Private Club business plans and budgets
Best practices for preparation and monitoring
ECLUB NEWS |
Our mantra for several years has been running your club like a business and, more specifically, using sound business principles in operating your club.
There was a time when the club budget process was simply to adjust the prior year's budget by a percentage which was approximately the increase in the consumer price index. Today, clubs go through a sophisticated and potentially lengthy budget process that has enabled the clubs to avoid operating assessments at the end of their fiscal year. Some clubs have refined their financial management techniques by adding the elements of a business plan and the use of key performance indicators (KPIs) to measure performance and assist management in taking corrective action when things go wrong.
A word or two on budgets
An effective budget is…
Realistic – If a budget is to serve as a guide for activities in the coming year, it must be well-reasoned and reflect current conditions. Unsubstantiated revenue projections and wild guess cost estimates will render a budget ineffective as a management tool.
Consistent – A budget must be consistent with short- and long-term strategic plans, and remain in line with the organization's mission.
Flexible – Budgets are based on a combination of facts and assumptions. If actual events and conditions vary from these assumptions, there must be opportunities to amend the budget to address revenue shortfalls and windfalls, and unexpected expenses.
Measurable – The basis on which the budget is created should be the same basis on which the books are maintained.
Incremental - Under the incremental approach, the foundation of the budget is simply the prior years' results. Managers start the process with last year's figures as the baseline and make adjustments based on anticipated needs and circumstances. Only expenditures over and above the baseline are required to be justified. The advantage to this approach is that it's easy for managers to understand, does not require much documentation or support, and as a result is not very time consuming. The disadvantage to this approach is that it promotes spending or managing to the budget as opposed to actually understanding and managing the budget, and over the course of time can lead to a severely inflated budget as managers simply spend money, so they don't lose it the subsequent year.
Zero-based - Under the zero-based budgeting (ZBB) approach, the budget is created from the ground up or a zero base. Historical results are still used, but only as a guideline, not as the foundation of the budget. This is the fundamental difference between the two concepts. With the ZBB approach, managers are required to justify every expenditure included in the budget. Under the incremental approach, managers are only required to justify expenditures over and above the prior year's results. Properly implemented, ZBB is a significantly more valuable management tool than the incremental approach.
As a practical matter, the budget process at most clubs is really a combination of the incremental and zero-based approaches. Club operations, particularly for a single golf course and clubhouse operation with no expected change in membership count, are usually consistent from year to year. Since salaries, wages, payroll taxes and employee benefits represent more than 50 percent of any club's expenses ; labor, payroll taxes and benefit budgets should be built from the ground up, mindful of the hours of operation, seasonal changes in head count and increases to annual salary, wage and benefit costs.
It is worth noting that the level of detail used in preparation of the budget will aid management and board members in explaining and understanding variances when they occur.
Budgeting for other departmental expenses
While I am suggesting that the incremental budget approach may be acceptable for budgeting expenses other than labor, payroll taxes and benefits, it may be prudent to use ZBB for other departmental expenses every few years. I would encourage financial managers as well as department heads to be very specific as to what vendors and expenses are charged to each of the other expense accounts. This type of information should be documented in the club's chart of accounts and will further aid in explaining and understanding variances.
Club business plans
At the inception of the budget process and throughout the year, management and board members should be aware of the club's overall and major department business plans. Each business plan should have:
- A mission statement to clearly define who we are and what we are striving to be
- Goals and objectives that are measurable and achievable to help accomplish the mission
- Action steps that provide a road map to attain the stated goals
Budgeted revenues and expenses should reflect planned operational changes found in the departmental business plans. Perhaps the golf course maintenance department business plan includes some nonrecurring maintenance issues that should be provided for in the budget. Changes in the hours of operation or number of days open for evening dining might also be part of the food and beverage department business plan.
The budget should also be coordinated with the club's activities calendar and is most useful when the budget can be broken down by weekly and even daily activity. Weekly labor budgets would be particularly beneficial in the food and beverage department when planning additional events or nonmember functions that could impact labor budgets.
Key performance Indicators
Clubs are finally beginning to realize what the well-run businesses have known for years: Regular monthly financial statements are only the first layer in understanding how your operation has performed and you can effect corrective actions to improve financial results. KPIs are often nonfinancial measures that cannot be expressed in dollars. In many cases, KPIs that are frequently measured (24/7, daily or weekly) can be monitored by the CEO and senior management teams. KPIs clearly indicate what action is required by staff, so the staff can understand the measures and know what to fix.
Clubs that measure and understand ratios such as memberships served per employee, covers served per dining room employee per shift or food and beverage departmental payroll as a percentage of departmental revenue, are better equipped to react swiftly to unanticipated fluctuation in projected revenue. Such metrics can indicate that the club is overstaffed for the revenue being received, or indeed can be a red flag to management that staffing is too thin based on demand, and therefore, be a first alert that service standards may be impacted.
Development of good KPIs can be used to test and determine if future budgets are reasonable. Do the relationships of revenue forecasts and expenses make sense given the historical relationships between those numbers? Clubs need to develop a flash report of the KPIs most important to their specific operation, budget to those measurements and then closely monitor those targets. It's too late to make corrective action if we are waiting for a monthly financial statement that might be available 10 days after month end. Actual revenue and payroll statistics compared to budget, ideally, should be available on a daily basis in order for management to take any necessary corrective action.