The following may be used as a quick barometer to evaluate your club’s financial health:
- Maintain at least a break-even working capital. (e.g., current assets less current liabilities). Most clubs do not have large cash reserves. The reason is that clubs generally operate on a “break even” basis and do not build up such reserves. Clubs would have to raise dues above normal increases to build reserves and members generally do not have the tolerance to pay the incremental increase. At a minimum, working capital should break even.
- Don’t overextend bank debt. Approximately 90% of clubs have some form of bank debt. Most of this debt was obtained to fund a capital project. In many instances a club will undertake a “major” capital project in any 10-year period. Knowing this, club officials should be wary of paying back debt for no more than 15 years. If a club has a loan payback period of 20 years or more, this may put future boards in a hole to finance a project down the road.
- Don’t add capital assessments to an existing bond. Some clubs have added or issued bonds to its members for assessments to fund a capital project. This form is no different than bank debt and creates potential cash flow problems down the road. Many clubs are presently facing such problems from this practice. Once a project is completed it begins to depreciate—and so too should a bond.
- Provide a listing of all late payers (over 90 days) at each board meeting. Clubs should have zero tolerance with respect to late payers and board members should be aware of these delinquent members. Policies should include late fees, posting of members and as a last resort expulsion. The practice of accepting credit cards to satisfy accounts is becoming more prevalent.
- Physical inspection or test counts of inventories. Many dollars are tying up capital in inventories. Periodically someone from the accounting department should test count inventories as well as receipt of goods. This would include food and beverage and greens department inventory of equipment and chemicals. Keep an eye on the balance sheet for increases in inventory. If there is a pattern of increases this maybe an area of concern and warrant monitoring.
- Dues revenue should at least cover payroll and related expenses. As a general rule, dues usually represent 54% of operating revenue. Therefore, payroll and related expenses are also 54% of operating revenue. Additionally, a key performance indicator (KPI) is “dues equivalents.” This is measured simply by dividing dues revenue by the top dues rate. Each year this should be calculated to determine the “real growth” of membership.
- Initiation fees should be used to fund capital projects. As a general rule if initiation fees are properly funding capital, they should cover 50%. Clubs that maintain that scenario and have not suffered a decline in initiation fee revenue are usually well positioned financially. Clubs that don’t usually have weaker balance sheets and more debt. This may be the most important indicator of your club’s financial health.
- Separate capital assessment. As mentioned in item 7, initiation fees should fund 50% of capital expenditures. The remainder comes from members in either operating profits or a dedicated capital assessment. As a result, a club should have a separate dedicated capital assessment and possibly a separate debt assessment to fund debt service.
- Raise dues annually. Yes, probably not the most popular but a fact of life. Costs go up each year for payroll, taxes, insurance, etc., and dues need to cover the increases. Over the past 10 years the average dues increase has been 3% on an annual basis. This may be a best practice.
- Keep benchmarks simple and at 30,000 feet. Board members are busy and do not need to be bogged down with too much granular information. Condon O’Meara McGinty & Donnelly LLP produces and annual study “Club Operating & Management Data” that keeps things simple and relevant. Consider having a professional who is well informed of club operations and the private club industry attend a board meeting and educate members on how clubs operate. If your club has a board retreat this can be an excellent opportunity for this discussion. Request a copy of the report from [email protected].
James J. Hankowski, CPA, is a partner with Condon O’Meara McGinty & Donnelly LLP. He can be reached at 646-438-6206 or [email protected].