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 info@clubbenchmarking.com 

Learn More About Value Creation in Clubs

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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
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#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.

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#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.

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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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Diagnosing the Health of Your Dues Engine Engine.png

Cars, college tuition, clothing, groceries… the cost of most consumer items goes up over time. Still, many private club boards cling to the notion that somehow member dues must be an exception to the rule. For many clubs, resistance to dues increases is strong and no board member wants to be the first to broach the subject. It’s not unusual for club boards to kick the dues issue down the road to avoid controversy and discord, but we know that eventually the subject must be addressed if a club is to remain financially viable. Taking a fact-based approach is a good way to turn this emotionally charged issue into a strategic discussion. So how do you get that conversation started?

Lay the Groundwork
The importance of achieving a healthy balance of dues rate and member count cannot be understated. There is no question that clubs are “in the dues business.” Club industry data proves that dues revenue is the key financial driver for a private club, representing roughly 80 percent of the money a club uses to support its operation regardless of size or geographic location. Analysis of that data over the last several years confirms that in this post-recession climate, nearly every club is currently experiencing some pressure on dues revenue. In many cases that pressure could be considered severe.

We like to picture a club’s dues revenue as a two cylinder engine. One cylinder represents the number of members paying dues while the other cylinder represents how much members pay to belong. An efficient dues engine, meaning one that produces adequate revenue for the club to operate, is a result of both cylinders working in harmony; an adequate number of members paying an adequate amount to belong to the club. A weak dues engine, meaning one that is producing insufficient dues revenue, is the result of too few members, dues levels that are set too low or in the worst case scenario, both. 

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Dispel the Myths
Understanding and managing the dues engine effectively requires club leaders to reject the long-held notion that there is value in comparing dues as a stand-alone item with other clubs in their local area. The inclination to call another club and ask what their members pay for dues (or how much they plan to increase them) is fueled by an assumption that the amount a given club can or should charge is directly affected by the amount other clubs in a local geographic area charge. While in certain specific situations there is competition between clubs, the much more common occurrence is that clubs charge for dues in accordance with their mission: Is the club’s goal to be upscale and exclusive, family friendly and affordable or something else entirely?

Even more critical to the equation is how many members you have. There are clubs that charge a relatively high level of dues for a basic level of service but consistently run at an operating deficit. On the other hand, there are clubs that charge a relatively low level of dues, offer world class services and amenities and produce a significant operating surplus. The difference between the two clubs in that example is that the club with the high dues and low results has a low member count while the other club, the one that charges less and produces more, has a large number of members. Ultimately, what you can or should charge for dues has nothing to do with what the club up the road is doing. Decisions about dues should take into consideration your club's current rates, member counts and culture.

Get the Facts
Basing decisions on one-off anecdotal comparisons with a small handful of clubs is misleading and frequently triggers frustrating, emotionally charged, unproductive discussions in the boardroom. Benchmarking is a fact-based method for determining whether or not your dues and member count are balanced at a level that will support your club’s long-term financial health. Diagnosing your club's dues engine begins with studying the data. Is your member count significantly higher (or lower) than the national median? How does it look relative to clubs with similar total operating revenue and amenities? Where are you on the dues-level spectrum? Once you have the facts in hand, you and your board will be much better equipped to begin a thoughtful, strategic and necessary discussion about what’s right for your club. Watch the video below for an in-depth look at dues engine analysis.
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Three Benchmarks that Define Your Club's Value Proposition

Club BenchmarkingValue, as in the value of a product or service, is a subjective concept that can be difficult to measure. When it comes to determining the value of membership in a private club, there are two forces at play. Members have certain expectations about what they will get in return for the dues they pay, and the club as a business must establish a dues level that makes it financially reasonable to meet those expectations. Finding your way to the dues level that will provide the necessary balance between happy members and the club’s long-term financial health begins with a look at three key benchmarks: Full Member Equivalents (FME), Dues per FME and Net Available Cash.

The ABCs of FMEs: Standardization of data is the only way to ensure true apples-to-apples comparisons. In order to create uniformity in the way the club industry studies and discusses member counts, Club Benchmarking uses a unit of measure called the “Full Member Equivalent” which is calculated by dividing the club’s total dues revenue by the amount a full member pays in dues per year. Nationally, the median for all clubs is 461 FMEs and for 50 percent of clubs in the country the number of FMEs is between 320 (25th percentile) and 740 (75th percentile).

Full Member Dues: This metric is the amount a full member pays. Club Benchmarking has developed very specific member scenarios for the six most common and critical member categories that exist at nearly every club (Full Family, Individual, Social, Senior, Junior and Non-Resident). Each of the six scenarios, or “cases,” is presented in a very specific manner to drive clear, “apples to apples” comparison. The Full Member Dues metric covers the Full Membership case. 

Net Available Cash: The Available Cash Model, one of the most critical financial measures in the club industry, is a standardized framework for assessing a club’s financial performance. Understanding your club's position from the perspective of Available Cash is vital.

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(Click Chart to Enlarge Image)

According to that model, Available Cash is defined as the standard measure of the cash a club generates to cover expenses related to non-revenue producing departments (course maintenance, G&A, building operations, etc.) and fixed expenses (as defined by the USFRC) which include real estate taxes, insurance, property and liability insurance and interest.

Net Available Cash is the standardized operating bottom line after all operating expenses have been covered. Net AC can be positive (operating surplus), negative (operating deficit), or break-even (as is common in non-profit private clubs). Net AC tells us whether the club’s operating expenses are being supported by operating revenue or subsidized by dipping into capital income or reserves. The amount of Available Cash, Sources and Net Available Cash are key performance indicators that shed significant light on the operational model of a club.

According to 2012 Club Benchmarking data, approximately 40 percent of all clubs are running a deficit in Net Available Cash requiring subsidies from capital funds (income from initiation fees, capital dues and/or assessments) or reserves.

The Value Proposition: While separately, each of the three metrics is interesting, together they tell the story of a club’s value proposition. Obviously a club with higher than the norm FMEs (above the median) and lower than the norm on dues (below the median) and a clear operating surplus or break even is a club with a strong value proposition. 

In contrast, a club with lower than the norm FMEs, higher than the norm dues and an operating deficit is trying to balance the club’s financial needs on the backs of too few members. The lack of liquidity (as manifested by negative net available cash) means capital reserves or capital income must be tapped for the club to meet its obligations. The value proposition at this club is in a precarious position. 

There are other clear scenarios that become apparent as well using the combination of these metrics; the club with “exclusivity” as the value proposition, and the club with “historical legacy” as the value proposition are examples.

A corollary to this entire view point is that comparing just one of the metrics, dues only for example, is really not productive. Comparing dues between clubs without understanding member count or the operating bottom line is a waste of time because the number is meaningless unless it is put in context. There are clubs that charge $7,000 per year in dues, offer world class amenities and services and are flush with cash. Others charge $12,000 per year in dues and offer pedestrian services and amenities but they are about to go out of business. The key distinguishing variable is the NUMBER of MEMBERS. Without that, looking at only dues is of no value.

(Originally published in the CMAA "Back of the House" blog.)


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diagnosis_senioritisIs your "Senior" membership category out of balance? How are fees and policies related to that category impacting the club's financial health?


CB Member Resources:
In this article we'll be looking closely at two slides: Senior Members and Senior Membership Count as a Percentage of Full Membership Count. If you are a Club Benchmarking subscriber, you may want to LOGIN to your CB account now and run the Membership Report as the first step in deciding whether your club might have "Senioritis."

Benchmark Study: In the United States, the Baby Boomer generation’s sheer size is affecting the economy in a number of ways. Boomers were born from 1947 to 1964, the eldest (the tip of the iceberg) will be 67 this year. The US Census Bureau estimates that in 2011, 13.3 percent of the country’s population was at least 65 years of age or older and reports from various agencies have confirmed that Social Security, pension programs and the healthcare system are all feeling the pressure. It could be time to take a closer look at what that growing pool of “senior members” is doing to the financial health of your club.

Most clubs offer a senior membership category which includes reduced dues. The logic behind it is good – longtime members should be rewarded for their loyalty and a discount makes sense given retirees live on fixed incomes that don’t allow for continued payment of full dues. At some clubs, older members qualifying for the senior category have to relinquish their voting privileges in exchange for that discount. Again, the logic is solid. Many clubs have learned the hard way that older members can be disinclined to approve progressive capital improvement plans focused on younger members. 

So if senior memberships reward loyalty and allow the club to remain relevant for the next generation, what’s the problem? It’s a relatively silent condition we’ll call “Senioritis,” and aggregated club industry data suggests that if not properly understood and managed it may take a toll on your club’s financial performance. To understand whether a club fits the diagnosis, let's start by doing the math. The Club Benchmarking (CB) chart below offers a closer look at data on Senior Membership Count. In 2011, the median across the club industry was 32 members in the senior category while at the 75th percentile the count leaps to 78 or more senior members. 

CHART 1

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The next chart (below) was recently added to the CB Membership Report to illustrate the ratio of Senior Members to Full Unrestricted Members. This ratio can be the key to understanding whether your club is suffering from “senioritis.” In 2011, the median for all clubs was a ratio of 12 percent. For clubs at or above the 75th percentile the ratio of seniors to members paying full dues was 20 percent or more. A lower ratio is better since full members contribute more dues revenue. The most obvious way to improve the ratio is to increase the number of full members, but as we’ve seen over the last five years that may be more easily said than done.

CHART 2

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Once a club has used CB membership data to understand their position on the industry curve, it’s time to take action. Preventing or curing “senioritis” begins with a review of senior membership policies to evaluate the point at which the associated dues reduction kicks in. Qualification for senior membership is typically an equation based on a combination of the member’s age and how long they’ve been a member of the club. As an example, if a club uses a “Rule of 85” to determine senior status, a 65 year old member who joined the club in his or her early 40s would qualify. According to 2011 CB data, at the median the proportion of members in the 61-80 age group was 34 percent (half of clubs had a higher proportion in that age group and half had a lower proportion). For 25 percent of clubs, 46 percent or more of their members were in the 61-80 age group. 

Raising dues for seniors is unpopular, but some clubs have successfully implemented a gradual adjustment of the equation used to determine eligibility. For example, moving toward a more acceptable combined age and membership term of 95 or 100 over the course of several years. Current senior members would be “grandfathered” in.

Another factor that can make a club more susceptible to “senioritis” is a membership cap. If seniors are included in the total and that cap is set too low to account for the influx of baby boomers, the club probably already has symptoms including a demographic bulge, a predominance of gray hair in the dining room and subpar financial performance. Raising the cap and/or removing seniors from the calculation will allow for growth in membership categories where dues are higher.

When a club’s ratio of senior members to full unrestricted members is too high financial health may suffer, but simply arguing for a change in senior membership policy because it “seems like” the club population is shifting is not enough. Use your club’s Senior Member to Full Member benchmark relative to a peer set or the industry aggregate to identify a ratio that will support financial health while still showing appreciation for older members. Once you’ve established that goal, the board can make strategic decisions about what policy changes or other adjustments might be necessary.

*This article was originally published in the statistics section of CMAA's Back of the House Blog.

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