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Wednesday, January 16, 2013
I truly believe most people understand there are two basic ingredients to running a successful and profitable business of any kind, be it golf or widget manufacturing - income and expense. The golf owner/operator has much less control over income, yet there’s generally more emphasis geared towards increasing income. Controlling expenses is equally important as increasing income, as far as profitability’s concerned. After all the basic equation for profit (or loss) is income minus expenses.
There are two categories of expenses generally associated with any business, fixed and operating expense. Fixed expenses remain somewhat constant overtime, (insurance, utilities, leases, taxes, etc.). Since they don’t fluctuate, the focus of this article will be on operating expense or more exact - variable expenses. Operating costs generally fluctuate with operating activities to some extent (it takes longer to maintain a course with heavy play). Golf course maintenance is generally a production environment, expenses change along with an increase or decrease in production.
Examples of Operating Expense:
• Hourly wages
• Chemical and fertilizers
• Equipment maintenance
Since operating costs are directly related to operating activities, they should be analyzed as a percentage of gross profit. The equation for the percentage is to divide gross profit into each individual operating expense. At the end of each month, calculate the percentage of operating expense to gross profit from the income statement. Once the percentage is calculated, these percentages can be compared to historical data and budget figures.
Expense Control Budget and Forecast
In order to create a budget, the forecast must be created first. The budget is simply a tool that helps control operating expense. The expense budget forecast, oddly enough, is basically a prediction of future income. Once the income forecast is created, the historical percentage of operating expense to gross profit is used to create the overall golf course operating budget in conjunction with a standard of maintenance. The calculation or percentage of gross income for each individual expense account should be used for creation of the budget.
Once the budget is created, expenses should be monitored by the superintendent so that expenditures are kept within the budgetary limits. If any specific areas of expenditures are exceeded, further analysis to determine the root cause should be undertaken. For further analysis of root cause, look at the general ledger expense accounts.
General Ledger Analysis of Expense Accounts
If an operating expense exceeds the budgetary limits, researching the general ledger for the offending expense account should provide the root cause. The majority of the postings to an expense general ledger account comes from the purchase journal. Analyze the purchase journal and look for postings out of the ordinary (miscoded expenses are often a culprit). Also look for dollar amounts that seem unusually high. Often the root cause will stick out like a sore thumb.
In conclusion; it’s best to concentrate on controlling operating expense. Operating savings dollars move without related expenses directly to the bottom line, (no advertising, or cost associated with legitimate savings that do not influence or add to deferred golf course maintenance). A budget should be created and expenses should be contained within the limits of the budget. If expenditures exceed the budgetary limits, further analysis should be conducted to determine the root cause. Following these simple guidelines should help to increase the profitability and financial health of your golf facility.