Part II of the COVID-19 Wake-Up Call: Forecasting for the Foreseeable Future

Last week I posted an article on LinkedIn about how the COVID-19 virus has given the private country club industry a wake-up call. The situation has caused us to reevaluate how we as Club leaders approach the annual budgeting process, ensure we use industry resources such as ClubBenchmarking, the CMAA, NCA, and capital reserve companies, and that we all need to do a better job to help our Clubs financially prepare for the future and times of uncertainty.

A link to the original article is found here: https://www.dhirubhai.net/pulse/country-club-industry-wake-up-call-initial-financial-jeff/

I received an outpouring of messages and support from Club managers all over the country, many who asked for help to address the here and now. Numerous Club leaders emailed asking for advice to keep up with requests from their Board for modeling scenarios and a game plan to address immediate needs at the Club.

I hopped on a call this week with my good friend, Nick Gerstner, the Director of Finance for the distinguished Arizona Country Club in Phoenix, AZ. Nick is regarded as one of the brightest financial minds in the industry and together we jotted down a few initial thoughts and considerations:

Members of private clubs likely have been asking the following questions the past few weeks:

Will we have to pay dues while the club is shut down? If you are at a 501c7 equity club, then the answer should be yes. Reason being is as a member of an equity club, you all share the burden of operating and maintaining the club. A shortfall or deficit at year-end typically triggers an operating assessment (the dreaded 13th month of dues….). By suspending dues during shutdown, all that does is greatly increase the probability for a year-end assessment while also drastically hurting your cashflow right now. The Board needs to reaffirm to membership that members are owners, not customers, of the Club and they need to treat their club like their own home. For years, members and Club leadership have mentioned a phrase that "the Club is just an extension of your home". You aren’t suspending your mortgage payments right now, are you?

Do I have to pay my F&B minimum this year? Minimums in the overall context of the club operation aren’t material drivers. They are considered by many to be a forced dues increase that ignores a much larger problem of WHY your members are not interested in spending their discretionary dollars at your club. Some clubs are offering to suspend minimums during the closure period, which is fine if your Club chooses to do so.

The Board of Directors for Private Clubs needs to be solely focused on leading with an ownership mindset and answering the following:

? How long can the club operate on dues revenue?

? How long can we pay our employees?

We must switch our focus from changes to the operation to also considering the impact of the Club being shut down for a while. Our duty as financial stewards is to provide the data for the Board of Directors to make the important decisions that will impact the financial health of the Club moving forward. Forecasting for the remainder of the calendar year is mission critical to ensuring financial health. 

How can clubs be forecasting?

Your Board will likely be asking the GM and CFO/Controller to produce several modeling scenarios for both their income statement and also for cash flow. Forecasting for the foreseeable future will need a model for the “worst case” scenario. The worst case model should be driven by Operating Dues. In this case, all other revenue sources should be omitted because they are uncertain at this time. The following is a very simple summary of one forecasting model clubs could be using:

Beginning Operating Cash + Operating Dues - Debt Principle & Interest - Fixed Expenses - Payroll - Tips/Commissions/Service Charges - Misc. Variable Expense = Ending Cash

However, the most advanced and accurate forecasting model will take a 12 month income statement forecast and tie it into a 12 month cash flow. If your Club doesn't have an advanced forecasting file, then a simple way to do this is to take your existing 2020 budget template and resave it down to be your new forecasting file. Your 2020 budget was likely a break-even $0 profit for Net Operations Income (NOI), so it’s very easy to make adjustments to your budget in future months and see the negative impact to operations. Start looking at every department – line by line, month by month – and adjust what will realistically occur over the next several months. Keep in mind if you are losing members, the dues impact will need to be adjusted for the rest of the year. Likely your 2020 budget file has a roll-up consolidated income statement that shows the Club’s overall Net Income (including all the line items below NOI such as capital income and depreciation expense). You’ll need the forecasted Net Income (not NOI) for the Club overall in every month going forward to produce an accurate cash flow statement. The Cash Flow from Operations section has many parts to fill out that require a month-to-month change in balance sheet lines (AR, AP, Prepaid, Deferred Revenue, Inventory, Accrued Expenses, Accrued Payroll, Accrued Vacation, Sales Tax Liability, etc). Make sure your CFO/Controller and Treasurer are adjusting these cash flow lines in all future months and that they make sense for what will likely occur.

Forecasting Operating Dues

The time is now to take a hard look at the Operating Dues Budget created for the year. Membership sales are uncertain for the foreseeable future. The forecast should strip out any additional membership dues increased from sales of new memberships. The forecasted number should only contain the Operating dues from the current membership. Resignations are much more likely than new memberships. Tracking resignations will be critical to forecasting the operating dues. What's happened over the course of the last few weeks? Stay in close contact with your Director of Membership.

Another serious implication will be the timing of member payments and dues. Member dues are a luxury discretionary spend and this type of spending will be at the top of the list for families to cut or defer given their own current situation. Take a look at your Member Accounts Receivable reporting in your Club’s POS software – is it starting to climb up? What about the AR balance in the 30-60 day column? What does it look like this month at this time compared to previous months? For many clubs, many members typically pay their statement balance in the last couple weeks of the month. Pay very close attention to your payments during the last two weeks of the month. If checks in the mail come to a halt, this situation will get worse quicker than we thought. If Member AR is climbing, the cash in the bank is declining.

Accounts Payable

Vendors have payment terms – 15 days, 30 days, 45 days, 60 days, etc. This is the time to stretch your vendor payments to the max for terms, and also make calls with vendors to renegotiate terms. These next 60-90 days are going to be the critical time period at clubs. If you can work with your vendors on terms, it will preserve much needed cash flow.

Debt Principal and Interest

The most important part of safeguarding the asset will be making certain the club can pay interest and principal of the mortgage and leases. It’s also a worthwhile conversation to inquire if your lender will consider a couple month grace period to defer payments. Many institutions are willing to offer a forbearance.

Fixed Expenses

The fixed expenses of Insurance, Licenses, Utilities, and Real Estate/Property Tax all need to be reviewed. The fixed expenses are required to continue operations of the club. Now is not the time to miss a payment on any of the fixed expenses.

Do the operating dues cover Debt and Fixed Expenses? If not, the club will now be relying on the capital sources of income to subsidize operations. The Board of Directors needs to understand the significant negative implication of using Capital Income to cover the Operational shortfall.  The club will be foregoing placing capital funds aside to continue subsidizing operations and avoid assessments. 

Payroll 

The most difficult section of the entire forecast will be payroll. As Owners of the club, the mindset will be to make certain that employees are taken care of in these unprecedented times. Depending on the Club’s financial state and cash position, this will determine just how long the Club can afford to pay their staff before their cash flow situation prevents from doing so.

If your Club gets into a situation where you will need to lay off employees, consult with your Club’s legal counsel as there may be notices required to go out to staff to comply with both Federal and State WARN Acts.

Tips, Commissions, Lessons, Personal Training, Massage, Service Charge Payout

Hourly Club employees rely on tips, commission, and service charge payouts to feed their families. Clubs will be shut down and the tips, commissions, and service charges will not be generated. The Board will need to make the decision about how the club will address the additional income for employees. Many Clubs are deciding to continue paying these variable income sources by taking an average of their historical pay over a similar period of time.

Capital Projects

In an effort to preserve overall cash on hand, it may be prudent to delay capital spending. Additionally, some areas of the country are on Shelter In Place mandates and embarking on an aspirational capital project during this time will likely be considered a non-essential function of business.

Non-Essential Operating Expenses

Take a look at what’s in the operating budget for variable and non-essential operating expenses – cut these out to preserve cash.

Accrued Vacation

Every payroll period, your staff accrues vacation and the Club expenses their accrued earnings. Your balance sheet reflects the total amount of the Club’s liability of paying out their earned vacation. When the staff actually uses their vacation, their vacation usage debits and reduces the vacation payout liability.

If your Club has a large vacation liability on the balance sheet, that’s going to be another use of your operating cash when staff uses it. It won’t affect your income statement because it was already expensed in the past, but cash will be affected because cash is used to pay out that vacation usage. If your Club intends to start laying off staff, there’s going to be a large cash outflow to pay out accrued vacation. On your cash flow forecast, update your Cash Flow from Operations section with the month(s) you would expect to see a large amount of cash depleting from paying out your vacation liability.

Ending Operating Cash/ Reserves

Does the forecast end in a negative cash position? How many months do you have remaining before it does?

If the forecast ends in a negative cash position, the Board of Directors needs to determine the appetite for pulling the following levers:

1.      Assessments

2.      Layoff

3.      Line of Credit / Third Party Funding

Assessments are always a dreaded word in Private Clubs. The reason the word has negative connotation is because it is normally a reactionary tool. Assessments are sprung on members without a lot of notice. Assessments and Dues are both required payments for membership.  The Owner mindset reviews assessments as the first lever to pull to fund the Club.  Messaging from the Board should warn members that assessments may be needed to cover club operations during the time of uncertainty.

If the Board is not willing to assess members to balance the forecast, the Board of Directors has made the decision to begin layoffs.  The Board will need to know the number of employees impacted and in what areas. The Board can then give guidance on how to proceed.

While this certainly isn't an exhaustive list of considerations, it hopefully does provide some assistance to what Club leadership, the Board, and Finance Commitee should be considering.

Jeff Dekruif, CCM, CHAE

Asst. General Manager & CFO

Blackhawk Country Club - Danville, California

Nick Gerstner, CFE

Director of Finance

Arizona Country Club - Phoenix, Arizona