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.

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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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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.

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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 

Learn More About Value Creation in Clubs

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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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