions about the source of the data and the anticipated effect of the proposed budget on their current position. Satisfied with what they heard, they signed off. The meeting was over and done in 45 minutes. The following year, James repeated the process with identical results.

The Impact
For John and his club, that one simple change has had a significant impact that goes beyond the sheer beauty of a quick meeting. Bringing data to the table introduced the board to a more strategic perspective on their club. The standard business terminology and measures presented were relevant and meaningful to them and John’s strategic approach to the budget process made it clear that he has a solid grasp on the ongoing health of the business that is their club.

Heading into the 2017 fiscal year, there are a number of changes in the mix for Anytown Club, including a dues increase. In a recent conversation John told us that in light of the decisions to be made, the data will be more important than ever, for him and for the board.  For more on how to use benchmarks in the budget process, watch the video.

benchmark_club_budget.png

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Mainstream Business Practices Provide
Needed Perspective for the Private Club Industry   

Armies of people study the dynamics of industries across the world. Bankers, investors, competitors, consultants—searching for clarity and insight on the factors that separate market winners from losers. Analysis of industry dynamics in every market is unceasing and those with the best information are poised to win.

Financial models are a central element of understanding both industry dynamics and the performance of an individual business within the market in terms of its financial sustainability and long-term success. Such models exist to unearth and convey the key drivers of financial success. Investors, consultants and companies spend significant money developing financial models so they can understand how revenue, costs, margins, overhead, leverage and other financial metrics impact profitability and growth. The quest for fact-based insight is a direct and necessary response to unyielding competition and business challenges. The private club industry can’t escape this reality.

covey.png

Financial Sustainability

What does “financial sustainability” mean for a club? Think of it this way: If your current operational results and capital generation were continued for the foreseeable future, would the club be able to provide adequate funding for all amenities and member experience, and be able to re-invest back in the club every year to replace depreciating assets and facilities per a documented capital reserve study? As you consider the question, remember to maintain a clear separation of funds: No stealing of capital to patch up operational deficits and no consumption of cash reserves that were not part of a capital plan.

In order for a model to be effective in measuring and even predicting financial sustainability, it must be comprised of indicators that are:

  1. Correlated to operational results and capital generation
  2. Relatively easy to measure
  3. Impacted by choices and decisions made by management and board
  4. Able to be benchmarked

The Financial Insight Model for Clubs

For measures that correlate to operational results, we can refer to any Business Management 101 course or the Yahoo Finance page, with a bit of customization for the club industry. Historically clubs have eschewed measuring themselves like a business, but like any business, clubs have revenue, direct costs of revenue (COGS), resulting gross profit/gross margin, etc. Just as these measures are critical to industries such as automobile manufacturing or software, they are also critical to the club industry. We call our club model the Financial Insight Model (FIM). Please note that while data shown in this article is for clubs with golf, the model applies equally to City, Athletic, Yacht, etc. clubs with only minor variation.

Core Concepts of the Financial Insight Model

  1. Separation of operating and capital monies and accounting for separate bottom line operating and capital results is a necessity.
  2. All clubs raise and spend money on common activities and items regardless of geographic location, size or level of service. This “law of commonality” has been proven by the data collected by Club Benchmarking.
  3. Recognizing a set of common departments present in every club leads to identification of direct costs (expenses directly tied to producing revenue), variable costs (expenses directly tied to sales volume) and fixed and independent costs (essentially overhead expenses independent of sales volume or department).

To understand how a club uses its gross profit, we present the information in a pie chart which can be used to answer several key questions: How is our spending divided between overhead and amenities? What is our spending split across amenities? What do those distributions tell us about the club’s culture and priorities?

AUTHOR’S NOTE: The Financial Insight Model does not displace the Uniform System of Financial Reporting for Clubs (USFRC) which is the accounting standard in the club industry. Our model leverages the USFRC. We are presenting a business analysis and financial model, not an accounting standard.

The goal of the Financial Insight Model is to view clubs as businesses. Visit Yahoo Finance, Google Finance or any financial website and type in any stock ticker symbol (regardless of company or industry) and you will get a very simple, common view of an income statement like that shown in the Table below.

yahoo_finance_example.png

This common view, at a glance, reports on the operational health of a particular company or business. Understanding the financial model of clubs requires a similar common view. Each club inventing their own fluid view that changes over time to suit the preferences of the current board defies all business logic and common practice. The premise behind the presentation of a common income statement on financial websites is simple: Identify the revenue, identify and calculate the direct costs of producing the given revenue, identify the fixed expenses necessary to run the business, identify the costs of financing the business (interest) and finally, identify and calculate the money the business drops to the bottom line. In a given industry, companies produce and sell a common product or service in a basically similar manner. As a result, there tends to be convergence of gross margin and operating margin across a given industry.

club_finance.png

The Financial Insight Model Considers These Specific Measures:

Operating Ledger

  • Operating Revenue
  • Gross Profit
  • Gross Margin
  • Fixed Expenses
  • Operating Result
  • Operating Margin

Capital Ledger

  • Carryover Operating Result (can be + or -)
  • Capital Income
  • Net Available Capital (net of operating result and lease payments)
  • Net Available Capital Ratio (to revenue)

Additionally, the Model includes two key operational measures:

  • Dues Ratio (dues revenue as a percentage of operating revenue)
  • Net F&B Ratio (net F&B result as a percentage of gross profit)

In follow-on articles we will discuss the Operating Ledger and Capital Ledger measures and why they are critical to a club’s Financial Sustainability.

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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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Club KPIs

Questions are the Key

You’ve heard the phrase “measure what matters,”  but how do you decide what really matters for your club? While the answer may vary from club to club, the goal is still the same—to identify a set of measures that can be used to accurately assess, manage and predict financial and operational performance. Deciding what to measure begins by figuring out what you need to know about your club. In Einstein’s words, you start by “determining the proper questions to ask.”

Through extensive study of club industry data, we have identified a set of key questions that correlate directly to the financial and operational health of a club and developed specific metrics and ratios that will answer those questions. The resulting standardized Executive Dashboard of Key Performance Indicators for the club industry establishes a common framework and common language for “measuring what matters.” The intent of the Executive Dashboard is to provide clubs with a properly focused set of metrics that help Boards concentrate on what does matter and, more importantly, keeps them from being distracted by what does not matter.

The Executive Dashboard identifies KPIs in five categories: Operating Finance KPIs; Capital Generation KPIs; Operational KPIs; Membership KPIs, and Debt KPIs. We’ll cover all five categories in a series of posts. This first installment will look at the four key questions and Key Performance Indicators related to Operating Finance.

Key Question #1
How much money is available to cover the club's fixed operating expenses?

KPI: Gross Profit (aka Available Cash)

Calculation: Membership Dues + (F&B Net = F&B Rev. – F&B Exp.) + (Rooms Net = Rooms Rev. – Rooms Exp.) + (Other Net = Other Op. Rev. – Other Op. Exp.) + (Golf Ops Rev. – (Golf Ops Exp. – Golf Ops Labor)) + (Yachting Net = Yachting Rev. – Yachting Exp.) + Ancillary Sports and Recreation Revenue

Relevance: The importance of understanding Available Cash cannot be overemphasized. Dues revenue is by far the dominating contributor to AC. A relatively high or low level of Available Cash is most often correlated to the mix of dues and food & beverage revenue. As in any business, lower gross profit (Available Cash) tends to result in a weaker operating bottom line, and higher gross profit (Available Cash) tends to result in a stronger operating bottom line.  Chart 1 below shows Available Cash for the median club in the CB database was $3.6M in fiscal year 2014.

(Click to enlarge)Gross Profit private club

Key Question #2
Does our revenue mix produce adequate margin?

KPI: Gross Margin (Available Cash to Operating Revenue Ratio) 

Calculation: Available Cash Ratio = Available Cash/Operating Revenue

Relevance: Variation in the AC Ratio can usually be explained by observing the mix of dues revenue and F&B revenue. Clubs with a high AC ratio tend to have a larger proportion of operating revenue from dues and lower proportion from F&B. Clubs with lower AC Ratios have the opposite mix and those clubs typically struggle to achieve operating breakeven (see Net Available Cash below) because there is not enough Available Cash to cover fixed expenses. By itself, a lower AC Ratio does not necessarily identify a problem, but coupled with a negative Net Available Cash it is likely indicative of a weak dues engine. Chart 2 below shows the median ratio for all clubs in the CB database was 59 percent fiscal year 2014.

(Click to enlarge)gross margin private club

Key Question #3
Is the dues component of our revenue suitable?

KPI: Membership Dues to Revenue Ratio

Calculation: Membership Dues Ratio = Membership Dues/Operating Revenue

Relevance: Dues revenue is THE financial driver in clubs and this KPI assesses what proportion of your club’s operating revenue is driven by dues (a club’s most profitable revenue). A low Membership Dues ratio cannot be ignored and deserves intense focus. A low MD Ratio often occurs where member counts (FMEs) are low and/or dues per member are low. Chart 3 below shows the median MD Ratio was 49 percent for all clubs in the CB database in fiscal year 2014.

(Click to enlarge)
dues revenue private club

Key Question #4
Do we produce enough money to fund operations? Do operations draw money from or produce money for capital?

KPI: Operating Bottom Line (Net Available Cash)

Calculation: Net Available Cash = Available Cash – Course Maintenance Expense – G&A Expenses – Building Maintenance and Operation Expense – Sports and Recreation Expense – Golf Operations Labor – Fixed Charges (Fixed operating expenses exclude any expenses related to leases which are considered a capital expense.)

Relevance:  Ideally, Net Available Cash will be break-even or positive since any deficits must be covered by subsidies that flow from the capital side of the ledger. Nearly 80 percent of a club’s Available Cash comes from dues revenue, so a negative result in Net AC is often the result of dues revenue being too low to support expenditures. Another possible cause is that fixed expenses are too high. The key is to understand the operating bottom line result as it stands, without any shifting of capital income. Chart 1 above shows median Net Available Cash for all clubs in the CB database was $53K for fiscal year 2014.

CLICK HERE to download a sample copy of the Executive Dashboard Report

WATCH THE VIDEO: "INTRODUCTION TO THE EXECUTIVE DASHBOARD"

The Executive Dashboard identifies KPIs in five categories: Operating Finance KPIs; Capital Generation KPIs; Operational KPIs; Membership KPIs, and Debt KPIs. We’ll cover all five categories in this series. NEXT IN THE SERIES: CAPITAL KPIs

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Better Governance Begins with Board Education 

Board_Orientation.pngOne of the most unusual aspects of life as a professional club manager is the idea that you get a new boss every year or two thanks to board turnover. Over two or three decades in the business, you could potentially work for dozens of club presidents and hundreds of different board members. Many of those bosses will be strong, positive leaders, some will be neutral influences, and then there are the others—the agenda-driven or opinion-driven presidents or board members who leave you questioning your career choice and fighting to keep the club healthy and on track until the next election.

Frequent turnover of a club's board can be tough on the management team and it can be even more hazardous to the long-term health of the club. Without a consistent framework for governance that replaces opinion with fact and relies on data rather than emotion in the decision-making process, it’s very easy for clubs to lose sight of long term plans and drift away from their original mission over time.

Laying the groundwork for a standard of governance that will withstand time and leadership transitions isn’t easy, but it is possible. It starts with board education and it requires consistency, patience and a plan.

The first step in a proactive approach to strengthening your club’s governance model is to take a good look at the information you’re providing for board members at the beginning of their terms. Consider that each of these successful individuals brings with them a deep knowledge of their own particular business. While that unique perspective is an important part of their value as a board member, it is imperative for them to understand from the very first meeting that unless they happen to be a private club manager, the model of their business is not the same as the club business model. 

Typical board orientations tend to focus on club financials, board policies, long-range plans etc. Ideally, establishing a common understanding of key facts and what matters (or doesn't) in terms of financial and operational success would start right there—as part of the orientation process. Imagine what might be accomplished in future board meetings if every board member started his or her term with a solid grasp of even just a few essential facts about the club business model. For example, the difference between and significance of dues revenue and food and beverage (F&B) revenue. The following are examples of just a few core concepts that could serve as a starting point for your next board orientation:

1. Food & Beverage is an Amenity, Not a Profit Center

While it is unquestionably one of THE most important amenities in any club, F&B does not function as a profit center. It’s a concept that most boards have a hard time embracing, but we’ve found that graphic illustrations like the chart below can be very helpful. The pie on the left (which reflects real data from more than 1,000 clubs) represents the sources of a club's revenue. The orange slice (29 percent) represents revenue coming from F&B. In the pie on the right, we net out revenue-producing departments to look at sources of the club's gross profit and the F&B slice disappears completely. According to our data, about 70 percent of clubs in the United States subsidize their F&B operations: in the other 30 percent, F&B represents only a tiny percentage of the money the club has available to fund to its operate. For more on club F&B revenue, visit www.clubbenchmarking.com/food-and-beverage.

Revenue_and_Gross_Profic_Breakout.png

2. Clubs are in the Dues Business

This is an essential concept, and yet it's one that some board members will spend their entire tenure trying to avoid. Club industry data in the chart above shows that dues revenue makes up nearly 50 percent of all the revenue a club produces. The profit margin on that dues revenue is 100 percent. When you net out all the revenue producing departments including F&B, money from dues represents 73 percent of the remaining dollars available to cover the club's fixed expenses (the club's gross profit). Every board member should be very clear on the idea that achieving and maintaining a healthy flow of dues revenue is a top priority and the key to the club's long-term financial sustainability.

3. Dues Rate and Member Counts Go Hand-In-Hand

Dues_Engine.pngHealthy dues revenue requires a proper balance of dues rate and member counts. We call that combination the “Dues Engine.” and having discussions in the boardroom about either dues rates or member count in isolation blurs the critical relationship between both "cylinders" of the engine. You’ll find a video that lays out the concept of the Dues Engine in our video library at www.clubbenchmarking.com/club-dues

Laying the groundwork for an effective and enduring governance model is a solid investment in the future of your club, and it begins with a committment to fact-based board education. 

We presented the idea of simple facts as a foundation for board orientations during a webinar in 2014.
That recorded session expands on this article and it is available at www.clubbenchmarking.com/board-orientation 

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navigate_club_board_educationBeware of Dragons...

Fair warning: The case study you’re about to read may be disturbing for even the most seasoned club leader. Any resemblance between this story and your worst nightmare is purely coincidental.

In medieval times, elaborate drawings of fierce dragons were used to mark the boundary between the known world and whatever certain danger might lurk beyond. Those who dared to defy conventional wisdom and venture past those limits were labeled as fools or heretics destined for disaster. In the modern world, business leaders are often called upon to face down “dragons” and navigate through unfamiliar territory in the process of executing a critical initiative or bold strategic plan. Unfortunately, and far too often in the club world, boardroom politics and personal agendas can block crucial information and sabotage the clear fact-based decision making process necessary to push on toward success. The belief that club food and beverage can be relied on as cash generating profit center rather than an amenity for members is arguably the club industry’s most notorious and persistent dragon. The real case below highlights what happens when chasing F&B business is placed above making sure the club’s dues engine is healthy.

Club Background: This cautionary tale begins in the boardroom of a long-established country club that has been part of its local community for nearly one hundred years. After a lawsuit almost a decade ago, the club was still struggling to regain its financial footing under the weight of considerable debt. The suit and subsequent economic downturn caused member counts to drop significantly and club leaders were anxious to reverse the tide and expedite the recovery process. In an effort to clearly identify the club’s strengths and opportunities for improvement, the club’s GM became a Club Benchmarking subscriber. Working closely with CB Co-Founder & COO, Russ Conde, they completed the data entry process and analyzed a variety of standard graphical reports in order to develop a plan of action.

As you will see in the detail below, the data clearly showed that through creativity and cost control the GM was actually patching up weak dues revenue with significant profit in F&B. They were taking steps that would not be acceptable in most clubs, but the club was generating F&B profit equivalent to dues from 35 members. The F&B performance was in the 95th percentile—clearly not much room for improvement there—and yet the club’s board remained convinced (erroneously) that the solution to their financial woes lay in even more F&B banquet revenue and more profitability from F&B. In reality, the board was out to slay a dragon, but unfortunately, they wanted to slay a dragon that had long ago been tamed. The true root of the problem—membership count—was obscured by the board’s singular focus on F&B as the answer to the club’s financial pressure.

Benchmarking Process: The benchmarking process began by running the Available Cash and Key Performance Indicator Report, Food & Beverage Report and Membership Report using the club’s data. Click here to view a sample Club Benchmarking report

  • Available Cash/KPI Report Findings: As the club’s management team suspected, the Available Cash & Key Performance Indicator report showed the club’s Net Available Cash was near break-even and at the 47th percentile nationally. The pie chart illustrating the clubs proportionate sources of cash revealed several anomalies, most notably the fact that the proportion of cash coming from membership dues was 25 percentage points below national norms (53 percent versus 78 percent as a national norm) and that F&B net was contributing a significant proportion (17 percent) to Available Cash with the national norm being a consumption of 3 percent of Available Cash. Clearly F&B outperformance was helping to mitigate insufficient dues revenue.

  • F&B Report Findings – The CB benchmark data clearly showed the club’s F&B operation was performing well beyond national norms from a financial perspective. F&B profitability was at the 95th percentile. Essentially, from a financial perspective, this club’s F&B department was operating as efficiently as possible. While 75 percent of all clubs consume operating cash to subsidize F&B, this club was producing 17 percent of the cash to run the club from F&B. Those results were attributable, at least in part, to extremely low labor costs in that department. F&B labor was 30 percent of F&B revenue (literally the 1st percentile) in contrast to the national median of 62 percent. The club’s F&B revenue per F&B FTE (full time equivalent employee) was very high—the 73rd percentile—which indicates a lean workforce producing very strong results. Management relied on a variety of measures to achieve those results including as-needed, part time college student hires.

  • Membership Report Findings – The club’s member count relative to clubs of similar size was very low (the 13th percentile) and the member turnover rate was very high—13 percent versus the national median of 5 percent. The initiation fee had been eliminated (national median for an unrestricted individual member in 2011 was $16,000), and the club’s investment in member marketing was lower than 75 percent of all other clubs in the country. Full Member Equivalent Count (total dues revenue divided by full member dues rate) was at the fourth percentile nationally, meaning the normalized number of members at the club was less than 96 out of 100 clubs in the country.

Data-Driven Results: This is not a typical CB case study. There are countless others where use of CB has had positive impact on a club.  This is a story about lost opportunity.

Based on the CB reports, it was obvious that the club’s business model was seriously out of balance. The data clearly showed that the most urgent need was to revitalize the membership base and fee structures, but the board’s obsessive focus on low-margin F&B as a solution to the club’s financial woes was draining resources away from efforts to attract and retain members. The board should have been commending the management team for keeping the operational results whole via F&B outperformance, but instead they were hounding the team for more F&B. Despite the overwhelming evidence, and the best efforts of the GM, the board chose not to accept the facts and instead stayed mired in the F&B über alles mindset.

This club’s board lost sight of their fiduciary obligation to utilize facts in their stewardship of the club, ignored the data available to them through their CB membership and declined an offer from the Club Benchmarking CEO and COO to provide a free on-site presentation and interpretation of the club’s benchmarking reports. They held fast to their own perspective on the club’s financial challenges, adamant that weak F&B performance was to blame despite an abundance of data to the contrary. They drew swords over expenses that CB reports showed were well below national norms including executive salaries, total labor expenses and a series of other critical expense benchmarks.

As you may have guessed, during this battle key members of the club’s management team, including the GM, were asked to leave. The board was intent on replacing them with “better F&B people with better skill sets” in order to book more banquets, essentially guaranteeing that the bulk of future management effort will be directed to F&B rather than membership growth. The prospects for the club’s eventual recovery seem in doubt absent a dramatic shift in the board’s internal dynamics and a willingness to govern based on fact rather than opinion or agenda. It’s a frightening story to be sure, and one that we hope will serve as a reminder of what can go wrong when opinions, guesswork and personal agendas compromise the ability of a club’s leadership team to rely on credible facts and data in the execution of its duties.

There are important lessons to be learned on two fronts in this case study…

Club Management: Be proactive in using data to help the board understand the business model of a private club and what drives that model. This takes time but it can change the dynamics and results of the club and set a proper foundation for board vs. club management roles and responsibilities. Taking a passive approach to board education increases the likelihood that a "nightmare board" will eventually find you. If you are facing a situation similar to the one described in this case study and would like to brainstorm with our team about the best way to get through to the board, please don’t hesitate to contact us.

Governance: Seek knowledge about the club industry and the business model of your club. Ask questions more often than you give answers. Don’t accept "because I just know" from fellow board members. Push for facts and data as you would in your own business. The tools exist for every board in this industry to be properly informed and thoroughly equipped for success.

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