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.

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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.

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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 info@clubbenchmarking.com 

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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.

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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.

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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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Whether you're just starting next year's budget or you're further along in the process, benchmarking is a great way to "fact check" your decisions.

Consult high-level reports like the Executive Dashboard for strategic perspective on performance and the sustainability of your financial model. Department-level reports (Food & Beverage, Course Maintenance, Labor etc.) provide a solid, fact-based frame of reference and credible third-party support for your decisions. Club Benchmarking Essentials and Premium plan subscribers can also use the new Financial Forecasting feature to track progress throughout the year and get a look ahead at where those decisions are taking them. 

Fact-Check Key Areas of Your Budget

  • The Dues Engine: Are the club's dues rates and member counts really in balance with its cultural goals? Is the "dues engine" providing sufficient revenue to support future operational needs or is it time for the board to discuss a tune up?
    VIDEO RESOURCE
  • F&B Goals and Results: Are results in the F&B department within industry norms? Are board expectations realistic or in need of adjustment? This is an area where presenting facts based on industry data can be a game-changer. Start by running the Available Cash/KPI report to get the big picture. For a deep dive, run your CB Food & Beverage report.
    VIDEO RESOURCE
  • Course Maintenance Spending: The golf course is sacred turf which makes it an easy target for opinion-driven decisions. It's important to keep an eye on the facts: What percentage of the club's gross profit is going to maintain the golf course and how does that number align with the club's goals and culture? For most clubs, the combined allocation for course maintenance and non-golf sports is 40 percent of gross profit. Again, the high level view is in the Available Cash report. Run the Course Maintenance report for the breakdown.
    VIDEO RESOURCE 
  • Capital Funds: Many clubs burned through capital reserves to fund operational needs in the worst of the downturn, and getting deferred capital projects back on the front burner will be critical to survival for those clubs. Does your club have a viable, sustainable plan for funding capital? Study Capital Generation KPIs in the Executive Dashboard report, and get additional detail in the Balance Sheet-Capital-Debt report.
    VIDEO RESOURCE
  • Payroll and Benefits: Payroll is a private club's largest expense, but the staff is integral to sustaining the unique culture that draws members in and keeps them coming back. Getting it right in this area of your operation is critical and the Payroll to Operating Revenue ratio shines a spotlight on how you're doing. In fact, it's such an important KPI that you'll find it in the Available Cash report, the Executive Dashboard report and in the Labor report. If you need additional detail, specific benchmarks for salaried and hourly positions are available in the Compensation & Benefits section.
    VIDEO RESOURCE

Learn more by watching our recorded webinar: 
Using Benchmarks in the Budget Process

Do you have a question about benchmarking your budget or would you like to learn more about Club Benchmarking? Email us at info@clubbenchmarking.com 

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Operational KPIs Take Emotion Out of the Equation

In Part 1 of our Executive Dashboard series we introduced the Club Benchmarking Executive Dashboard and the section related to Operating Finance KPIs. In Part 2 of the series we explored the “Capital Generation” section of the Executive Dashboard which is comprised of three Key Performance Indicators that correlate directly to a club’s future: Total Available Capital, Net Available Capital and the ratio of Available Capital to Operating Revenue.  

The Key Performance Indicators related to club operations in the third section of the Executive Dashboard address two essential aspects of the delicate balance between member expectations and a club’s financial realities. Undertaking a fact-based assessment of these two extremely sensitive issues, club payroll and food and beverage (F&B) results, can turn emotional boardroom debates into focused business discussions.

Key Question #1
Are we staffed at a level that balances financial results and member service expectations?

KPI: Payroll Ratio

Calculation: Payroll to Operating Revenue Ratio = Total Payroll (including total payroll taxes and benefits)/Operating Revenue

Why it Matters: The Payroll Ratio is the club’s total loaded payroll divided by its operating revenue. This is one of the most important ratios for managers and boards to understand and measure. Ultimately, three critical parameters intersect in this ratio; financial results, operating efficiency and member satisfaction. There is a direct correlation between this ratio and the Gross Margin of every club. Clubs in the upper quartile (above the 75th percentile) tend to generate operating deficits (negative Gross Margin). Clubs in the lower quartile (below the 25th percentile) tend to generate an operating surplus. Clubs between the 25th and 75th percentile tend to hover around operating break-even (zero Net Operating Result). The ratio is statistically "tight,” meaning the farther you fall from the median, the more drastic the differentiating performance of Net Operating Result. As with most indicators, there is no firm right or wrong and this ratio should be looked at in concert with Net Operating Result. For instance, if Net Operating Result is negative and your Payroll Ratio is significantly above the median, reduction of payroll likely needs to be considered (see other Club Benchmarking reports and metrics to diagnose department level labor expenses). On the other hand, if you happen to have a relatively high Payroll Ratio and positive Net Operating Result, it is likely indicative of a higher Gross Profit to Revenue ratio (higher gross margin) which is likely a sustainable model. The chart below shows that in fiscal year 2014, median Payroll Ratio was 55 percent for all clubs in the database.

Club_Payroll_Ratio.jpg

Key Question #2
What is the financial impact of F&B on the club?

KPI: Net F&B to Gross Profit Ratio

Calculation: Net F&B to Gross Profit Ratio = (F&B Profit or Loss/Gross Profit)

NOTE: This calculation requires F&B department revenue and expenses in alignment with Club Benchmarking standardization of F&B accounts.

Why it Matters:  Across the industry, context is often missing in discussions about financial results from F&B. Focusing on straight F&B revenue drives far too many board meetings off course. As a Key Performance Indicator, the ratio of Net F&B to Gross Profit provides a crystal clear view of F&B in the financial context of the overall club by identifying the relative impact of F&B as opposed to simply the result in absolute dollars. To illustrate, consider this: Two clubs might have the exact same dollar loss in F&B, but that same amount may be insignificant to one club while highly impactful to the other. Context is key. If the ratio is -15 percent and your club has an operating deficit as evidenced by negative Net Operating Result, the F&B loss may need to be trimmed. The same -15 percent ratio in a club with an operating surplus as evidenced by positive Net Operating Result may indicate that the subsidy is acceptable and reflective of what are essentially cultural choices the club has made in terms of service expectations and food quality. As a side note, making a substantive impact in F&B results will typically require an adjustment in the F&B labor to revenue ratio. The chart below shows that for fiscal year 2014, about 80 percent of clubs had a negative Net F&B to Gross Profit ratio, meaning they subsidized F&B to some degree. At the median, the ratio was -4 percent.

food and beverage profitability in private clubs

Did you miss the webinar? Watch it in our video library.

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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

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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.

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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.

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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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