What are the measures of financial viability?

Venues are no different to any other businesses in that it is considered to be a going concern if it can be demonstrated that they can meet all financial commitments as and when they fall due.  In other words the business (venue) has the ability to operate in the future without the need to liquidate assets.

In the club & hotel industry, a venue is considered to be financially viable if sufficient funds can be generated from trading activities to enable it to meet its costs, provide services to members and the community, meet all external financial obligations and, over time, provide the financial capacity to re-invest in the venue to enable it to remain competitive and relevant.

Responsibility is a practice
A fundamental principle that underscores the responsibility of venue directors is that of corporate governance, in other words the processes by which venues are directed, controlled and held to account.  This encompasses authority, accountability, stewardship, leadership, direction and control exercised within the venue.

By engaging in corporate governance, venue directors will demonstrate to stakeholders, including members, that they have taken all reasonable steps to minimise loss and to positively control and direct the affairs of the club.

The not-for-profit motivation for Clubs
Unlike many Hotels, Clubs are not-for-profit entities and are not motivated by maximising profit to provide a return to investors (or shareholders).  A Club’s motivation is to maximise the level of services and quality of facilities provided to members.  Profits are generally used to subsidise services or to reinvest in facilities for members.

Clubs’ not-for-profit status means that benchmarking financial performance against other general businesses is not useful.  Club & Hotel specific indicators of financial viability are therefore important, and thus industry benchmarking is more specific and the 'like vs. like' comparisons are more actionable.

Measures of Financial Viability:

None of the above measures will, on their own, provide a definitive indication of a venue’s financial viability – they need to be considered together to obtain a complete picture.

The Relevance of EBITDARD (%)
EBITDARD (%) is a useful measure to enable venues to compare financial performance over any given period.  This measure enables a proper comparative across all venues as it eliminates the significant differences (rent and donations) that some venues incur and others do not.  EBITDARD (%) is a good measure of operational efficiency across venues of all sizes.

Here is an EBITDARD (%) Trend from Astute BI showing a venue (blue columns) compared to industry peer groups - Low 25%, Mid 50% and Top 25% of like venues.

Source:  Astute BI, EBITDARD (%) Benchmarking Comparisons

Applying EBITDA (%)
EBITDA (%) is an important measure for venues as it establishes the level of profitability of a venue and is a good indicator of the level of borrowings that a venue maybe capable of sustaining.  Lending institutions use EBITDA (%) when assessing lending proposals from customers.

Here is an EBITDA (%) Trend from Astute BI showing the venue (blue columns) compared against industry peer groups - Low 25%, Mid 50% and Top 25% of like venues.

Source:  Astute BI, EBITDA (%) Benchmarking Comparisons

There are many methods used to calculate a venue’s debt capacity.  A good example of this is the “interest cover”.  This calculation is the earnings available for debt servicing (EBITDA) divided by the interest expense.

If a lender requires a 2 times interest cover for example, and EBITDA is $250,000 then interest expense will be $125,000. If interest rates were 10%, then a loan of $1,250,000 would result in interest payments of $125,000 per annum.

Why reporting is important
It is important for club & hotel directors and managers to understand that unless you are producing adequate, detailed and regular financial reports you are really “flying blind” in terms of understanding your venue’s financial performance and ongoing viability.  Good reporting and benchmarking information is imperative to allow a venue to monitor performance and importantly, identify early signs of deteriorating financial performance.

The combination of internal financial reporting and performance benchmarking (i.e. comparative analysis against the wider market) enables venues in Astute BI to establish a solid foundation of financial reporting which is fundamental to the practice of sound corporate governance.

Return to Top

Was this article helpful?
0 out of 0 found this helpful