A budget is a living document that is analyzed and adjusted on an ongoing basis to account for changes in business priorities, performance differences, or changing economic conditions. Especially prior to submitting your budget to the board for approval, it is important to consider and analyze potential scenarios that could impact your budget and ongoing forecast.
Here are the 3 major keys to effective scenario modeling:
1. Identify your Critical Variables.
It’s impossible and impractical to account for every potential change. Therefore, model your critical variables – the ones that would have the greatest impact on revenue or expenses. These variables may be different from club to club, from year to year, or even within your fiscal year.
- Membership variables – such as renewal percentages, acquisition costs, standard versus premium membership tiers, and dues structures.
- Revenue streams – such as event bookings, food and beverage average spend, golf pro shop sales, lesson demand, and spa packages.
- Cost structures – such as wage growth, salary increases, benefit changes, facilities maintenance, and utility costs
2. Build Realistic Scenarios
Develop at least three core scenarios. Look to adjust different groups of assumptions – such as the effect that unknown membership churn would have on food and beverage spend, lessons, golf cart fees and spa services. Or how a midyear increase in benefit costs or the minimum wage would affect net income. Use the likely or known assumptions to inform your monthly or quarterly forecasting process so any substantial changes can be mitigated as quickly as possible.
- Base case: for example, model the current membership trends for renewals, tiers and dues, base the revenue streams on last year’s actuals, and plan for moderate increase in cost structures.
- Aggressive case: for example, increase dues at popular membership levels, assume high event/bookings revenue, and increase food and beverage average spend.
- Conservative case: for example, increase membership churn, reduce food and beverage overall spend, reduce event bookings, and increase benefits cost.
3. Stress-Test Key Assumptions
Know the major drivers that have the highest impact on your financials. Isolate them in your models to predict the outcome of various scenarios.
- Membership sensitivity: Membership retention directly affects 60-80% of your recurring revenue. What if 20% of your premium members downgrade?
- Event revenue: Event revenue is often a very large variable income source. What is the revenue and expense impact of losing all or some of your major annual tournaments?
- Labor costs: Labor costs are typically 40-50% of your operating expenses. What if the minimum wage increases?
- Seasonality: What if there are monthly fluctuations in facility usage, such as golf rounds, lessons and outdoor food and beverage spend due to the weather?
Engage Your Department Heads
Include the input of your department heads in this process. They are the experts in their area and can provide front-line guidance and validation for the various scenario assumptions. Additionally involving your department heads will increase communication and collaboration, leading to higher levels of engagement. Increased engagement leads to higher levels of productivity and profitability.
Scenario Modeling Made Easier with BudgetPak
Please read the “Scenario Modeling for Clubs XLerator” guide to learn how finance teams using BudgetPak by XLerant can easily create and compare multiple budgeting or forecasting scenarios.
“The number one thing for me was the scenarios–the ability to basically, in the blink of an eye, create a different scenario without having to take 8 hours to rebuild the ship. That really was a selling point for me.”
