Understanding your club finances: a ratio approach.The management of any business requires operating executives to pay close attention to the financial scoreboards, and a club business is no exception. The general manager, often called the chief executive officer, closely monitors the financial activities of the club by studying the income statement. Various consulting firms Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a provide the club industry with annual operating statistics. These statistics are focused primarily on revenues (sales and dues), expenses, and the resulting bottom line. However, little attention has been given to the balance sheet and its vast array of numbers covering assets, liabilities, and members' equity. Therefore, our research objective was to determine the average assets and liabilities of private clubs and also the most common balance sheet ratios. Survey Methodology A survey questionnaire was mailed to 500 members of the Hospitality Financial & Technology Professionals (HFTP HFTP Hospitality Financial & Technology Professionals HFTP Hybrid-Fiber Twisted Pair ) associated with clubs in the summer of 2005 requesting them to report their 2004 year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. figures from their balance sheets and a few revenue and expense numbers from their clubs' income statements. We also asked for the typical demographics The attributes of people in a particular geographic area. Used for marketing purposes, population, ethnic origins, religion, spoken language, income and age range are examples of demographic data. , including type of club, number of members, and geographical location. A total of 82, or 16%, of the surveys were returned, and the results discussed in this article are based on those responses. Overview of Financial Ratios A comparison of two related numbers yields a ratio. When dollar amounts are used, the ratios are called financial ratios. Common financial ratios used by clubs include the current ratio, accounts receivable turnover Accounts receivable turnover The ratio of net credit sales to average accounts receivable, which is a measure of how quickly customers pay their bills. accounts receivable turnover , debt-equity, and food and beverage F&B is a common abbreviation in the United States and Commonwealth countries, including Hong Kong. F&B is typically the widely accepted abbreviation for "Food and Beverage," which is the sector/industry that specializes in the conceptualization, the making of, and delivery of foods. inventory turnover, just to name a few. Exhibit 1 displays 20 key financial ratios based on financial numbers reported to us. For each ratio--besides reporting the median--the upper and lower quartiles are also provided. Managers of individual clubs can assess their own club's standing with these 20 financial measurements. The 20 ratios can be classified into five major categories: liquidity, solvency The ability of an individual to pay his or her debts as they mature in the normal and ordinary course of business, or the financial condition of owning property of sufficient value to discharge all of one's debts. solvency n. , activity, operating costs operating costs npl → gastos mpl operacionales , and profitability. Liquidity ratios measure the ability of a club to meet their current obligations, that is, "can the bills be paid as they come due?" Liquidity ratios include the first four ratios listed in Exhibit 1, namely the current ratio, accounts receivable turnover, average collection period, and the operating cash flows Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. to current liabilities Current Liabilities Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. . Solvency ratios Solvency Ratio One of many ratios used to gauge a company's ability to meet long-term obligations. Notes: Derived by taking a company's net worth and dividing by total assets. See also: Asset, Asset Valuation, Balance Sheet, Fundamental Analysis, Income Statement measure the potential of a club in honoring their long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. obligations, and include the next five ratios shown in Exhibit 1. These five ratios draw on financial information from the three major financial scoreboards and include (1) operating cash flows to long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. , (2) long-term debt to total capitalization Total capitalization The total long-term debt and all types of equity of a company that constitutes its capital structure. total capitalization See capitalization. (LTD LTD 1 Laron-type dwarfism 2 Leukotriene D 3 Long-term depression, see there 4. Long-term disability plus members' equity), (3) debt-equity ratio, (4) times interest earned times interest earned See interest coverage. , and (5) fixed charge coverage. The second and third ratios are based strictly on figures from the balance sheet, while the last two solvency ratios are derived from numbers from a club's income statement. Five activity ratios (ratios 10-14 from Exhibit 1) are reported. These ratios include food, beverage, and golf merchandise inventory turnover, fixed asset turnover fixed asset turnover A financial ratio that indicates a firm's ability to generate sales based on its long-term assets. Fixed asset turnover is calculated by dividing annual sales by the dollar amount of fixed assets. , and total assets turnover Assets turnover is a business term and may be used as a broad measure of asset efficiency and is calculated by dividing sales revenue by the total assets. Its also used in the Du Pont Identity: Net Earnings/Shareholders Eq. . All these turnover ratios help to explain the effectiveness of management in using the assets to operate the club; generally, the higher the turnover, the better. Three operating ratios Operating Ratio A ratio that shows the efficiency of management by comparing operating expense to net sales: are reported including the food cost percentage, beverage cost percentage, and golf merchandise cost percentage. These ratios assist in assessing the efficiency of management. There are many more operating ratios that the consulting firms do an excellent job of reporting. Remember, our primary focus of this research is the balance sheet. The final three ratios (ratios 18-20 from Exhibit 1) focus on profitability. The three profitability ratios Profitability ratios Ratios that focus on how well a firm is performing. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment. reported are (1) profit margin, (2) return on assets Return on assets (ROA) Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). , and (3) operating efficiency. The ratios presented in this article will be discussed by class of ratio. The formula will be shown for each ratio followed by a brief discussion. Liquidity Ratios 1. Current ratio = current assets/current liabilities A current ratio of 1.0 means that a club has an equal amount of current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. and current liabilities. From Exhibit 1, the median current ratios for the beginning (December December: see month. 2003) and end of the year are fairly close at 1.45 and 1.57, respectively. The lower quartile Quartile A statistical term describing a division of observations into four defined intervals based upon the values of the data and how they compare to the entire set of observations. Notes: Each quartile contains 25% of the total observations. current ratio was 0.97 while the upper quartile was 2.56. As an overall measure of liquidity, these current ratios suggest the club industry as a whole has little difficulty in meeting its obligations as they become due. 2. Accounts receivable turnover = total revenues/average accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying This ratio measures the number of times the accounts receivable are collected during the year. Since revenues cover a period of time, generally a year, the accounts receivable amount should be an average for the same time period as total revenue. The median turnover was 9.66 times during 2004. The lower and upper quartile figure turnover of 6.79 and 14.89, respectively, differed significantly. Just how good the collection efforts are may also be reflected by the average number of days it took to collect the average account. This is determined by dividing 365 days by this turnover ratio. 3. Average collection period = 365 days/accounts receivable turnover The average collection period (ACP (Associate Computing Professional) The award for successful completion of an examination in computers offered by the ICCP. It is geared to newcomers in the computing field. For more information, visit www.iccp.org. ACP - Algebra of Communicating Processes ) is really just another way of viewing the collection efforts and it indicates the average number of days required for a club to collect amounts owned by their members. During 2004, the median ACP was 37.8 days. The two extremes (lower and upper quartile) were 24.5 and 53.8 days, respectively. Clubs at the upper quartile spent an average of nearly two months to collect their accounts. Accounts receivable for the average club is a significant amount, and failure to make timely collection of these accounts is costly in labor efforts and missed investment opportunities. 4. Operating cash flows to current liabilities = operating cash flow/average current liabilities This ratio compares the amount of cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses as shown on a club's statement of cash flows to the average current liabilities. Some financial analysts suggest this may be a better measure of liquidity than the other ratios since obligations are paid with cash, not current assets. The median of 0.41 means that $.41 of cash flow was generated by operations for each $1 of the average current debt. At the two extremes, as shown in Exhibit 1, financially weaker clubs had only 0.09 while the stronger clubs at the 75th percentile percentile, n the number in a frequency distribution below which a certain percentage of fees will fall. E.g., the ninetieth percentile is the number that divides the distribution of fees into the lower 90% and the upper 10%, or that fee level show 1.02 for this ratio. Solvency Ratios Solvency ratios help to assess a club's ability to pay their long-term obligations. The ratios presented in this article measure this ability by looking at figures from three different financial scoreboards. 5. Operating cash flows to long-term debt = operating cash flows/average LTD The operating cash flows used in this ratio are shown on a club's statement of cash flows while the average long-term debt is shown on the balance sheet. While the short term version of this ratio has a median of 0.41, this median is only 0.13. This may seem low; however, long-term debt is moved to short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. over time so it will probably not pose a problem for most clubs. 6. Long-term debt to total capitalization = LTD/LTD + members' equity This ratio simply reflects the percentage of LTD to the total of LTD plus members' equity. At a median of 0.18 at the end of 2004 means LTD is only 18% of the total capitalization of the average club. At the lower quartile, LTD was only 8%, while it's less than 50% of total capitalization at the upper quartile. Clearly, the ratios suggest the majority of the financial risk in most clubs is borne by club members rather than lenders. 7. Debt-equity ratio = LTD/members' equity This ratio uses balance sheet numbers in a slightly different way than the previous ratio. Long-term debt is compared to total members' equity. Median ratio was 0.21 at the end of 2004. This ratio was very similar to the median of 0.20 at the beginning of 2004. Again, these results suggest clubs are managing their LTD reasonably well. 8. Times interest earned (TIE) = (net income + interest expense) / interest expense The next two ratios enable a person to evaluate solvency from an income statement perspective. The TIE ratio indicates how many times a club could pay the cost of debt. In 2004, the median TIE ratio was 11.0. The ratios at the two extremes were 3.24 and 28.0. This suggests that most clubs could easily pay the cost of borrowing funds. This result is not surprising since the prior two solvency ratios suggest clubs have a relatively low amount of long-term debt. 9. Fixed charge coverage = (net income + interest expense + rent expense) /(interest expense + rent expense) This is similar to the TIE ratio but it also includes rent expense. Although most clubs do not have rent (only 13 clubs reported any rent expense), it is still useful to report this ratio for the few clubs paying rent. The result of a 9.36 median is good for the club industry. The lower quartile of 5.03 and an upper quartile of 28.65 also confirms that the club industry is most solvent solvent, constituent of a solution that acts as a dissolving agent. In solutions of solids or gases in a liquid, the liquid is the solvent. In all other solutions (i.e. when considering both interest and rent payments. Clearly, the average club has a relatively low amount of long-term debt, as reflected by both the long-term debt to total capitalization and the debt-equity ratios. The two solvency ratios, based on income statement numbers, TIE, and fixed charge coverage, also suggest that most clubs have no difficulty in meeting their interest and rent payments. Activity Ratios The five activity ratios presented in this article compare asset values to either revenues or cost of sales. In each ratio, the higher the turnover, the greater the use of the assets. The first three ratios value inventories of food, beverages, and golf merchandise. 10. Food inventory turnover = cost of food sold/average food inventory The median food inventory turnover, as reported in Exhibit I, is 21.57. Dividing 21.57 into 365 days a year yields results in 16.9 days, meaning that food items on average were in inventory just a little over two weeks. A 17.59 lower quartile and 28.75 upper quartile food inventory turnover translates into 20.8 days and 12.7 days. Keep in mind that while some food items are flesh and should be turned over in a day or two, others, such as canned goods and frozen foods, may last considerably longer in inventory. 11. Beverage inventory turnover = cost of beverage sold/average beverage inventory The results of this study reveal a median of 4.07, meaning beverage items stay in an operation for 89 days, or about three months. It is also expected that beverage items stay in inventory longer as club managers have to cater to their members and stock many items for these members. Unless the clubs have a healthy catering business, weddings, or big banquets, the turnover of beverages is normally low. In addition, a number of clubs purchase wine with the intent of holding these liquid assets Cash, or property immediately convertible to cash, such as Securities, notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account receivable. for several years in the future, thus contributing to a relatively low turnover. A lower quartile of 2.41 times, or 151 days, and an upper quartile of 4.84 times, or 75 days, are also reasonable results. 12. Golf merchandise inventory turnover = cost of golf merchandise inventory sold/average golf merchandise inventory The turnover data in this category is quite low. With a median of 2.21, the merchandise in the golf pro shop is turning over every 165 days, which is over five months' time. The lower quartile of 1.78, or 205 days, suggests that some merchandise may be kept in the shop for over half a year. The upper quartile of 2.91, or 125 days, still suggests over four months of golf merchandise was on hand at any one time. Therefore, it makes sense for management to work with the golf pros to determine if the merchandise meets the need of the members. There may be ways the club can work with clothing and equipment manufacturers about merchandise re-stocking programs so the clubs do not waste monetary resources while investing in golf merchandise inventory. 13. Fixed asset turnover = total revenues/average net fixed assets fixed assets npl → activo sg fijo fixed assets npl → immobilisations fpl fixed assets fix npl → General managers will want to have a high number for this ratio as it means the assets are generating more revenues for the club. In essence, this ratio measures how effective management is in using their fixed assets. Our study reports median, lower, and upper quartiles of fixed asset turnover at 0.79, 0.50, and 1.17, respectively. Thus, for every dollar of net fixed assets at the average club, $0.79 cents of revenues were generated. Since clubs have most of their assets as fixed assets, a relatively low turnover is expected. 14. Total asset turnover = total revenues/average total assets This ratio measures usage of total assets. A median of 0.55, a lower quartile of 0.39, and an upper quartile of 0.88 are reported, indicating that for every dollar of assets, the average club has generated $0.55 in revenues. These results are lower than the fixed asset turnover since total assets include both fixed assets and current assets. Operating Ratios Operating ratios focusing on expenses are designed to measure efficiency. Only three cost ratios are reported since major accounting/consulting firms provide operating statistics on an annual basis for the club industry. 15. Food cost percentage = cost of food sold/food sales The club industry posts a higher food cost than hotel food services food services Hospital services A 24/7 department in a hospital that provides for the nutritional needs of inpatients–eg, those needing special diets, preparing meals and transporting them to the floor and, through the cafeteria, the hospital staff and or free-standing free-standing Managed care adjective Referring to a physically and, often, financially discrete entity–eg, a surgical center, that is separate from, but may be affiliated with, a hospital; FS facilities may provide ambulatory surgery, emergency or restaurants due to the fact that members view their membership dues and food minimums as already paying for part of the food. Thus, for the same quality of food, the menu price is usually lower, making a lower sales figure and thus higher cost percentage. A median of 40% is the same as the historical food cost percentage for the club industry. A lower quartile of 36.8% and an upper quartile of 43.5% show that many clubs are reasonably close to the median number. 16. Beverage cost percentage = cost of beverage sold/beverage sold Traditionally, beverage costs should be lower than food costs, and the results of this study are no exception. The posting of a 30% median, though a bit higher than other beverage operations outside the club industry, is very good. A lower quartile of 26.6% and an upper quartile of 33.6% are also most commendable com·mend tr.v. com·mend·ed, com·mend·ing, com·mends 1. To represent as worthy, qualified, or desirable; recommend. 2. To express approval of; praise. See Synonyms at praise. 3. . 17. Cost of golf merchandise percentage = cost of golf merchandise sold/golf merchandise sales. Since there is no cooking or serving involved, the mark-up of golf merchandise is not as high as that of food and beverage items, and one can also reasonably assume that the cost percentage, therefore, is much higher. For this study, the respondents In the context of marketing research, a representative sample drawn from a larger population of people from whom information is collected and used to develop or confirm marketing strategy. share a medium percentage of 58.0%, a lower quartile of 25.3%, and an upper quartile of 75.7%. The differences among the median, the lower quartile, and upper quartile are more dramatic for the cost of golf merchandise compared to food and beverage cost percentages discussed before. Profitability Ratios Most clubs are not-for-profit Not-for-profit An organization established for charitable, humanitarian, or educational purposes that is exempt from some taxes and in which no one in profits or losses. for tax purposes but do desire to generate a positive bottom line from their operating activities. We present three ratios to measure how well clubs perform from a profit perspective. 18. Profit margin = net income/total revenues Profit margin suggests how many cents slip to the bottom line for each revenue dollar. For 2004, a 7.3% profit margin is reported, which means that for each $1 of revenue, 92.7 cents was incurred in expenses, resulting in a bottom line of 7.3 cents. This is good news, and such funds can then be used in renovating or expanding the club and serving the membership. The upper quartile of 26.9% and a lower quartile of 3.7% also indicated that 2004 appears to have been a very good year for clubs. 19. Return on assets = net income/ average total assets A 4.6% median shows that for every dollar invested in assets of a club, it is able to generate $0.046, or a bit less than a nickel nickel, metallic chemical element; symbol Ni; at. no. 28; at. wt. 58.69; m.p. about 1,453°C;; b.p. about 2,732°C;; sp. gr. 8.902 at 25°C;; valence 0, +1, +2, +3, or +4. in net income. This is a reasonably good number given the not-for-profit status of most clubs. The lower quartile is 1.7% and an upper quartile of 15% appears to be fairly high. 20. Operating efficiency ratio = (income before fixed expenses)/total revenues This last ratio offers a better measurement of "management" effectiveness than the other two profitability ratios, since this ratio looks at income before fixed charges. Many managers are not involved in negotiating issues resulting in fixed charges, such as interest or rent, as such decisions are often made by the club's board of directors. Therefore, measuring managers' performance by using this ratio is a fairer way than using numbers from the income statement that follows after income before fixed charges. A median of 27.7% is a reasonably good number. The lower quartile of 18.6% looks reasonable, while the upper quartile of 92% seems too good to be true. What's Next? You now have an idea of financial ratios and measurements. Where does your club stand? We suggest that you ask your controller to prepare a dashboard (1) See Mac Dashboard. (2) A software-based control panel for one or more applications, network devices or industrial machines. Dashboards display simulated gauges and dials that look somewhat like an automobile dashboard. report with these 20 key ratios on a monthly basis after the month-end reports, and then you will have a good grasp of how well your club is performing compared to these industry averages. Ratios analysis is really not a difficult tool to use. Once you understand the ratios, you can also use this data for diagnostic purposes and be more proactive and strategic in managing your club. Excel A full-featured spreadsheet for Windows and the Macintosh from Microsoft. It can link many spreadsheets for consolidation and provides a wide variety of business graphics and charts for creating presentation materials. or another spreadsheet spreadsheet Computer software that allows the user to enter columns and rows of numbers in a ledgerlike format. Any cell of the ledger may contain either data or a formula that describes the value that should be inserted therein based on the values in other cells. program can greatly simplify the tedious calculations. Consider the following: Step 1: Start with the basic 20 numbers. Step 2: Set your own dashboard. Step 3: Use ratios to gauge performance or diagnose diagnose /di·ag·nose/ (di´ag-nos) to identify or recognize a disease. di·ag·nose v. 1. To distinguish or identify a disease by diagnosis. 2. issues. Step 4: Take appropriate corrective actions A corrective action is a change implemented to address a weakness identified in a management system. Normally corrective actions are instigated in response to a customer complaint, abnormal levels if internal nonconformity, nonconformities identified during an internal audit or or set strategies. Step 5: Continuously evaluate. Go with these five steps and start managing your club's finances more effectively! By Raymond S Raymond, town, Canada Raymond, town (1991 pop. 3,130), S Alta., Canada, SE of Lethbridge, in a sugar beet area. Sugar is refined and honey is produced there. A provincial agricultural college is in the town. . Schmidgall, Hilton Hotels
The Hilton College began in 1969 when James Taylor, who would be the first dean for the college, presented Eric Hilton, son of Conrad N. Hilton with plans for a hospitality college to be located at the University of Houston. , University of Huston
EXhibit 1. The Ratios
Ratios Median Lower Quartile Upper Quartile
(25%) (75%)
Liquidity Ratios
1 Current ratio
December 2003 1.45 1.07 2.78
December 2004 1.57 0.97 2.56
2 Accounts receivable
turnover:
Times 9.66 6.79 14.89
Average collection 37.8 days 53.8 days 24.5 days
period
4 Operating cash 0.41 0.09 1.02
flows to
current liabilities
Solvency Ratios
5 Operating cash
flows to
long-term debt 0.13 0.07 0.68
6 Long term
debt to total
capitalization
December 2003 0.17 0.08 0.45
December 2004 0.18 0.08 0.47
7 Debt-equity ratio
December 2003 0.20 0.08 0.81
December 2004 0.21 0.09 0.81
8 Times interest 11.0 3.24 28.0
earned
9 Fixed charge 9.36 5.03 28.65
coverage
Activity Ratios
10 Food Inventory
turnover
Times 21.57 17.59 28.75
Days 16.9 days 20.8 days 12.7 days
11 Beverage inventory
turnover:
Times 4.07 2.41 4.84
Days 89 days 151 days 75 days
12 Golf merchandise
inventory turnover:
Times 2.21 1.78 2.91
Days 165 days 205 days 125 days
13 Fixed asset turnover 0.79 0.50 1.17
14 Total asset turnover 0.55 0.39 0.88
Operating Ratios
15 Food cost percentage 40.0% 36.8% 43.5%
16 Beverage cost 30.0% 26.6% 33.6%
percentage
17 Golf merchandise 58.0% 25.3% 75.7%
cost
percentage
Profitability Ratios
18 Profit margin 7.3% 3.7% 26.9%
19 "Return on assets 4.6% 1.7% 15%
20 Operating efficiency 27.7% 18.6% 92%
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