It goes without saying that the last couple of years have been economically challenging for both commercial and non-profit organizations in the U.S., and certainly this dilemma would extend to private clubs.Â Traditionally, the first impulse among owners and managers facing eroding profitability is to cut services or staff, a somewhat dubious calculation when considering the long term consequences of these actions.
Without getting into the debate surrounding the viability of business models used by clubs given today’s distressed financial and demographic environments, there are realistic, yet generally overlooked, measures that are available to mitigate revenue shortfalls.
Organizations, irrespective of their type, essentially have two broad means that can be taken to improve profitability:Â Â 1) increase revenues, or 2) reduce costs.Â Increasing revenues is often a difficult proposition, at best, although it may be argued that creative marketing can offer great potential to those willing to utilize it.Â Still, if the overall [economic] pie is not growing, aggressive marketing will serve only to benefit the more creative at the expense of the less creative.
The alternative to raising revenues is to reduce costs.Â Surprisingly in this country, only a small number (below 10%) of organizations have ever undergone an independent, comprehensive analysis of their expenses, despite the fact that cost reduction usually is so impactful.Â Furthermore, and depending on the profit margin of a given organization, it would require at least five times the amount of revenue to produce the equivalent amount of bottom line benefit that cost reduction can generate â€“ without a penny invested in marketing.
Although most organizations employ accountants, treasurers and/or CFOs, their typical policy in this regard is to look only at trends or exceptional, possibly one-time only, expenditures and to assume that the status quo should not be disturbed.
It is not meant as a criticism to suggest that these folks are usually missing the forest for the trees (or, perhaps better stated, the trees for the forest).Â The fact of the matter is that they simply cannot be expert in all of the categories of expenses found on any P&L statement.Â Let’s look, for sake of discussion, at some of the line items that would be found on a club’s books:Â electric utility costs (including lighting), internal-equipment maintenance (including that for heating and A/C, restaurant, water supply, and waste removal or mitigation), vehicle maintenance, facility maintenance, IT, telecom and security systems and service contracts,Â advertising, office supplies, uniforms, bank fees, insurance (of all types), human resources, travel, and the ever-popular financing expenses.Â Consider the staff size that it would take to establish not only the appropriate “baseline” numbers for these items, but then to have the sophistication and capability to access alternative vendors for them or to re-negotiate existing contracts, if necessary.Â Fortune 500 companies have entire departments devoted just to this arena; smaller organizations can’t afford them.
It must be emphasized here that we are not speaking of small potatoes in the aggregate when assessing the excess spending in these categories.Â It would be hard to envision that most clubs of any size would not have adjustable expenses â€“ i.e., excluding salaries and commodity related supplies â€“ in the million dollar-plus range.Â It is no exaggeration to state that an expense audit would be expected to uncover potential savings, on average, of $200,000 to $300,000 at this level of expenditures and that, the greater the gross expenditures, the greater the cumulative savings benefit.Â Additionally, not only can the savings occur in the first year, they recur in the years to follow.
So why is it that more organizations don’t employ an outside consultant to evaluate their spending patterns?Â In part, it’s because owners don’t realize such services exist, in part because they first need a nudge from a trusted source before they’ll try something “new,” and in part it’s because they’re convinced their staffs can handle it.Â Although expense reduction is not the only answer, it is one of the answers, and one which can be accomplished with no financial risk or out of pocket cost to the organization as fees are usually based on a split of realized savings, and then only for a limited period.
Steve Vest, Pearl Logic, Inc.
A graduate of Occidental College in Los Angeles, and with a post-graduate degree from Thunderbird Graduate School of Global Management in Glendale, Arizona, Mr. Vest’s career spans over thirty years in the investment and business brokerage industries, during which period he held positions as a Wall Street security analyst, institutional salesman, financial advisor, and business-transaction specialist, while earning the professional designations Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP).Â Most recently, he has become associated with a consulting company, Pearl Logic. Inc. (Tampa, FL) as a Senior Solutions Advisor in the area of cost reduction of operating expenses on behalf of mid-size companies and non-profit organizations.
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This weekly blog comments on and discusses the club industry and its challenges. From time to time, we will feature guest bloggers â€” those managers and industry experts who have something of interest to say to all of us. We also welcome feedback and comment upon the blog, hoping that it will become a useful sounding board for what’s on the minds of hardworking club managers throughout the country and around the world.
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