268: Board Chats-Boardroom Finance Essentials for Club Stability
In this episode of Board Chats with
Peter Nanula from Concert Golf Partners,
we delved deep into the financial operations of private clubs,
highlighting the crucial role of financial forecasting.
We emphasized the necessity of a base case financial forecast
and the importance of having phased capital projects
to avoid potential fiscal pitfalls.
Peter underscored common mistakes made by
private clubs, including over-borrowing and misappropriation of funds,
which could lead to unexpected member assessments.
Additionally, we addressed the importance of proper budgeting to avoid these scenarios.
Finally, we discussed the role Concert Golf Partners can play in providing valuable consultation and potential solutions for clubs facing these issues.
Visit the Concert Golf website to learn more about their boutique approach to private club management, and be sure to connect with Peter Nanula on LinkedIn
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Welcome to Board Chats presented by Concert Golf Partners, the boutique owner-operator of Upscale Private Golf and Country Clubs nationwide. Here on Board Chats, we are All Things Private Club Boardroom. We're here to deliver valuable insights, expert advice and actionable strategies that will elevate your boardroom experience. Join us as we unlock the secrets to improved decision-making, enhanced board communication, strategic planning and long-term success. I'm your host, denny Corby, alongside CEO of Concert Golf Partners, peter Nanula, on this episode of Board Chats. I wanted to bring on Peter. I wanted to do something more along the lines of the basics of boardroom finance, and not just the basics. really, the whole gambit is all about boardroom finance, private club boardroom finance Because for me, i wanted to know. I'm not an expert by far on any of that stuff, let alone boardrooms. So for me it was also a hey, let's learn a little bit more about the basics for someone who might not know. And also, it's just always good to go back to the basics and just hear and re-hear the reassurance of things that you need to do. So welcome back to Board Chats. What, in your opinion, are the basics of a boardroom finance? Are there any key financial terms, concepts that every board should be familiar with?
Speaker 2:Yeah, i think one of the good things that people do in the business is it's to like a new board member introduction right. Because if you're a doctor, lawyer, business owner, you might be a fairly sophisticated person but you may not know much about private country club budgets or funding or finance right. So I think club benchmarking has some of this. I think there are several consulting firms that do offsite retreats for new board members and they really bring them up to speed on some of the basics. But yeah, the budgeting process, the way that operations typically are run separately from funding capital projects. So, like your capital account, initiation fees come in from new members joining. If people pay capital charges in, those go to a separate account. And we do the new greens, we do the new bunkers, we build a new girl room, separate fund operations and we got a pair of people to run the club every day and keep the place open. A lot of times board members are completely new to that whole dynamic.
Speaker 1:How does the financial structure of a private club typically work And it can maybe talk about the key responsibilities of certain board members when it comes to overseeing the finances.
Speaker 2:Yeah, so typically a board of a member owned club, which is 80 plus percent of all private clubs in America. Yeah, you've got a president, vice president, secretary right. It's in the bylaws that those people need to be elected. And then there's typically a finance committee with one of the five, 10, 15 committees of the club. So normally you're gonna have a finance chair and then you're gonna have several other members on that committee the finance committee And their job is, like you said, budgeting capital for projects and those sorts of things. So that group is a committee that the board delegates responsibility for the finances too.
Speaker 1:There are some common misconceptions about private club finances that boards should be aware of, maybe even like address.
Speaker 2:Well, there's lots of those Misconceptions. I think a lot of people in the club industry think you need to lose lots of money on food and beverage and subsidize that with your golf operations. That's a pretty typical one. We've seen them all over the map. We've seen clubs that lose $2 million a year on food and beverage 2 million a year But big club people paying a lot of dues, initiation fees, and they're very profitable And the other part of the business in their view is let's subsidize that. We see other clubs that manage to break even or eke out a little profit in food and beverage. So a little bit of a misconception there.
Speaker 1:Some make maybe common financial challenges Like what are like the kind of ones that you see.
Speaker 2:Yeah, i think one of the biggest ones is, like we talked about before, lack of board member education about the club business and finances, and that's why I think it's become sort of a best practice to get a subscription to club benchmarking, which is relatively inexpensive for most clubs. You get data from them. Here's my club where you are in Pittsburgh, and here's the seven other clubs in Western Pennsylvania that are at a similar size and kind of price point. Well, how come they lose 200,000 a year in food and beverage and we're losing a million? How come their payroll is 47% of total revenues, right? staff payroll and ours is 58? Oh, well, maybe we should sit down and talk to our general manager about why our payroll is so out of control. So I think club benchmarking data is good Introductory education for new board members. So I think just sort of lack of new board member education is a key challenge. Another one I think Denny is moving targets, changing priorities, personal agendas, right. You and I joined the board of our local club. You're a big tennis guy. I'm a low-handicap golfer. I really want the greens to be at 13, 14 on the stint meter. You don't wanna spend any money on golf because you're a big tennis player. You wanna put in a tennis bubble? Okay, everyone's got a different agenda. How about, once we make the annual business plan? that's just the plan. We're just gonna stick to it. We're not gonna come to every meeting and whip-saw between changing priorities. So yeah, those are a couple of the biggest challenges I see with member-own, member-governed clubs.
Speaker 1:What financial reporting is typically required from the boards? How often should they review those? What are the certain things that have to be looked at, and how often should they be looked at and monitored?
Speaker 2:I would say most member-owned clubs have an annual budgeting process and then they have monthly or quarterly board meetings and they get updated financials from the general manager and then they have a board meeting about it. At least the finance committee is doing that, at least monthly, and then the board will look at it. You know it really varies, denny. I think some do a good job of it. Best practices, i think, include doing it more frequently, monthly. I think having some communication with your members. You're probably going to ask me about that. You need some more transparency with your members to say, hey, we're up in members, we're down in members, we're ahead of our plan, we're behind our plan. Because of that, we're at trim costs here, we're going to hold back on this project or we're going to accelerate because we're in a unique position right now. Like more transparency with the members is the thing we hear over and over again. It really builds trust and the clubs that we see struggling with their membership and with trust are the ones who are very secretive.
Speaker 1:How can boards kind of involve and educate their members of the clubs' finances but without kind of compromising confidentiality or kind of unnecessary alarms and stuff that might be a little?
Speaker 2:bit weary. Yeah, that's a tricky balance. The best practices we see out there, denny, are boards that are much more open with their members. They do focus groups Right. Let's get a group of 10, 20 members. Let's ask them what their priorities are for capital projects. Let's ask them what we're doing. Well over now They do member surveys, mcmahon Group and Club Benchmarking and a ton of consultants do really good surveys. Club 59 does really good member surveys. They do town hall meetings and bring people up to speed on state of the club. How are we doing Here's our annual business plan When they share the business plan and the budget with their members and then they have regular financial communication with the members and they really build trust that way. The ones we see get into trouble are the ones that are very secretive and they don't tell their members much, and then the members are asking tons of questions, feeling frustrated, don't trust the board. Now do you have to tell every single number? No, we've got to give some highlights so that members feel like we're being dealt with straight. People are trying to share information with us so that we can understand how our club is doing.
Speaker 1:What's a gauge people can use to see their club's finances? Obviously, if they're on the outside, maybe looking in, or maybe they're on the board but don't know 100% of everything, is there a gauge or litmus test, almost where people can? I don't know if it's asking a question, but is there a way for people who maybe may not know that they can gauge and go? oh okay, maybe we're doing well here. No, we're doing better than we thought.
Speaker 2:Yeah, there's several, i would think a number of members Dues. How much dues are coming in compared to what we budgeted? Let's face it the dues of a club are the lifeblood of the club business. All revenues come from either You and me paying our dues and then spending on Satan, reverent, spending our cards, guest fees and everything else. How's our total membership count versus our original plan? How's our dues looking? Are we profitable or not? Those are some of the basics.
Speaker 1:You mentioned dues quick. How do boards and private clubs address outstanding dues, member debts, unpaid fees, because that can add up very, very quickly.
Speaker 2:Yeah, I think this is another area of weakness in club governance that we see quite often is somebody has a personal relationship with a family that has an issue. The board will make a personal exception for someone who don't have to pay their bill. You can imagine in a one-off case where some horrific health tragedy or some military family or you can imagine a valid excuse. The problem is when you go from one or two valid excuses like that for a leave of absence or give a person a break on their bill, to 10, 20, 30, 40 of these floating around. That's what we see is we see clubs that go beyond the rare exception and there's just a lot of people not paying their bill for 16, 90, 120 days, 180 days, and they're just letting it slide, Thank you. And the problem we hear is not just financial. It's all the other members who are paying their bill dutifully every month And then they find out that there's 25 other people that are at the club golfing, eating, not paying their bill. It's just not fair right To the rest of us that are paying our tab. So you know, we have a we have probably a more disciplined approach to that, where there are much fewer exceptions because we find people like it from a fairness perspective, you know.
Speaker 1:so obviously you know clubs have to be a little bit in a good financial place to be able to support some of those unpaid fees and debts and stuff. You know how should clubs kind of manage their reserve funds and determine, you know, the appropriate levels to, you know reserve and maintain.
Speaker 2:Yeah, reserves are key, right? There's a whole industry of people who do what are called a capital reserve planning, And so you can hire these people. I think club benchmarking is one of the firms that have the capital reserve consultancy. You call them in, it takes them, you know, a month or two and they do a detailed read on all your assets, your maintenance equipment, your golf course, all your facilities And you know what's the useful life of bunkers and greens and equipment and all that sort of stuff. And then you can see a spreadsheet. Wow, we need to spend $700,000 next year on upkeep of our stuff, or we're gonna look up in a few years and we're gonna have a huge pile of multi-million dollar deferred maintenance. So start with a capital reserve study and then come up with a funding plan for your capital needs that matches somewhat that capital reserve study.
Speaker 1:How do private clubs manage cash flow to ensure they have enough funds to cover operating expenses?
Speaker 2:No all over the map, you know the best ones. Like I said, we have a finance committee that has monthly reviews of their results with the general manager And if you're below or behind your plan with membership or results, you got to make some adjustments. I would say most clubs don't. Most member owned clubs don't keep up with that And so they will fall behind. Maybe we have a few fewer members this year and they won't make any adjustments, and then the end of the year comes and they say well, we're 320 members instead of 350. I guess we got to raise the dues by eight or 9% on everybody to catch up with the fewer members. Well, guess what happens when you raise dues eight or 9%, 20 more people quit, cause that seems like a pretty high dues increase. And then you get into this spiral of we're raising our rates so much that we're driving some of our members off And some of the members around the board table will say well, listen, if they can't afford it, they don't belong here. Okay, that may be fine for me and you and a bunch of our friends that put golf together on Saturday morning, but how's this club gonna be when we only have 160 members? We need the whole community and not everyone can write the big checks quite as easily as the rest of us, right? And so we see that kind of thought process filter into clubs that end up maybe two years, five years down the road in some trouble because they price themselves out of their local club market.
Speaker 1:Are there any cool trends or innovations that are going on kind of in the private club finance and governance that a board should be aware of?
Speaker 2:Again, i keep referring to club benchmarking just cause I think in the last decade or so, the emergence of real data for boards to sit around and look at is a huge help. The idea of volunteering for the board of your club not knowing anything about how it works and then not having any data in front of you based on comparable clubs or anything, just seems like flying blind. So I think that's been a huge improvement. I think a lot of clubs in the last decade that I've been doing this have been more open to having conversations with outside parties, whether it's Trun Golf or people like us at Concert Golf, where, hey, we might not be shopping for a management company to help us or we might not be thinking about getting capital or help from a firm like Concert Golf. But shouldn't we have somebody on our board? go to Club Management Association of America annual conference? Shouldn't we have somebody on our board? do a Zoom call with somebody at Trun or Kemper or Concert Golf or Clubcore just to see what's out there. Because when I do get on a Zoom call with a number of these board members, their eyes are just pinned open. They can't believe what they're learning right. They can't believe we saved $300,000 a year buying the same stuff that they're buying. How Well, we're buying for 30 clubs. They can't believe that we fund all these multi-million dollar capital improvement projects and the members never get assessed. Wait, this sounds almost tricky to be true. How is it that you could build a whole new member patio with a grill and it'd cost you $2.7 million and the members are still just paying $8.25 a month? and then how does that work That there just seems like the scales are coming off their eyes. They didn't know that there are other options. They didn't know there are other experts, because they're just in their town, driving over to their club, talking to their general manager and going back home. That's their only data source. So I just see exposure and education. I've seen a nice trend in that direction.
Speaker 1:You mentioned a little bit more about membership decline. Times, depending on who you listen to, might be a little uncertain right now, in a time of like economic downturn membership decline. How can boards adapt their financial strategies to ensure the club's survival and long-term success?
Speaker 2:Yeah, a great question and very timely, because the last three years have been three of the best years in the history of the club industry, with COVID and with people looking for somewhere to go that's outside and healthy and safe. It's been fantastic for golf, but in the last six months or so, most of the industry has started to see the return to normalcy people going back to an office and a teeny bit less rounds played and golf and membership demand. So you're starting to see it. And then this recession top that's out there, it's coming, and so how do you adapt? So I think one of the biggest things that people do in the board of their real company but they don't do in the board of their country club is have budgeting that has like a base case. Here's what we're all hoping There's no recession and we had 50 new members this year and we lose 40 and we're doing great. Well, where's your downside case? Everybody's company has a downside case budget for if things don't go well, if we hit a recession, okay well. Does your general manager giving you a downside case budget for your club? Okay, well, if we start to see those trends happen, what are the action steps that our general manager is authorized to take to cut here and make certain changes that we've all authorized him to do. Otherwise, wait, we're going to get six months into our recession, we're going to start having panicky board meetings, we're going to keep doing everything as if there's no recession and everyone's going to get surprised, and we're not communicating effectively with our members. So I think that's one of the things that people should be talking about now What happens when the recession hits? Do we already have a downside budget that we could pivot to?
Speaker 1:Not just even the recession coming, but I mean there's other, tons of other financial risks, you know natural disasters, unexpected events. How can clubs manage those risks?
Speaker 2:a bit more. Exactly, yeah, and that's why we talked about the capital reserve fund idea, which is, if you're putting aside money every month into a capital reserve fund and a hurricane hits like this happened to us at a bunch of our Florida clubs you have money that's been sitting there storing up, well, for a rainy day or a surprise like a hurricane. If you're not funding into a capital reserve fund, then you're dry and you have to go out to your members and say sorry, you know there's 200 trees down on the course, the roof caved in on the clubhouse and we got $2 million of work to do. Club's going to be closed for two, three, six months. Members don't want to hear that. They want to hear that you already planned for it and the crews are out there cleaning everything up because you have the money in the bank to go deal with that stuff, right. So reserve funds are critical.
Speaker 1:And if you're a concert golf Correct, you don't have to worry about it Exactly It's going to get fixed.
Speaker 2:It's going to get done. Yeah, having us involved it's really different Like this. This conversation is not an ad for concert golf or dealing with companies like us, but it is striking when we talk to these board members at our clubs. Right, no debt, we pay off all their debt. So being a debt-free club means you're not paying your bank loan payments anymore. The one we're doing right now in the Midwest is a club we'll take over in about a month. You know they're paying $250,000 a year to their bank. It didn't sound like a ton, but that's $250,000 every single year. They could be going to Greens renovation bunkers, redoing the clubhouse and all these things that members are talking about at that club. But no, they're going to check the bank of wherever every year and that money's going out the door. So that helps. And we, like you said, we fund all the capital projects. All our clubs have the benefit of our purchasing power, right? So we'll save $200,000 to $300,000 a year at that club just because we buy seed, fertilizer, chemicals, golf cards. We buy it all as a large crew from the same vendor, from the same sales rep, on the same truck. It's the same products but we have a different rate sheet Because we're buying in volume and they'd like to deal with somebody like us. So that club is now at a significant cash flow advantage because they're not paying their bank and they're saving money on purchasing. You know, several hundred thousand dollars a year and extra cash flow That's wild Yeah.
Speaker 1:That's really wild, it's something that's unbelievable to have that much extra revenue Exactly Basic revenue, i mean cash flow.
Speaker 2:I mean, yeah, you mean revenue coming in cash flow Exactly. And a lot of the board members, like another one we're talking to right now, will say well, tell me which of your clubs are profitable and which aren't doing so well, and I look them straight in the eye and say we have 29 clubs. All 29 are profitable this year, last year, every single year. What? They can't believe it. They think, well, you just did a big project and so a bunch of new members joined and you're at a really exciting time at Club X. Because we did that six years ago. We redid our clubhouse and it was booming, but then three years later a new board came in and times got tough and we didn't have a reserve fund and we went through a deferred maintenance period for three or four years and we were losing money. They go through boom and bust cycles at a typical standalone club. All of our clubs are profitable every single year. But because we have these advantages that are built in and most of these board members just want their club to be sustainable long term, be a wonderful club, have their home values around the golf course to be in good shape And they just want to go enjoy it. They don't want to be worrying. Whether the club is riding the wave of the COVID or the recession, they just want it to be there for the next 50 years, right?
Speaker 1:So there are ways that you've seen where clubs can maybe handle or find opportunities for cost saving measures, but ones that don't particularly compromise the member experience. Obviously, you guys have the pool buying power, but a normal club, how in the board? what can they look for to use some cost savings?
Speaker 2:No, they can do it too, maybe on a little bit lesser scale. But there are buying groups, there are group purchasing organizations, GPOs, that you can join And some general managers know how to tap into that. They might not save quite as much money as a group like us, and you know, frankly, listening to your general manager more. Hey, general manager, we're 200,000 short this year. Where would you recommend we cut and not affect the member experience this month? Most good general managers It's not a happy conversation, but they know how to do it. They've been in the club industry for 10, 20, 30 plus years. The challenge, i find, is when an board member comes in, has their own agenda or orientation because they're in a certain business They're in the real estate or the marketing or whatever kind of business they're in and they'll show up not having been in the club industry and they'll say I think we should do acts because they don't really care about tennis, so let's just cut over there. Or why don't we do? why? Because we never go out to the pool. My wife and I don't have young kids And so we don't use the pool like these other 200 families do. Why don't we cut that? Well, the issue is you're not thinking about the whole business like the general manager is right. So I task the general manager to come back with $200,000 of cuts that aren't going to affect the overall member experience. They know how to do this. They're trained to do it. So I would say listening to your general manager is rule number one. So simple It sounds simple, but it's hard. Like a lot of these people volunteered and raised their hand to run through the board of their club because they want to help. They are prominent members of their community and they bring some real smarts and expertise to bear in their area. But I'd never seen a bigger mismatch in my career between the business you're involved in and the acumen or the expertise of the board members, like normally. If you and I were to join the board of a picker company in Pittsburgh, you know Heinz well you're not going to be on the board of Heinz A without having specific knowledge relative to the catch-up business right and a specific way that you can add value to that right. It's not just people who showed up and thought they would volunteer to help. You would never make it on the Heinz corporate board right And most of these people know this from their own business careers, but at their country club, all that logic seems to go out the window. It's just an election of who's the most passionate. So you get two handicappers who love golf and are willing to spend 200 hours a year on the Greens and Grounds Committee. How many of those people have an agronomic degree from one of the leading agronomy schools? None, they don't know anything about grass or chemical applications or fertilizer. They don't know anything about it. Your superintendent does right. So why don't we have a USGA and superintendent making those decisions instead of a board member like me or you, who never went to a gronomy school, right? It's just a big mismatch, because it feels more like you're volunteering for your school board, which I've done before. I don't know anything about teaching US history, but I'm on the board because I'm a parent, right, and I may be there to help with fundraising or something. But what do I know about teaching ninth grade biology? And why am I telling people how we should be doing that? I don't know anything about ninth grade biology, and that's what a lot of these club boards are People of super well-intentioned, prominent members of their community and they're getting involved in the decision making of running the club on a day-to-day basis And you have a general manager been doing this for 24 years. That's the person that should be deciding all that day-to-day stuff, and your job as a board should be strategy, business plan. Hire a good general manager. After that, you should let your general manager run the day-to-day.
Speaker 1:And that's hard to do. It's hard. Are there any tax considerations for clubs and how can boards ensure compliance with the laws and regulations?
Speaker 2:Yeah, so the biggest tax issues are around outside non-member income. You've probably heard there are a bunch of IRS rules. You can't generate more than 15% of your income from non-member activities. So, like a corporate outing on Mondays or a wedding from a non-member, you've got to keep that under 15% of your total revenues or the IRS says you will lose your tax exemption as a tax exempt non-profit. There's a newsletter called the Club Pax Newsletter. It's the leading resource for private club tax issues that I would recommend people subscribe to. It's got a Mitchell Stump and he's kind of the expert. I think he used to work for the IRS and audit clubs. But anyway, that's probably the biggest one. And so here we are in May. Does your club have a good plan around non-member income and keeping it within that 15% limit? Usually they do, but then the events will kick up and they'll go over the limit And they haven't been having regular conversations on the finance committee with their general manager about that. That's probably the biggest one. There are a few others.
Speaker 1:What about financial disputes or conflicts of interest among members and stakeholders? Any insight on that?
Speaker 2:Yeah, that comes up a lot. I mean again, it always comes from a good place. You volunteered for the board of your club. You care a ton about it, right, and everyone wants you to be on the board because they love Denny and they love how passionate he is about the club. So let's invite you onto our board. Great Denny's family has an asphalt business so it is generously offering to redo all the car pass. Well, how much is he charging us? I don't know 100,000. He says it's like at cost. Did anyone go get three bids? No, we just gave it to Denny because he's into the club business and he's super passionate about it. We find that at a lot of clubs, where it comes from a good place but the club's paying lots more money than they should be, didn't get three bids right. And it's because of that you might follow the conflict of interest, because you've got people with their own personal agendas involved in the business. Of your fault. They might not be saving you money, they might not be doing the best quality work, but because Denny's one of ours, that's why he's doing the work. So that happens at clubs a lot.
Speaker 1:So, on that same path, how can clubs kind of maintain effective financial controls to kind of prevent that fraud or mismanagement of the club funds?
Speaker 2:Yeah, so you have a finance committee and one of the functions of that finance committee is budgeting, capital planning, what we talked about. Another function of that committee is who's our vendors right? Are we using any inside member vendors? And if we are, there's an inherent bias against that because of there's a conflict there. Are we letting 27 people slide on paying their bill every month? Finance committee should be reviewing that, because it's not fair to 300 other members who pay their bill every month to have 27 people not paying. And I see that guy over in the dining room eating, just like you and me. They paid his bill in six months. It's not fair, And so finance committee needs to be on top of that stuff and needs to make decisions based on the bylaws and the principles of the club. not Denny Corby and his family are my friend. I'll talk to him. We'll work it out. That's what seems to go on. a lot is a lot of exceptions get made because we're friends Need to run it a little bit more like a business, where you wouldn't do that if you were on a corporate board. There would be rules at your company to make sure that that wasn't happening, or run our club in a similar fashion.
Speaker 1:That's wild. That's wild. So I know this isn't finance related, but how have you and your club handled members that have those unpaid debt? What's that conversation like?
Speaker 2:Yeah, i would say we love our members and we strive for it's high of member satisfaction score at all of our club as we can, and they tend to be very happy because we're very responsive and attentive. But when people are paying their bill, i would say we're pretty disciplined about it. To be candid, we'll give you a warning, we'll have a private, quiet conversation with you about why this is happening. We'll review the bylaws 30 days, 60 days late, and then we'll just tell them we'd love to help you get through your situation, but you can't be here while you're not paying. Right, and so we'll. Our main focus is we have 400 other families who are obeying these rules. It's not fair to them if you're not paying, and so we'll have the harder conversations with those people. And maybe that's one of the small reasons why our clubs tend to be better managed, more profitable, more consistently, at a high level of excellence is because we're trying to run it more, more like a business. There's a heart there, but not to the detriment of the overall club. Deferred maintenance, conflicts of interest, people losing confidence. People losing trust. People always trust that we're going to do the right thing for four or 500 families.
Speaker 1:What's the best way to effectively analyze and manage the club debt and what are some potential consequences of carrying too much debt, which I think we know the answer to that, but how do you analyze and manage that If you're just like, oh man, what do we do?
Speaker 2:Yeah. So that's a huge issue for private clubs. So let's start with these super elite clubs You and I have played at. There are some clubs They could take on enormous piles of debt. I talked to one last week that just borrowed 40 million 40, 40 million from their bank as part of a $54 million renovation project. All right, so $40 million bank loan Okay. Well, most of us think that's a lot of money and a lot of debt service and that's too much. This is the kind of club where they can make the payments. A it's very profitable club every year. B they can hit up their members for giant assessments and nobody blinks, no hesitation. We do not need to have difficult town hall meetings. Everyone cough up 25 grand, no problem, oh, okay. So there are some elite clubs in that situation where let's just say these rules about debt don't apply In general for the vast majority of other clubs. When you get above one times your annual revenues, you're borrowing too much. Right, so it fits a club doing seven or eight million a year in total revenues. Dues, initiation fees couldn't be averaged all of it. If you have a club generating $80 a year in revenues, break an even or a little above or below and you go out and borrowed 12 or $15 million for a big project. You may think that that's an okay thing to do today. Remember, we're just coming off of three of the best years in the last 100 years in the club business. Your membership is relatively full, your numbers are looking good. Oh, we could afford, you know, $900,000 a year in principal and interest payments. We can afford it, okay. So what happens when this recession kicks in Q4 this year or next year And we're down 50 members and we can't generate quite as much revenue that we were last year? Oh well, that bank loan is gonna start to be a burden on our club. Right, you borrowed too much. So one rule of thumb that's pretty tried and true is if you're borrowing more than one times your annual revenues, you're probably borrowing too much. And so people will say all right, well, we've got a $14 million project to do. We wanna borrow from the bank at four, five, six percent. That's much better than tapping your members for that. And the answer is it sounds like it is, but you owe that bank Over the next 15, 20, 30 years. Your club was just gonna have to keep paying, whereas if you asked your members what they're willing to pay, and you assessed them for that right. They've given you their consent. They'll pay that much. Maybe you should have scenario A, b and C for your capital projects and you should only spend what your members are willing to pay for, not what a bank will lend you now, and then you choked on that bank loan. Three years from now, we just see that happen a ton.
Speaker 1:And that probably boils down to a lot of the importance of like financial forecasting too Correct.
Speaker 2:That's what I said, like having a base case financial forecast. Everyone does that. Some people hire a McMahon group, who is a very reputable firm that does capital planning. Which new clubhouse remodels should we do? Okay, $12 million. Well, what's our pro forma? for? How many new members are we gonna add and what's our budget gonna look like out of five or 10 years? Great, i hope that all happens. What if it doesn't? What if we hit a recession? right, okay, well, what's our downside case? Well, if the downside case happens, can we still pay off our bank? If we do a big assessment, are 50 people gonna quit? Oh, well, maybe we shouldn't do the $14 million renovation plan. Maybe the $8.6 million renovation plan is the more prudent one. And then there's a series of projects that we're all still kind of excited about And we put those a little bit on the back burner, and two or three or four years from now we revisit those in phase two. So I like the plans where there are phases. There's phase one everyone agrees we gotta do these now. There's phase two, there's phase three, and then we see how the recession or the economy or the membership is doing before we bite off the next big chunk.
Speaker 1:Yeah, cause you. basically you still wanna make any financial missteps And I think having those plans and those steps in place really helps that. Speaking of some missteps and stuff, are there any like common missteps or things that you've seen private clubs make And like what lessons can we share to the other club boards about them?
Speaker 2:Yeah, i mean. Some of the common ones are one borrowing too much. Like you said, barrowing more than about one times your annual revenues gets a surprising number of clubs in trouble. Number two we see a lot of clubs barred from Peter to pay Paul. They go, they have capital projects they're trying to fund And there's nothing in the capital budget. And so they go raid their operating surplus. Hey, we're up a couple hundred thousand dollars over here, let's grab some money and redo the car pass and redo the HVAC or whatever it is. And they start to use operating funds for capital projects That can really catch up to you. Poor budgeting we talked about before. We don't do good financial projections with good you know downside scenarios. All of a sudden you've got a surprise member assessment. Hey, members sorry to pass along the bad news We're 30 members down from where we expected we would be. So we're gonna send out a special assessment. We're not building you to new pickle ball forts. You're not gonna get new greens or bunkers. You're not gonna get anything that you can see or touch or benefit from. But we're short on our budget this year by $300,000. You all just need to kick in another 2000 bucks And everyone gets that bill in the mail and says what? I'm gonna write another check. I'm not getting anything for it that I can see when I go to my club, but because my board did a bad job of budgeting, i just got to write another check. Okay, so half of your members are fine with that. It doesn't really affect them financially too too much. Half of your members are pissed right like what's that about? companies never do that. But our club did that because they didn't budget for different scenarios.
Speaker 1:Yeah, but that point, it's not even the Cost. It's just like you feel like you're like you're being nickel and dying. Correct you know you get your bill and it's like this fee, this, this like, just come on, just give me the whole thing. I don't care, just give you a lot of ones. I don't want to feel like. You know It's like the old Cell phone bills It was you just kept going extra fees on your bill.
Speaker 2:Yeah, and that's what we here. It's just. It's just a loss of confidence Maybe not necessarily in the people on the board, because you may know three folks yourself and like it's more loss of Confidence in the business model. What are these people doing? and why do I have a bill six nickel and dime items? And why are they always surprise assessments? and why do we have deferred maintenance? The way we're governing and funding are running our club, i just don't believe this is the best way to do it Right, and those are a lot of the calls we get. Isn't there a better way? And you know we're fortunate enough to have a bunch of successful clubs where we can say go visit these clubs, go play out. I'm, go talk to our board presidents and see what you think yourself, and I Personally think it's a much better way to run a club, because we have the capital and we have the experience and you know We have what would you call best practices of Of. We've learned all these lessons over the past 27 years and so we have policies and procedures to avoid some of the pitfalls That you've been raising on this call. So I think it's a better way to run Run a club but that's not for everyone. But there's a lot. They can learn from your podcast any about how some of the better clubs do and how we do it. Maybe they can run their club a little better.
Speaker 1:Now let's say someone is interested in learning more, what should they do about concert golf?
Speaker 2:Yeah, i mean first, good website right. Concert golf partners calm, there's a ton of information on there and case studies and stories about other clubs like yours and that sort of thing. And then they can call me. My information is right. On the website We can have a very confidential Exploratory discussion about your club. And then oftentimes, danny, i'm just pointing them to McMahon group or club benchmarking or One of the leading consultants in various aspects of the club industry who Are really top-notch, and if they haven't been exposed to those experts, they can get on the follow them, they may hire them, they might just talk to them and say, wow, we really should consider this new type of solution for our greens, because we're having this problem with our greens and our superintendent Isn't giving us good answers. So it's just a way to get Expertise. Give us a call, go to our website, we'll try to help you out.
Speaker 1:And I'm sure you get the people as well who you know start Uncovering, peeling back all these layers of the onion going. Oh, this is a lot more work than we really think it is. It's right, let's just call conser go I'll see what we can do, because this is turning in tons of that.
Speaker 2:Tons of that, yeah, but there's a lot of pride. I mean, if you have three thousand private member owned country clubs in America, most of those clubs have a lot of pride in being a member own flaw And they like to be on their boards and be part of it. Right, and so we support that. We want these clubs to live on and be self-sustaining and be terrific clubs If, if we can't be the solution for them ourselves, we can direct them to some good resources. You.