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Boards Need Clear, Concise Info to Make Financial Decisions
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| When you've got a growing private club amassing assets, accumulating liabilities all to meet demands of a growing membership, clear concise financial reporting is absolutely necessary so the club's board of directors and management can make informed financial decisions. But how is that best done in today's private club environment?
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| "I am a firm believer in the KISS principal," says Kevin F. Reilly, JD, CPA, a member of PKF Witt Mares of Fairfax, VA. "The amount of financial information available today can be overwhelming. The information technology system can be sliced and diced in so many different ways to provide information on departments and even lower levels of service, and this can be exceptionally valuable to the club managers and their teams.
| "However, it's information overload to a board of directors and to the members. As the information flows from the management team through the finance committee to the board of directors and ultimately the members, the amount and detail of the information supplied should become progressively more general." In other words, Keeping It Simple throughout the whole process.
| "The finance committee may need details; the board more general and the members must understand the overall financial health of the clubs," the PFK member expounds. "Outside of management and potentially the finance committee, no other group needs to analyze every line item in the report.
| 'However, in saying that, it is not to remove the fiduciary responsibility that the board of directors has to ensure the club is financially sound," Reilly contends.
| So analyzing a balance sheet and income statement is probably the best place for board members to start. And while some directors may need guidance, others may not.
| Fortunately, says Jim Reilly, CPA, JD, a partner with Condon O'Meara McGinty & Donnelly LLP of New York, "many board members are financially literate because they are active or retired business owners, executives or professional advisors.
| "They work, or have worked with financial statements on a recurring basis. In reviewing a social club's balance sheet (a.k.a. - statement of financial position), board members have the opportunity to familiarize themselves with the assets, liabilities and equity (net assets) of the social club as of a specific date."
| The income statement (statement of activities) permits board members to understand: 1) how much revenues is received during an identified period, typically a year for audited financials; 2) how much is paid out in costs and expenses during the same period; and 3) the difference - excess (deficiency) of revenues over expenses.
| "The statement of cash flows permits the reader…the opportunity to determine how the social club has managed its inflows and outflows of cash during an identified period (typically a year for audited financials)," the New York-based CPA outlined.
| "I wouldn't assume that all board members receive their club's balance sheet and income statement on a regular basis," suggests Bob Salmore, CPA with RSM McGladrey's club service team. "Financial reporting is usually the responsibility of the treasurer and the finance committee, who report about the club's financial condition at monthly board meetings.
| "In my experience," Salmore suggested "the focus is usually on comparison of actual 'income statement' results with budget. Again, in my experience, little attention is given to the balance sheet (a.k.a. statement of financial condition). We can agree that board members should receive and, hopefully, understand the club's balance sheet and income statement."
| In Salmore's opinion "club management should arrange an annual financial workshop to present background relating to the club's financial reporting and financial condition. Ideally, this session should be planned by the treasurer and/or the finance committee and include the club's controller or CFO, and the option of a presentation by the club's independent auditors."
| Kevin Reilly expresses that "it's important to distinguish between the statement of financial position (balance sheet) and the statement of activities (income statement). The first takes a snapshot of the club at a specific time. It shows the assets, liabilities, and net assets at a given point - generally at the end of a month, quarter or year."
| The balance sheet "has its inherent limitations because it's static. However, it should show the club's current and future obligations as well as its liquidity in meeting those obligations. More important than a specific statement is a comparison of the statements from several periods to follow the trend the club is taking.
| "The statement of activities will show financial performance during a period of time. It addresses the whole issue of whether a club is profitable during the period," the Fairfax, VA CPA opined.
| "Depending on how detailed the statements are, it should provide information related to the sales within different departments, the cost of goods sold related to the sales, how much labor was during the month, any unusual expenses during the month and how much was spent in each department.
| "Assuming a club has a detailed and effective budget process, one of the more important aspects is an analytical review showing variance from budget and change from prior years," he recommends. "The board member should analyze these variances" with an explanation from management regarding the cause.
| "Some variances are more easily explained than others," Kevin Reilly suggests. "For example, it is likely that every club in the country will have a negative variance when it comes to fuel and utilities since it is unlikely that clubs budgeted for such a dramatic increase." A truth today to be sure.
| In analyzing the balance sheet, Jim Reilly adds another twist.
| "The first thing a board member should look at is the auditor's opinion letter accompanying the audited balance sheet and the income statement. Close attention should be paid to an adverse or unfavorable opinion."
| The balance sheet, or the statement of financial position, assists a board member in making a determination of whether the social club has:
- an adequate cash position to meet obligations;
- an inadequate cash position or
- excess cash that is not being effectively utilized.
| "It also discloses the amount of the social club's debt," Jim Reilly explained. "If the social club has significant debt, the club may not have additional borrowing capabilities even in the event of an emergency. In addition, paying interest on the high debt, or repaying a portion of, or all, of the debt, can place a burden on a club during difficult economic times.
| "On a positive note, if a board member identifies high debt on the balance sheet, they may be prompted to make a determination so see whether this debt can be replaced with lower interest rate debt, which would benefit the club," he added, suggesting this is a fact boards should remember with the U.S. experiencing a period of relatively low interest rates.
| The New York CPA also recommends reviewing the balance sheet, and other financial statements, with the prior year's balance sheet to identify variances in reporting categories.
| "If accounts receivable are notably higher than the previous year, the board member may want to know the reason for the increase (for example, are bills being collected) and whether there are any accounts in this category that are not collectible. A social club doesn't want to make its financial plans based on monies that may not be received," Reilly expounded.
| In addition, he recommends the board review accounts payable in the comparative (two years) balance sheets to determine if accounts payable, or other payables, have notably increased.
| "If accounts payables have increased, the board should ask management to explain the increase. If the accounts payable have increased because of a lack of funds, the board will probably have to raise dues or cut costs," Reilly explained.
| Salmore feels there are several other balance sheet factors to be considered by the board.
| 'What is the club's cash position? How much does the club have in the bank; what other investments does the club have that may be converted into cash quickly? Board members should understand when major cash inflows and outflows will occur. For example, how and when are dues and other fees billed - monthly, quarterly or annually?
| "Does the club have long-term debt or lines of credit? It has become more common for club's to seek bank financing for various needs (usually capital in nature)," Salmore added.
| "Are there obligations for payments to resigned or former members? Board members should have an understanding of how membership equity is redeemed. This can be one of those "hidden" items that can "create" an obligation without having a source of funds to satisfy the obligation," Salmore opined. "Are new members permitted to pay joining or initiation fees in installments? This is a source of funds that is usually not recorded on the balance sheet.
| "Are there any designated funds? Are there sources of funds for future capital improvements and what are these sources of funds for capital improvements? (member joining and/or initiation fees, regular capital assessments or funding from dues) Are these funds "accounted for" separately from operating funds?
| "And are there unrecorded obligations? Are there "post-retirement" or deferred compensation or other retirement payments that may be obligations created by informal or even formal agreements "hidden" because of commitments by previous boards?" All questions Salmore indicates as most relevant when considering the club's balance sheet.
| If the income statement discloses the social club's revenues have exceeded its expenses, "a board will want to identify the source of the money used to cover the excess expenses," says Jim Reilly.
| "Does the money from a fund established to cover such excess expenses or costs (such as a capital fund or a contingency reserve fund)? Was the money from increased debt? Do dues have to be raised? Should costs be cut?" All questions to be considered the New York-based CPA maintains.
| In his opinion, the income statement should be reviewed on a comparative basis. "The current year's income statement should be reviewed against the prior year's income statement, and all notable increases or decreases in revenue and expense items should be investigated. For example, if food and beverage sales are down but cost of sales is up (for example, as reported in the comparative income statements 2004 vs. 2003), the board member may want to investigate.
| "The income statement should include: revenue (membership dues, initiation fees, assessments, food and beverage sales, locker and equipment rentals, room rentals, greens fees, golf cart rentals, beach and cabana rentals, other fees), costs and expenses (cost of sales, payroll and related, insurance, utilities, repairs and maintenance, administrative and general). The club may also capture other direct expenses by category, for example, golf expenses, beach expenses, food and beverage expenses, clubhouse expenses, locker house expenses, cottage expenses.
| This will assist board members in making informed judgments regarding the reason, and desirability, of certain expenses. For example, does the club want to spend so much on beach activities or is it in the club's interest to spend more on the golf course," Reilly queried.
| In the final analysis, it's important there be full disclosure…that nothing is hidden from the board, management or members.
| And at that, says Jim Reilly, the balance sheet is limited, because "historical costs may not present the true value of some assets. For example, the price paid many years ago for a club's land and/or facilities are likely not a measure of their present worth.
| And he makes a couple of other pertinent points. "Board members will want to familiarize themselves with organization documents including the club's articles and by-laws and minutes of the board of director's meetings for the last three years.
| "Not only would the IRS be interested in these documents on audit, but a board member can learn much about the establishment of the organization and its current operations from these documents," he expounded.
| Publisher's final thoughts
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| It becomes clear from the viewpoints of accounting experts that the financial performance and health of a club should be evident when all the financial statements are put on the table. The purpose is disclosure so nothing is "hidden." There must be transparency and there should be no surprises for either the board or management. The bottom line is the board has a fiduciary duty to the members of the club to ensure the financial viability of the club. The ability to analyze financial statements gives both board members and club members a more comfortable feeling that the best interests of the club are being upheld.
| At least that's the way I see it.
| What's your opinion? If you have any questions or comments, John Fornaro can be reached by email at johnf@apcd.com. |
John G. Fornaro
Publisher |