Your Club’s Finances – How Much do You Know?

Most members have limited knowledge about the costs to maintain the golf course, run the food & beverage operation and what may be fair and competitive salaries for key employees. At many clubs, there is limited transparency regarding board decisions and it’s not uncommon for major capital projects to be approved WITHOUT a member vote. One member at a very prestigious club shared with me that his club approved an 8 figure capital project without a member vote because the board had authority to do so as long as there was no assessment. In that instance the board was authorized to incur debt without the approval of membership. There are instances where boards spend freely, even recklessly and incur significant debt without even informing the membership of project cost details or how much debt is incurred – that will require debt service for many years. There are also examples of clubs that failed to adequately reinvest and suffered the consequences.

Several golf/club management firms specialize in targeting clubs with high debt as potential acquisition opportunities. This is what occurred frequently prior to COVID and, cycles being what they are, could occur again when the COVID surge in club membership subsides and the supply again grows in response to the recent increases in club membership. In some cases, like my nearly lifelong club, the club failed to reinvest and was forced to sell to a developer and later closed for good as a large mixed-use development took over the property.

The first place to look to begin learning about your club’s financial condition is the annual report, which should contain both a balance sheet and a statement of income & expenses. While most annual reports show only limited detail, among the most relevant entries are club liabilities, which should have an accurate representation of the club’s debts. Historically, it’s been debt that distressed many clubs and resulted in the (now common) practice of management firms acquiring and operating formerly member-owned clubs for profit.

After debt, the club’s income/expense statement reveals much. Here, one can find out the amount and sources (at least by department) of revenue and expenses generated by the club. Typically, there’s not much detail but one can start to get a picture of how the club operates, financially. For instance, how much is spent on golf course maintenance, or whether the food & beverage operation (a frequent area of focus) is self-sustaining or not, are shown. How much is spent on capital reinvestment, interest on loans and whether the general and administrative costs are reasonable are often questions that can be answered. Each of these (and other) categories can be analyzed in comparison to other comparable clubs through data compiled by several sources to determine where your club might be able to become more efficient. Has anyone ever considered how much for each round of golf or each member is spent on golf course maintenance? Another way to compare clubs is to review the IRS 990 forms that all non-profit organizations are required to file. These list club revenues, expenses and typically display salaries of those in key management positions at the club.

Since nearly every club has at least some deferred maintenance or upcoming capital replacements that aren’t shown on the annual report, it’s important to observe the club’s physical assets and understand that things like irrigation systems, cart paths, bunkers, roofing, HVAC and kitchen equipment have finite life cycles. While capital expenditures are usually shown in an annual report, reserves for replacement typically aren’t and call for prominent consideration in the financial evaluation of a club. Understanding reserves requires observation of the club’s facilities and infrastructure, their age and condition and their useful life and projected replacement cost. While many clubs commission detailed reserve studies, others simply allow a percentage of revenues for reserves and still others simply decline to acknowledge the need to prepare for replacement of these items. A club without adequate reserves can be staring at either assessments, debt or both, in the future, especially in the event of a failure of a key infrastructure component.

Since each club’s finances and goals are different, understanding a club’s culture and the membership’s appetite for either debt or assessments should contribute to how the club plans, especially for capital improvements. Almost all member-owned clubs take pride in their facilities and want to “show off” in comparison to their “peer clubs”. This has resulted, at some clubs, in what I call the “space race,” where clubs often find themselves competing to outdo their competition and spending recklessly. Most certainly, while clubs do compete, it’s critical to consider the club’s culture, and future culture to ensure that the added costs of potential enhancements won’t result in excessive debt, negative cash flow and an exodus of the membership. Some clubs seemingly can’t spend enough to win the space race, while others don’t spend enough to maintain their facilities.

It can’t go without being said that member-owned clubs can experience financial indiscretions in a variety of areas. There are numerous examples of employee theft, such as food and liquor disappearing, maintenance equipment and chemicals being used for either members’ lawn care or a superintendent’s side gig maintaining lawns. In addition, there can be and sometimes is favoritism in awarding contracts for goods and services to influential members or their friends that can even result in higher costs to the club through potentially higher pricing, and even kickbacks to board members. I’ve even heard stories of rent-free use of club facilities or property. It’s not unrealistic to think that management would “look the other way” in the interest of self-preservation in such egregious instances. Nobody wants to acknowledge these occurrences, but they do happen, and and can compromise the club’s financial future.

It’s essential for a club’s membership to support improvements and capital expenditures for success. Ensuring that the membership understands and pays attention to the club’s complete financial picture and full transparency are a must. In the often politically charged club environment, good communication helps to ensure that the club’s financial decisions are made in the best interests of the club’s long term future. Members taking the time to understand club finances helps encourage that full transparency.