Is Your Board Focusing on the Balance Sheet?
The balance sheet and long term financial health
While income statement analysis is interesting and useful, it seems to us that often too little time is spent at the Board level on a private club’s balance sheet. In many ways, the balance sheet is a much better indicator of the long term financial health of a private club and that’s the ultimate responsibility of the Board. While an exhaustive discussion of the analysis of a balance sheet is beyond the scope of this blog, we thought we’d mention a few thoughts and questions Board Members should be considering.
Cash for operating and capital purposes should be kept separate and the integrity of each preserved. Are they at your club? Are amounts segregated for capital purposes offset by a matching fund balance in the equity section? Some clubs have unfunded fund balances which are always problematic. Are any operating cash surpluses regularly transferred to the capital fund? Are any operating cash shortfalls resolved with assessments or additional dues without “borrowing” from any capital funds? The temptation to borrow from Capital Funds must be resisted. As we say, private clubs have an insatiable need for capital and diverting any accumulated funds will lead to deferred replacements of assets and/or delays in addressing improvements needed to satisfy member and attract new ones. The Board needs to assure itself the operating cash balance is appropriate and the club is accumulating capital funds at a pace consistent with the long term needs of the Club. As fiduciaries, it the Board’s job to do so. If you don’t already have one, you need a long-term capital plan matching long term sources and uses of funds. When we say long term, we’re thinking 10 years.
Most private clubs do a pretty good job of collecting funds or limiting access to the club quickly. It can be more difficult when an HOA (homeowners’ association) is involved. Board members need to be vigilant in monitoring and pursuing collections in fulfilling duties to the membership. It is not always pleasant to pursue funds from fellow members but it is necessary.
Board members should understand the appropriateness of inventory levels and the quality of goods on hands. Is everything saleable? Which vendors permit returns of unsold inventory? What might cause fluctuations in comparative balances?
Some items such as insurance are routinely paid for in advance. Board members should understand the components of prepaid expenses and the timing of ultimate recognition on the income statement. As with every component of the balance sheet, period to period fluctuations invite the best questions.
Property and Equipment, net of depreciation
Clubs need to constantly replace physical assets and add new ones to meet the needs of current members and to attract new ones. It’s all part of the broadening of amenities needed to compete in today’s private club market. We have previously written about the need to expand the capital base. Depreciation consumes the capital base at an unrelenting pace. Healthy clubs must be reinvesting capital at a faster pace to maintain and increase the capital base. We believe this is the acid test of the financial health of a club. Is your capital base increasing?
Accounts Payable and Accrued Expenses
Fluctuations in amounts owed to others must be understood and related to cash and accounts receivable balances. Is the club able to meet its obligations on a timely basis? Are all vendor discounts being properly taken? These are critical questions to ask in assessing immediate financial health of the club.
These are generally member dues billed and/or paid in advance. They are recognized as income as the season progresses. Board members should understand if the offset is in cash or accounts receivable and what the answer means to cash flow planning for the year. We can help if you need additional assistance in sorting this all out.
Debt and Lease Obligations
Clubs often take on debt (or leases) for capital spending. Debt needs to be used judiciously and in the context of a long-term capital plan. We have written much on the use of debt in private clubs and we hope you review it or contact us if you are considering new debt or a refinancing of existing debt. There are many opportunities to save your club considerable sums over the life of a loan. It’s not just about the rate.
Equity (Unrestricted Net Assets)
This section is generally broken into line items for the Operating Fund (accumulated balance of operating results from private club inception to date), funds restricted for specific purposes (and hopefully offset by segregated cash) and amounts due certain members.
If your club receives funds from the members that are refundable at exit or other points in time, it is critical to understand the terms and expected timing. You must provide for the repayments in your capital planning. Also, when you accept the funds, additional entries beyond increasing cash and the liability to members are needed to restrict the amount in the appropriate fund balance. The additional steps can be easily overlooked making balances misleading to boards. This is particularly true if communication of the intent for the use of funds to the private club’s controller is not clear.
If it’s time to better understand and manage your balance sheet, we can help. The comments above are just the basics.
Club Board Professionals is a strategic financial consulting and training firm. The Principals, Dave Duval and Joe Abely, assist clubs achieve excellence in three areas: governance, financial sustainability and membership satisfaction. Contact us for a complimentary initial assessment of your club.
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