Country Club Industry Wake-Up Call: Initial Financial Implications Of The COVID-19 Crisis

Jeff originally posted this on LinkedIn. I enjoyed it so much I asked if I could also share it on my blog. In his original post, he commented, “I’ve never published an article before….so here is my first one. COVID-19 was a wake-up call for the private country club industry. We need to do a better job to prepare for the future and for times of uncertainty. We have resources out there to help us be better operators. Use these resources! #CMAA #ClubBenchmarking #FinancialAstuteness”

We are in unprecedented times, and it’s just getting started. Many of us are in leadership roles operating a 501c7 private equity country club – by definition, a club that is a non-profit on a $0 break-even operating budget. There is, frankly, little to no margin for error to ensure a club operating in that model hits their annual operating plan. Any variance to plan can easily cause a year-end shortfall, and then of course cause the dreaded “A-word” (Assessment).

When the last economic downturn hit in 2008, the private club industry simply did not have significant resources available to support data-driven business decisions and empower Club GM’s and Boards with facts and data. Thanks to resources like Club Benchmarking, as we enter what is clearly another period of recession, we do have the resources to make better business decisions that are based on facts rather than emotions. Club Benchmarking has been preaching for years to get on the strategic train, to improve board governance, and to start preparing your club for the future. Clubs that did not take heed are probably wishing they had now. On Monday (March 16th) National Club Association (NCA) hosted a Virtual Town Hall webinar that was attended by more than 2,400 people. During that session, Club Benchmarking Founder Ray Cronin addressed near-term, mid-term and long-term financial implications. He also reissued the company’s standing invitation for all clubs participate in a FREE Strategic Monthly Dashboard service that was developed to provide near-real-time market intelligence on trends in local and national club markets. The tool was inspired by the lack of data available to clubs during the 2008 financial meltdown.

This week, reality likely set in for many club GM’s and Board members regarding the financial state and financial stability of their clubs. Whatever that reality looks like, understand that it is a product of past choices, strategy, and reflection of the use of (or disregard for) the financial resources and education available to Clubs. The COVID-19 crisis in many ways has served as a wake-up call for clubs to think about the way they approach strategy and preparation for the future. The clubs that embraced Club Benchmarking and other financial resources will be the clubs that weather this storm.

As Michael Crandal, author of the “ABC’s of Plutonium Private Club Leadership” says, one of the most common reasons for GM turnover is an unrealistic, unachievable board-approved operating budget. Member dues are the lifeblood of a club and any material variance to plan will cause a hole that is difficult to get out of. How many clubs have a 2020 budget that is based on an unrealistic goal of hitting significant positive Net New Members just to make the budget balance because there was fear of facing the reality of the dues structure required to operate the club? How many clubs are now sweating bullets because their Board gave the directive to back into a dues increase amount rather than acknowledging the dues structure necessary to sustain operations? (example – “let’s make it work at a $55/month increase”) It should not require a miracle year to achieve an annual operating plan.

How many Clubs out there budgeted for significant Monday golf outings just to balance their budget, and now their Monday outings are canceled due to Coronavirus? Other than member dues, guest green fees are really the only other material driver of NOI profitability. Private Club food and beverage is not a material driver of profit – it never was and it never will be. F&B reflects a Club’s choices and value proposition – meaning how they approach membership satisfaction and service levels. At least with a reduction in F&B revenue due to closures, we save on the associated COGS expense from that revenue shortfall. We don’t have that luxury with lost guest green fees. It’s a direct negative impact to the bottom line.

Club Benchmarking data confirms that 75% of the clubs in America are not producing enough capital to meet their future capital needs. This is mainly a product of not producing enough capital income to at least cover the replacement costs of their capital assets. I can’t begin to tell you the number of Clubs I’ve heard brag “We are beating NOI budget this year! It’s been an excellent year for the Club!” … completely ignoring the fact that they brought in $375K in capital income when their annual depreciation expense is $900K.

Let’s talk cash flow – because cash flow is going to get us by over the next 90 days. A lot of Clubs are going to be draining cash quickly from lost business. Does your Board or GM read the cash flow statement in your Club’s monthly financial workbook? Does your Club have one in your monthly financial workbook? (please tell me you do…). You know, it’s that little statement that everyone seems to ignore that talks about Cash Flow from Operations, Cash Flow from Investing, and Cash Flow from Financing. The statement of cash flows is a critical piece of data that every Club needs to have available as it can explain just about everything you need to know about what’s occurring in the Club. More than ever, your Club needs a financial model that ties into the cash flow statement and can forecast cash over the course of the next 12 months. This cash flow model should be tied into a 12-month income statement forecast so any re-forecasted changes to operations will automatically drive the change in cash flow. If you don’t have one, I am happy to discuss with your CFO or GM how to build one out.

Cash Reserves – does your Club have healthy cash reserves? Typically, the Clubs that have healthy reserves are the Clubs that also have a professional reserve study in place and have embraced capital income as the primary driver of their financial success and their ability to remain relevant in the marketplace. The Clubs that have embraced this and have treated their Club, essentially like most HOA’s operate, are going to be flush with cash because they have prepared for the future. I’m not saying to drain the capital savings account, but it’s certainly a sigh of relief that Clubs can weather a storm temporarily because they have money in the bank. They don’t have to borrow from a credit line or incur unnecessary debt to manage cash flow. If you don’t have a professional reserve study in place, it is time to get one done.

Club GM’s – this is your time to shine and polish up your financial acumen. There may be some downtime with closures. Use this time to educate your Board and take advantage of resources like Club Benchmarking, CMAA, the NCA, and reserve study companies that specialize in Clubs or HOA’s. If your GM at your Club is not actively involved in CMAA – THIS IS A PROBLEM. The CMAA is the most comprehensive resource in the industry and their depth of knowledge and education is far superior to anything out there. There is simply no excuse for a private Club GM to not be involved and actively participate in CMAA. Club GM’s of the future must possess strong business skills. You can’t rely on a silver lining to mask inefficiency. You need to know enough to be dangerous in every department, but most importantly you need to know how to run a business!

Alignment of Board & Club Leadership – there is nothing more powerful than a unified team among Board and Club leadership. This is a mission critical objective during a time of crisis. In our case, we are meeting daily (virtually) with our Board and our team together. Nobody is in a silo. Communication is constant. Our Board wants our senior management team to work on decisions together as one unified group. Our Board empowers our senior leaders at the Club and places trust in us. There is no micromanagement. One unified team on the same mission, same vision and same goals.

Our most vulnerable during this time are not our members. Our loyal, dedicated staff members – many who have devoted 10, 20, 30+ years of service to our Clubs are the most vulnerable. They are our hourly employees who are just trying to put a roof over their head and food on the table for their family. Many who have young children who are experiencing canceled schools and they cannot afford childcare. This is time for our Clubs to make a statement to protect their #1 asset – their loyal employees. Live out your mission statement and values! Many Clubs are committing to pay their employees during these trying times and this is incredibly admirable. But what if the Club doesn’t have the financial resources and cash flow to do this?

If there is a valuable lesson to come out of this most unfortunate situation, it’s that Clubs need to do a better job to prepare. At the end of the day, we are tasked to operate a multi-million-dollar business with hundreds of employees, protect an asset spread out over hundreds of acres, and we are responsible for the satisfaction of hundreds or even thousands of members. We need to be better business operators and financial stewards, and we need to recognize our duty as financial stewards to utilize all resources and information available to us. It will not always be rainbows and butterflies and COVID-19 crisis proves just how quickly the situation can change for the worse. Let’s use this experience to improve our Club’s fundamental business practices so it’s easier to weather the storm when a crisis occurs in the future.