1. A Primer on Private Club Finance Finance is the Language of Business – Even for Clubs
This slide deck serves as a starting guide to help managers and boards analyze and understand their club utilizing the Club Benchmarking Financial Insight Model and Key Performance Indicators.

2. Primer Contents Financial Modeling Modeling Private Clubs
Operational KPIs
Capital KPIs
Conclusion

3. Financial Modeling
Wall Street uses financial modeling to predict success... and failure
Seek relationships between “the bottom line” and revenue, margins, leverage, expenses, etc.
Investment banks, consultants and companies pay analysts a fortune to create and maintain models – because it works!
Models reflect KEY DRIVERS both of the industry and of the competitors within the industry
“Not-for-Profit” is a tax status – NOT a business model. Clubs are businesses with their own KEY financial and operating drivers

4. Modeling Example Cholesterol 240 220 200 180 160
The NUMBER (data) by itself doesn’t provide insight…. INSIGHT comes from linking variations in the number to heart disease

5. Insight comes from the study of variation and relationships.
Financial Modeling in Clubs
Insight comes from the study of variation and relationships.
In the case of clubs:
You can’t understand a club without studying the industry, and you can’t understand the industry by studying one club
The Club Benchmarking Financial Insight Model and its related ratios shed Insight on both individual clubs and the entire industry

6. Finance is the Language of Business – Even for Clubs
Financial Modeling in Clubs
Finance is the Language of Business – Even for Clubs
Financial Models result from understanding the variation in profit and its key drivers (Revenue, Gross Margin, Fixed Expenses, Leverage, etc.)
One of the biggest issues in club boardrooms is the LACK OF CONTEXT, or understanding of financial relationships within the business

7. Train your membership to understand the difference
Groundwork – Operating vs. Capital
Operating Funds
Capital Funds
Buildings
Furnishings
Course Rehab
Facilities
Lights/Heat
Employees
Food/Bev
Supplies
Blood Flow
Skeleton
Train your membership to understand the difference

8. Groundwork – Operating vs. Capital
SOURCES
Operating Funds
SOURCES
Capital Funds
Dues Revenue
F&B Revenue
Golf Ops Revenue
Non-Golf Revenue
Initiation Fees
Capital Dues
Assessments
Asset Sale
Debt
Not Sustainable

9. Explaining the Business
Can a board be effective without understanding the business and financial relationships?
How do club boards understand the business?
“Cholesterol is Bad” is not an explanation
“Clubs are in the dues business” is not an explanation
“We should make money in F&B” is not a strategy

10. The Framework: Club Benchmarking Financial Insight Model
Operating Ledger
Capital Ledger
Total Capital Income (Initiation, Capital Dues/Assessments, Investment Income) Adjust for Net Operating Result
Subtract Lease Expenses
Revenue (Dues, F&B Net, Ancillary Departments)
Gross Profit
Fixed Operations
General & Administrative
Buildings Maintenance & Operation
Fixed Charges
Golf Operations Labor
Course Maintenance Expense
Sports, Recreation, Youth
Operating Surplus
Operating Deficit
Net Available Capital
Net Available Capital is the amount the club has available for capital investment, debt reduction and increasing reserves
Net Operating Result

11. Explaining the Business
As in any business, the linkages among revenue, source of revenue (high margin/low margin), resulting gross profit/margin, operating expenses, net operating results, capital requirements and leverage need to be understood and explainable by all those in a fiduciary role.
Traditionally there has not been an accepted set of measures for every club to use in understanding and explaining their club.
This has left clubs and boards to develop their own measures, or more commonly, to work from opinion and emotion.
Being able to define and explain your club in the accepted language of finance is MISSION CRITICAL for every club.

12. What are the Key Questions?
Explaining the Business
What are the Key Questions?

13. Explaining the Business

14. Explaining the Business

15. Private Club Financial Insight
The following slides show actual industry data. Club Benchmarking subscribers can login and run their own reports to see their position on the curves relative to the filtered peer sets.
We will begin with a review of operations first, and then we’ll move on to capital.

16. Financial Sustainability
What does Financial Sustainability mean?
If your current operational results and capital generation were continued for the foreseeable future, would the club be able to adequately fund all amenities and member experience, and be able to re-invest back in the club every year to replace depreciating assets and facilities? 16

17. Explaining the Business - Gross Margin
As in any business, the Gross Margin dictates the monies available to fund fixed/operating expenses. Higher gross margin enables greater flexibility and allows the club have a culture of value creation rather than expense control. Note the attributes of clubs based on gross margin levels.
As expected the relationship between gross margin and operating result is clear, and the mix of revenue (primarily dues and F&B) directly impacts gross margin. The chart represents clubs with golf. Clubs without golf have gross margins about 10 points lower.
What is your club’s gross margin? Club Benchmarking subscribers can login and run the Gross Profit/KPI report to access their own results.
CB subscribers see precisely where they sit on the curve
Dues Ratio 45% % %
Rev. % from F&B 36% % %
Operating Result ($131K) $31K $205K

18. Explaining the Business - Sources and Uses of Gross Profit
Visibility of the sources and uses of gross profit yields a very telling window into the way clubs operate. The core funding sources of the club are clearly visible. Likewise, the proportionality of the club’s operating expenses is critical regarding how closely the club adheres to typical proportions and how decisions have impacted operational spending by area.
In clubs, 80% of revenue is typically derived from two sources: Dues (~50%) and F&B (~30%). Dues carries 100% margin, while F&B carries negative to slightly positive margins. In other words, all revenue is not created equal. In most clubs there are only two real drivers of gross profit, dues and golf (for clubs with golf).
Operating expenses are very proportionately consistent in clubs with ~50% in overhead and ~50% in services and amenities. As clubs modify the amenity mix the overall amenity allocation does not change but the mix within the allocation is shifted.
Dues
Sports & Recreation
Service & Amenities
Overhead
Golf Operations
Guest Rooms
Non-Golf Sports
General & Admin
Course Maintenance
Fixed Charges*
Golf Operations Labor
Building Operations
& Maintenance
* Real Estate Tax, Property & Liability Insurance, Interest on Debt

19. Explaining the Business - Dues Ratio
The Dues Ratio has direct impact on the club’s overall gross margin and operating result. Higher dues ratios yield a higher gross margin and therefore more money to fund fixed expenses for both overhead and amenities. Note the attributes of clubs based on the location of their dues ratio on the curve.
Clearly dues revenue is critical. Knowing your dues ratio (driven by number of members and dues rate). There is no substitute for dues revenue. The chart represents clubs with golf. Clubs without golf have dues ratios about 10 points lower.
What is your club’s dues ratio? Club Benchmarking subscribers can login and run the Gross Profit/KPI report to access their own results.
Gross Margin % % %
Operating Result $-15K $31K $205K
% of Clubs with Operating Loss % % %

20. Explaining the Business - Net Operating Result
The net operating result determines if the club’s operating revenue and margin was sufficient to cover all operational expenses. Note the dues and gross margin attributes of clubs across the range of operational deficit, breakeven, or surplus. Ensuring your revenue mix and resulting margin is sufficient is essential.
Within the realm of operating results, clubs have latitude on a variety of choices: F&B subsidy, payroll levels, staff benefits, member amenities and services, etc.
Achieving at least breakeven results ensures capital monies are not being re-directed to cover operational deficits. When deficits are experienced, use the KPIs to determine if root causes are revenue based or expense based.
Adds to Capital
Draws from Capital
Dues Ratio % % %
Gross Margin % % %

21. Explaining the Business - Payroll Ratio
The Payroll Ratio is a representation of the largest expense in most clubs. Labor sits at the intersection of member service, operational efficiency and financial results. A club cannot answer the question “do we have too much or too little labor” without understanding their payroll ratio. This ratio should be viewed in concert with the club’s Net Operating Result
Note the correlation between the Payroll Ratio and a club’s Operating Result. Breakeven can be achieved with a higher ratio, but generally requires an extra strong dues ratio.
Note that highly regarded clubs have very similar payroll ratios indicating that culture, rather than greater spending, is in play. In most clubs, a ratio above 60% creates a challenge to achieve operational breakeven. A very low payroll ratio can impact member experience. Balance between service and affordability should be sought.
52%
57%
59%
Distinguished
& Platinum Clubs
$115K
($170K)
Operating Result
$230K
($15K)

22. Explaining the Business - Food & Beverage
F&B is a vital aspect of clubs and is best viewed in context to the entire club, not solely as a departmental “standalone” business. The financial impact of F&B is best viewed in relation to the gross profit the club generates. Clubs with stronger gross margins are able to fund a higher grade of F&B experience through higher quality and greater service. The F&B “trap” exists where clubs simply believe F&B should generate profit and in doing so, drive value down.
As seen in the chart, 75% of clubs subsidize F&B. One might assume that clubs in Group A have larger subsidies because they are poorly managed. In fact, the opposite is true.
Group A clubs are generally very healthy and choose to deliver stellar F&B, ultimately subsidized by healthy dues revenue. Clubs in Group C typically have weaker dues engines and attempt to compensate by trying to drive profit from F&B. Generally that is a fruitless effort with a negative impact on member satisfaction. More on the next slide…
Group A
Group B
Group C

23. Explaining the Business – Food & Beverage
Financial results in F&B REFLECT a club’s financial position. They don’t cause it.
Initiation Fee is a telling proxy for the value proposition of a club

24. Private Club Financial Insight
Moving on to Capital

25. Explaining the Business - Net Available Capital Ratio
The Net Available Capital Ratio is a Mission Critical KPI. It measures the capital generation power of the club in relation to the size of the club and is indicative of a clubs ability to build and deliver member value over time. The ratio expresses the amount available for Capital Investment, Debt Reduction and Increasing Reserves, prior to debt principle payment.
Every club should strive to be a capital rich club.
Capital rich clubs are able to focus on long term value creation while capital starved clubs tend to have a short term focus with cost cutting as a potent theme.
Note the operating result, turnover and initiation fee patterns that correlate.
Capital Rich
Capital Starved
Operating Result
$121,000
$234,000
($51,000) 8% 6% 4%
Full Member Turnover
Initiation Fee $10K $20k $46K

26. Capital Investment Thesis
Growth Cycle
Hold Cycle
Ongoing Investment Yields Return 26

27. Explaining the Business - Debt Ratio
The Debt Ratio is a simple way to define the relative amount of leverage carried by the club. While debt is a useful tool for clubs, over-leverage can be difficult to manage. It is critical to have a strong funding plan to pay down high levels of debt and to recognize the impact on operational budgets . Club Benchmarking models assume interest is an operational flow and principle is a capital flow.
It is not uncommon for a club to have a high debt ratio (+/-100%) at the inception of a large project.
Ideally debt is used as a way to build long-term member value and demand for new memberships through advances in facilities and amenities.
The concept of return on capital applies to clubs where the return is achieved through higher initiation fees, higher capital dues and greater overall capital income.

28. Explaining the Business - Debt per Full Member Equivalent
Debt per Full Member Equivalent Ratio is used to view the club leverage at the per member level. It is useful to view Debt per FME relative to the annual dues rate paid by a full member. This KPI should be viewed relative to the economic horsepower of your membership. Highly affluent memberships have greater ability to handle debt than less affluent memberships.
Considering Debt per FME relative to the dues rates is important. Debt per FME less than 1 times the dues rate is typical. Debt per FME 2-3 times the dues rate may indicate a challenging level of debt.
Is debt being used to grow services and amenities or is it being used to manage existing asset replacement? Ideally debt is used for the former while organic capital income is used for the latter.

29. Conclusion
Financial Modeling garners business insight and is highly valuable in the club industry as it is in other industries.
The part-time and transitional nature of club governance creates greater than normal need for rapid assimilation, understanding and alignment.
Consistency of ratios regarding revenues and expenses, and services and amenities across clubs makes strategic benchmarking especially effective.
Utilize INSIGHT, not raw data, to make decisions.
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