Managing Club Profitability 1
It is always a worthwhile exercise for a club’s management committee to step back and review the club’s income and expenditure. The benchmarks and comments noted below are based on the South Wales average social club with annual bar takings of £210,000 net of VAT taken from our annual survey:-
|Gross Profit including bonuses
(minimum 50%; ideally 55%)
|Heat and Light
|Repairs and Renewals
1. GROSS PROFIT
The average gross profit percentage in South Wales including brewery bonuses is between 52% – 56%; larger and usually more profitable clubs have a higher gross profit percentage with many achieving 60%. To ensure a healthy margin the following should be considered:-
• Pricing – Price increases from the brewery and budget must be passed on to the members, few clubs can afford to absorb these increases; clubs now tend to round their prices in 5p and 10p to reduce change requirements. The stock sheet needs to be studied, for example, some clubs carry lines for which only a few barrels a month are sold, are there more popular and more profitable alternative to the lines sold? Are there lines with a low GP%?
Ensure you know how to calculate the gross profit, as an example, with VAT at 17.5% the formula to calculate the mark up percentage from cost is: –
1 x 6
The mark-up for a range of
percentages is shown below: –
Thus to achieve a 55% mark up the cost price should thus be multiplied by 2.6667, a unit costing 90p should be sold for £2.40.
• Efficiency – A professional stocktaker should undertake regular stock checks, all deficits should be investigated.
Line and waste allowances as reflected by the stock sheet should be monitored and controlled. Line and waste allowances should be no more than 2-3% of bar takings, allowances in excess of 3% should be managed down.
Excessive bar stocks should not be carried; stock levels average one month of purchases or less; stocks of keg beers should not be much greater than 7 days;
Consider number of lines carried and the number and variety of spirits stocked behind the bar.
• Buying – the brewery should always be the cheapest for most products, if you get a cheaper price list show it to the brewery rep. To improve profitability maximum advantage should be made of brewery discounts, to achieve this borrowing from the brewery in any form whether by way of loan, advance discount, listing fee should be kept to a minimum or preferably totally eliminated. Many brewery deals include minimum barrelage requirements, when the shortfall penalty is added to the interest charge a headline interest rates of 6% can become a 30% charge.
The committee should consider whether it can afford more than one brewer, usually the greater the barrelage the greater the discounts offered, in addition there should be savings in respect of steward’s time for deliveries and in the waste and line cleaning allowances.
2. MACHINE INCOME
Location of the machine together with regular changing of unpopular machines is important to maximise income. As a result of the decline in popularity of gaming machines many clubs are reviewing the profitability of their machines and are being removed and replaced with B3A lottery or other types of machine or gaming activities.
3. OTHER INCOME
Clubs are becoming increasingly inventive in raising other sources of income, greater use is bring made from the hire of club facilities, hire of rooms, pool teams, together with lotteries such as Lucky 4 etc.
A number of clubs have tried catering operations, however, the business model of a husband and wife pub team does not transfer well to a club committee. The downside for losses is large, do you really want to get involved in employing a chef, food suppliers, waitresses, waste and shortages, H&S and members’ complaints. Where a club has a successfully restaurant operation it is usually franchised with the club benefiting from wet sales and a small rent
The difference between a profitable and loss making club is often how the wage costs are managed as the costs for bar staff, cleaners, officers etc at 35% of bar takings are the single largest running costs of a club. Increased legislation in respect of the living wage, pension auto enrolment and holiday pay has left many clubs with unsustainable wage costs structures and to return to profitability many clubs have to manage down wage costs. The current averages are; total wage costs at 65% of gross profit; bar wage costs averaging some 24% of bar takings. These averages are too high and do not leave enough surplus to fund other expenditure resulting in losses for many clubs.
Committees will consider the impact of brewery price increases and pass on the rises in the bar price of goods sold. Few, however, consider the impact of increases in Living Wage and pension costs. For the average club statutory rises in wages and pensions equated to 5p per pint.
We see large differences in wage costs even where clubs are of similar size. The more efficient clubs tend to employ stewards or bar manager on contracts of 47 hours per week or less supported by 3 or 4 bar staff each working some 18 hours. The less efficient clubs still have stewards working 60 hours or more; when time and a half, higher pay scales and national insurance are considered these extra hours are costing the least efficient club some £5,000 per annum without increasing the service to members. In addition a good team of bar staff will reduce the costs of steward’s holidays with lower holiday pay and less dependency on relief stewards.
The committee should also review opening hours comparing bar takings with the cost of staffing levels should these above ratios be exceeded.
The living wage, pension, holiday entitlements together with national insurance means that club officers and committee must review the weekly wage records. Attention should be given to part time bar and cleaning staff, many prefer to work less hours and receive the same take home pay, saving the club and employee national insurance and PAYE as a result.
An unexpected H M Revenue & Customs enquiry covering six years can be extremely expensive. Honoraria, committee duty payments, extra labour are all subject to PAYE, the H M Revenue & Customs PAYE inspectors know these are easy targets at clubs. Ensure you know the regulations, checks given for the payment of duties are taxable, free drinks given to members and committee are not. Up to date form P46 should be held by the club for all officers and staff. Failure to follow these procedures will prove costly.
Appeals should only be made using chartered surveyors specialising in commercial property or firms approved by their governing body. Smaller clubs should ensure they are receiving small business rates relief, a number of clubs with sporting links have applied for Community Amateur Sports Club status which gives the club entitlement to 80% mandatory rates relief.
7. HEAT AND LIGHT
Electric and gas cost increased significantly in recent years, an average of six weeks of the bar profits and now required to cover heating and lighting. There are two aspects pricing and usage. A full review of electricity tariff rates should be undertaken, if you have a price agreement make a note of when it comes to an end, many clubs have found at the end of a contract that they have been rolled on to a new fixed contract at far higher rates. With clubs closing during week days use of the ‘evening and weekend’ tariff can result in considerable savings. Consumption should be reviewed and the use of thermostat and low LED energy bulbs should also be considered. Separate meters should be installed for the steward’s quarters, if the steward pays his own heating and lighting costs the PAYE tax on these benefit in kind will also be avoided.
8. WATER AND SEWERAGE
Is a problem area with six monthly bills and poor location of meters. Water charges are one of the most variable costs incurred by clubs. While water charges average £1 per £1000 of bar takings annual costs for the typical club can vary between £800 to £4200. A water leak can result in large unexpected bills; the cost of a leak is doubled by the assumption that the water ends up as sewerage. To manage water costs install misers, monitor meter readings and watch workmen with hosepipes – another common cause of a sudden increase in water charges.
9. REPAIRS AND RENEWALS
The income of a club is required to not only meet running costs but also to fund repairs, refurbishments and capital expenditure programmes. Such expenditure cannot be constantly cut back on with short term savings often leading to larger bills in the future.
10. BANK CHARGES
A club should always know where its bank balance stands, bank charges and investments policy should be reviewed annually.
11. ENTERTAINMENT & SATELLITE TV
Entertainment may be a loss leader in clubs making a surplus but can be an additional drain in a club already making a loss. Except for the larger more profitable clubs entertainment expenditure should not exceed 5% of bar takings as expenditure beyond this level is unlikely to result in further profit increases. Many clubs now hire their hall out for functions or parties with periodic ticket shows for members.
Whether Satellite is a benefit will vary from club to club depending on if the club can afford the expenditure and whether the high costs of Satellite results in it bringing enough people into the club to justify additional costs.
Many clubs have been caught out with leasing scams for door entry systems, air conditioning units, alarms, etc. While leasing may appear a cheap source of finance it can prove expensive in the long run, especially when the equipment has ceased to work long before the lease contract has terminated. All leasing agreements should be reviewed and authorised by the club committee and if necessary advice should be sought from the club’s professional advisors.
Is a problem for many clubs. It is important that the club maintains accurate up to date digital VAT records. Errors in the submission of VAT returns can prove expensive when the club is visited by H M Revenue & Customs.