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Zero-based Capital Budgeting

Florida Yacht Club, our featured club in this issue, is a tremendous example of a club’s leaders embracing a zero-based approach to capital budgeting and taking the necessary steps to set their club on a path of continuous improvement. I was first introduced to the concept of zero-based budgeting as a student in hospitality school. Per the name, it means starting a budget from scratch or zero as opposed to starting with the previous period’s budget and adjusting. This concept allows decision makers to constantly look at the business with fresh eyes, free from the limitations of past assumptions or targets. In the course of my 20-year management career, I’ve been involved in zero-based operational budgeting on many occasions.

The exercise begins with identifying the desired level of member experience, the expenses associated with delivering that experience and a reasonable forecast of non-dues revenue that is not overly reliant on that source. The difference between what is required to deliver the desired experience and the reasonable forecast of non-dues revenue defines the operating dues needed to produce the desired financial outcome, which, in most cases, is break-even. This approach to operational budgeting is consistent throughout the industry, but many clubs mistakenly define the desired dues rate ahead of the reality of actually funding the club’s mission.

Through careful analysis of the business models of approximately 1,000 private clubs annually, Club Benchmarking has seen that unlike operational budgets, the approach to funding capital budgets varies widely from club to club. There are many different approaches clubs take to accurately define their capital needs and decide which funding levers will be used to meet those needs. For benchmarking purposes, it is reasonable to look at operating dues and assume business models are similar from club to club. The same cannot be said about benchmarking capital dues and initiation fees—many factors need to be considered when making such an analysis. Does the club have an accurate picture of its capital needs? Does the club rely on membership assessments every five to seven years? How much existing debt does the club need to service?

This brings us to the concept of zero-based capital budgeting, which is an exercise that will help define how a club can properly fund its complete footprint for years to come. It’s not a simple exercise, but if club leaders are to take on their role as fiduciaries to protect and grow the club’s assets seriously, it is well worth the investment of time and effort. The capital budget should look out many years (we recommend 10) to account for annual variations in the capital replacement schedule, the next few major aspirational improvement projects and how debt, assessments and member fees will all align with the club’s total financial picture.

The first step in developing a zero-based capital budget is defining the club’s capital needs. This is considered obligatory capital, which is maintaining your existing asset base so the facility is always fresh and up-to-date. Aspirational capital is an expansion of the asset base to offer additional amenities to your members. Accurately quantifying obligatory capital requirements requires a professional capital reserve study of the footprint, which establishes a timeline of when the club should expect to replace each asset (based on the specific use of each asset), and how much the club should expect to spend to replace those assets with inflation and member expectations built into the calculation. To fund obligatory capital, members should pay ongoing capital dues (monthly or annually) to cover the cost of repairing and replacing physical assets consumed during the course of their membership. Flooring, furniture and kitchen equipment are just a few examples of items that are consumed over time.

To quantify aspirational needs, the club should use its strategic plan and membership surveys to develop a campus master plan that ensures the club will remain relevant for both existing and next-generation club members. For golf clubs, there are typically separate master plans for the golf course, the clubhouse and non-golf amenities. Net initiation fee income should be reserved for funding aspirational capital, including any debt service. For most clubs, this exercise is likely to highlight a gap between funding needs and the club’s existing resources. While the reality can be painful, knowledge is power and identifying the gap is an opportunity to bring your membership on board and proactively develop a plan to properly fund your club’s true mission. By looking at a 10-year horizon, the club can commit to incremental changes that will have a profound compounding effect over time. In taking hundreds of clubs through this process, we have found that the more you educate your membership about the club’s financial picture, the more willing they are to be involved in the solution.