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The Club Business Model: Revenue versus Available Cash

Posted by Teri Finan on 5/16/13 1:01 PM

club financeRevenue Realities in Private Clubs

In any business, strategic leadership demands consideration of one essential question: How can we deliver value to our customers in a way that fulfills our financial objectives? The answer to that question shapes the company’s business model. In most cases, it’s fairly simple—a company creates a product and sells it for a price that exceeds the cost of producing it—but in the club industry the financial realities are not quite so straightforward. Private clubs provide a variety of products and services for their members, but not all of those products or services generate revenue, and, of those that do, not all are profitable. The business model for private clubs is unique.

In the February 2013 edition of NCA CONNECT, The National Club Association's monthly e-letter, we explored a traditional revenue and expense view of club finance, which assumes that 100 percent of the revenue produced is available for redistribution into operating costs. Recent in-depth analysis of aggregate industry data has confirmed that while the revenue and expense model may be appropriate in other industries, clubs operate in a very different reality where all revenue is not created equal. Some club revenue is highly burdened with cost (e.g., F&B revenue), while other revenue is pure, unencumbered cash (e.g., dues revenue). Clubs need to adopt a different perspective in order to better understand their actual business model.

This alternate view of club finance, known as the Available Cash Model, moves beyond a traditional revenue view by clearly identifying the money a club actually has to operate. The Available Cash Model addresses the net operating cash generated and the allocation of that cash among a club’s non-revenue generating departments.

Available Cash Model
*(Golf component only applies to clubs with golf)
Operationally, Available Cash is consumed covering the fixed expenses of the club.
Available Cash Model
*(Golf components only apply to clubs with golf)

Understanding the difference between revenue sources and available cash sources is an important step in identifying which facets of a club’s operation are actually impacting its financial health. Board members often come from the business world where financial decisions are based on a traditional view of revenue and expenses. The Available Cash Model addresses sources and uses of cash by netting the major revenue departments to more accurately reflect the business model of a club.

Ultimately, the key difference between Revenue and Available Cash is the F&B operation. Seventy-five percent of the clubs in the country break even or lose money in F&B (the vast majority lose money). The average club derives 30 percent of its operating revenue from F&B, so for 75 percent of clubs, 30 percent of the revenue produces no cash to run the club (in fact it most cases it consumes some cash). Chart 1 below shows the straight revenue view of clubs on the left and the Available Cash Sources view on the right. In the Available Cash Model view, analysis drawn directly from consolidated industry data shows the proportionate sources and uses of cash are nearly identical across all revenue ranges and geographies.

club finance
Click here to enlarge

As you can see in Chart 1, a key benefit of the Available Cash Model is that it puts the financial impact of F&B into context, allowing managers and boards to focus their discussions on more strategic issues. The longstanding debate over F&B profitability is cast in a new light when you consider that, while F&B produces about 30 percent of the revenue in the average club, in 70% of clubs F&B generates no Available Cash. At the average club 3% of the Available Cash is used to subsidize the loss in F&B. For the majority of the clubs in the country, the F&B operation has a minimal financial impact (positive or negative) on the club's finances, suggesting the considerations concerning F&B are best placed on service and quality—not on finances.
Chart 2 shows the national distribution of this ratio based on analysis of industry data from more than 1,000 clubs.
F&B revenue
Click here to enlarge

Over the last several years, many experienced club executives have expressed a clear understanding of the club business model and the limitations of trying to have strategic discussions based on a revenue and expense view of club finance. Their conversations with industry peers have confirmed that F&B performance is relative—for one club, a $150 thousand F&B loss may be insignificant, while another club would be devastated by those results. No matter what type of club these executives run, they know that $1 of food and beverage revenue is, in reality, nowhere near a full, usable dollar from the club’s financial perspective and, at the end of the day, clubs are in the dues business. The Available Cash Model makes it possible to use credible club industry data as a tool to affirm those instincts.

Topics: Club Business Model, Articles

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