United States

Twelve wishes for private clubs in 2013

ECLUB NEWS  | 

The McGladrey team wishes happy holidays to all who are celebrating this season and a happy new year to everyone. It is in this spirit that a few contributors to this newsletter were inspired by the idea of twelve days of Christmas to offer good tidings for private clubs in the coming year.

1. Board members will become bored with daily management and appreciate the true value their governance provides to employees and their fellow members.

If one wish surpasses all others for the New Year, it is that board members focus their tremendous collective expertise on defining and executing strategy. As noted club consultant Jack Sullivan says, “We don’t do peanuts.” Board directors should aim to provide strategic direction guidance to club executives, without becoming managers themselves. They should demonstrate their trust in those they have placed in these roles and allow them the opportunity to flourish and make their goals for their clubs become a reality.

From a practical standpoint, a club that earns a reputation in the marketplace for micro-management will find itself struggling to attract and retain talented professionals, which will subsequently impact the member experience.

Delving deep into operational issues undermines management and allows the board to shy away from its true purpose and the true challenge of providing a strategic vision for the club—which is needed more than ever. Board members can offer so much more when they enable their executives to offer all that they are able.

2. An understanding of business risks will be achieved.

While this might sound simple, many clubs should reconsider whether they have a truly robust and effective risk assessment process. If a club has yet to take the time to document its strategic, operational, financial and regulatory risks, it cannot possibly know if those risks have been sufficiently addressed. A properly constructed risk assessment process will help the club identify those areas of greatest exposure—the risks that sit at the intersection of the most probable likelihood of occurrence and greatest magnitude of loss. Formal risk assessment has long been an established business practice in the corporate world. Given all the challenges that private clubs have faced in the last few years, and will continue to face, a formal risk assessment procedure that is revisited at least annually is a practice that clubs should embed in their routine business planning.

3. The singular fascination with budgeting will give way to an equal focus on forecasting.

This is not a call to cease all budgeting. It is instead a wish that clubs will learn that forecasting does not equate to taking year-to-date actual results and adding the budget for the remainder of the year. Forecasting requires much more effort—and not necessarily from the club accounting department. Department heads must be challenged each month to analyze what they now believe the rest of the year will look like based on what has already transpired. For a club with a calendar year-end, there should be a much greater ability for managers to project accurately the six months from July 2013 to December 2013 in June of next year as compared to the ability that existed in November 2012 (or whenever the budget was prepared). Constant re-forecasting has become normal business practice and clubs must embrace it to minimize surprises to the board and membership at year-end.

4. There be will a universal recognition throughout the industry that depreciation is a real operating expense.

Consider the annual reports filed by ClubCorp with the Securities and Exchange Commission (SEC). Depreciation and amortization is included in the determination of operating income. The reason for that is because that is what depreciation really is—an operating expense! Arguably every other business in the world includes depreciation expense in operations. Private clubs have historically excluded it under the argument that capital inflows from initiation, joining or entrance fees covered that cost. Since many clubs would struggle to make that argument today, it is time to revisit how depreciation is portrayed in financial statements. Warren Buffett famously asked, "Does management think the tooth fairy pays for capital expenditures?" Should clubs be trying to “fund depreciation” (wait for wish #5!) from operating revenues or are they going to push the problem down the road and charge a capital assessment to whomever happens to be a member of the club at the time a major capital asset needs replaced? This conundrum was recently summed up by one private club board member when he said, “Don’t tax him, don’t tax me, tax the guy under the tree!” Current members may argue that they have paid for the asset once and should not have to pay again. To those members, clubs must ask what they think depreciation expense represents. It is a measure of the enjoyment they get from using the asset. When it stops working—so too does their enjoyment.

5. Funding capital reserve studies will supersede funding depreciation.

Is this wish for the New Year contradicting our fourth wish? Perhaps, but it has always been a struggle to comprehend any point of basing cost estimates of future capital purchases on what was paid for the same asset any number of years earlier. The concept of inflation suggests that such an estimate would inevitably result in a shortfall when it comes time to write a check in the future. Questions continue to be posed regularly about whether private clubs should conduct reserve studies. The answer to such a question is a resounding yes. After all, how could a club president or treasurer ask for any level of capital assessment at the annual meeting if they do not possess an independently researched study to support the need for the amount being requested? In no other business with major facility and equipment needs would management approach the capital or debt markets without professionally prepared documentation of the funding levels required. It is time for clubs to follow suit.

6. Private clubs will measure what is important rather than what has always been measured.

The balanced scorecard highlights what is already well known anecdotally—financial information only measures whether good or bad decisions were made 10, 15, 30 or maybe even 45 days previously. Financial analysis is by nature a lag indicator of performance. While these measures have their place, consider what the lead indicators are that should be measured to ensure the financial results meet expectations. Member satisfaction drives financial results; perfecting internal processes drives member satisfaction; training and learning leads to perfecting internal processes. Club management should reflect on the setting and measuring of goals for all of those who work within a club in regards to their being trained, trained and trained again. Think about how to measure just how good internal processes are managed—checking a member into a room at a city club; serving meal in the grille; shaping the rough so it is challenging but provides an opportunity for a recovery shot. And of course, how good is the club at measuring member satisfaction? If clubs can renew their focus on measuring these elements of their business, the financial results will inevitably follow.

7. Every staff member of every private club will be an ambassador for his or her club.

As a result of serving private clubs around the country, a certain appreciation for the small things develops. Those small behaviors and practices among staff members that can so easily get under the skin of a current or prospective member. Too often, drivers stop at the gatehouse, ready to produce the photo I.D. the sign says will be required, only to be waved through without being questioned. Other times, visitors are stopped and greeted by a guard who is speaking on a cell phone about a clearly a personal topic (hopefully chewing gum just to complete the picture). While these are the impressions of consultants who were making these visits, the guard at the gate would have been none the wiser had these cars been occupied by a prospective member eager to buy a house in the security of a gated community. Every staff member is involved in marketing—whether on duty and off. They represent the club when at work and when away. Clubs should consider whether their staff members universally recognize this fact and remember that marketing never ends—before, during and even after a membership experience.

8. Private clubs will cease the constant discussion about operating like a business in favor of simply doing it.

In addition to the countless conversations club professionals have had amongst each other about operating like businesses, a significant amount of time and attention was devoted to analyzing what it really means to run a club like a business in this publication and other McGladrey presentations throughout the last year. What was offered by the McGladrey team was liked and welcomed by some, challenged by others and completely dismissed by others. What was never disputed was the fact that clubs are businesses and a need exists to get on with the business of managing them. Paralysis by analysis certainly caused seizures at many clubs. There are volumes upon volumes of metrics and information available in the club marketplace. Distilling what is really important for each club is the challenge. Be aware of what competitors are doing, but do not fear it! Address it in business planning meetings; those ongoing SWOT analyses that should not just occur once a year, but rather should be planned analyses and reactions to ever changing market conditions in the continual life cycle of your business.

9. Club professionals will commit to learning what is unknown to them.

Every professional in every field reaches points in his or her career when he or she simply does not know enough about certain elements of business. For many, new developments in information technology are perhaps the most common area or at least the one thought of most readily. Meanwhile, comments are often made to the McGladrey team from club executives who want to gain a better understanding of finance and financial statements. There is no shame in this. In fact, realizing that one does not know as much about one area of specialization as another is commendable and voicing a desire to learn more is admirable. The boardrooms of clubs are beginning to fill up with a generation of corporate executives who came of age under Sarbanes-Oxley and the increased expectations that this law brought for financial understanding and oversight by chief executives. These new board members are expecting similar levels of understanding from their chief executives of their clubs. Chief operating officers of clubs should take this cue from their peers and come to terms with their strengths and weaknesses and take steps to convert those weaknesses into an even greater number of strengths.

10. Clubs will get real about selling the business to investors.

Through this publication and other avenues, the McGladrey team has repeatedly emphasized the importance of being able to handle questions from prospective members about the financial condition of the club. Clubs should reflect on what they have done in the past year to improve their investor relations department. In 2013, clubs will have responses prepared to respond to an array of questions that are being posed by prospective members every day. A sampling of them is listed below.

  • Does the club have debt?
  • How much debt does the club have?
  • Why does the club have debt?
  • How is the debt being paid off?
  • What is the interest rate?
  • What is an interest rate swap?

Whether club management is aware of it, these questions are being asked and answered by club employees and board and committee members. It is time to work this department into the operations of the club and to reflect on who is responsible for it and for developing consistent, truthful and meaningful messages.

11. Clubs will audit their operations.

To perform any audit, there must be standards or assertions against which to measure the audit results. Clubs that do not have documented standards against which the club should be operating simply cannot perform an operational audit. So, start by documenting what and how employees should be doing in fulfillment of daily duties. Only then can the club hope to audit its operation.

12. Peace and goodwill will be felt by all board members.

Discord in the boardroom does no one any good. Yes, healthy debate should be encouraged and practiced but the horror stories that emanate from some club boardrooms would put Stephen King to shame. Help board members help themselves by routinely investing in governance training, orientation sessions and governance audits. But remember, just like operations audits, a club cannot audit anything unless established standards exist. It is time to reflect on whether these standards for board governance exist within every club.

The year 2012 has been an eventful one and the only guarantee is that 2013 will not be a dull one either. The McGladrey private club professionals look forward to continuing to serve this industry. The actions of those who read eClub News and engage in developing a memorable membership experience have a profound effect on the lives of many—including the lives of those who write this publication. It is with the utmost sincerity that the McGladrey team thanks its readers and its clients.

Let this New Year mark the start of even more success for all of those who work in the private club industry.

In This Issue

Twelve wishes for private clubs in 2013

A successful financial statement audit: No miracles required

New industry financial reporting standards released

Cloud technologies for the nonprofit organization: Part three of a four part series

Automatic gratuities: Tips or services charges?