Have you recently read through your clubs financial statements and been confused as to what it all means? If you have, don’t worry, you’re not alone.
As an external auditor to many organisations in the hospitality and not-for-profit sectors, I often hear that the financial statements now are too complex, no longer relevant to our members and why can’t we just go back to having a simple profit and loss and balance sheet like we use to?
While I’d love nothing more than to be able to tell you that financial statements will return to less complex days, unfortunately that isn’t the case. Australian Accounting Standards (which in many ways mirror the International Financial Reporting Standards) are here to stay and generally need to be applied in preparing your financial statements. However, there is good news afoot.
Recently the accounting standards settings approved the reduced disclosure regime framework, which allows your financial statements to have significantly less disclosure than before (however you still must apply those sections that are integral to the valuation or measurement of any asset or liability). As a result of these changes financial statements can now remove much of the detailed disclosure including:
- Removal of most (in some instances) of the disclosure surrounding the clubs financial instruments (which the exception of information around any borrowings and credit facilities your club may utilise.
- Removal of the capital management disclosure, future capital and expenditure commitments, auditor remuneration and new accounting standards for future periods
- Removal of the cash flow note reconciliation of operating cash flows
- Removal of the property, plant and equipment roll forward for the prior year (however, you must still have that information disclosed for the current year)
- Removal of large sections of key management personal remuneration and some related party transaction disclosures
- Some disclosures of impairment, particularly around goodwill, intangibles and some property, plant and equipment
From our experience, the application of reduced disclosure has removed has helped the number of pages within the financial statement to reduce by up to 20%. We still believe these can be reduced even further, however, the debate still continues with the profession and our accounting standard setters as to whether it should go further. My advice to you would be to watch this space! If in doubt, talk to your auditor or accountant as he/ she should be aware of these developments.
While the core of your financial statements remains much the same, there are areas that all Board members should look out for in their clubs annual report, which reveals the fundamental health of the organisation. Some of the key areas I regularly discuss with my clients include:
- Gross profit margin (particularly on food and bar operations): The gross profit is calculated as the gross profit (being sales less purchases) divided by revenue. If this ratio has a trend of declining it could indicate that either costs are growing faster than revenues and it might be time to review your prices or possibly that there is an increase in spoilage of stock, due to poor inventory management, over ordering or product or slippage of stock.
- Cash flow from operating activities: operating activities are the core of your club. It represents your bar, kitchen, gaming and other key operations of the club (such as sporting activities etc). Cash flows from these operations are key as they show whether your club is generating enough free cash flows to fund its operations, as well as key expansion/ refurbishment plans.
- Wages to income ratios: Wages represent one of the single biggest costs to any club. A simple analysis of total wages costs divided by total income will give you a quick and easy way of assessing whether your club is over/ under staffed, or whether wages are rising at a faster pace than revenues. This can be a powerful tool in assessing the future staffing needs of your club and one that should be monitored on a regular basis.
- Current Asset Ratio: The current asset ratio is calculated as current assets dividend by current liabilities. It should generally always be greater than 1, which indicates that your club has at least $1 of current assets to cover every $1 of current liabilities. This calculation helps assess the solvency of the club and the ability of it to trade comfortably into the future.
- Loan Requirements: If your club does have external debt (particularly if you have financed a recent refurbishment or extension), the bank will generally impose a number of requirements on you.
Generally speaking these include a loan-to-value ratio, an interest times cover and a debt coverage ratio (earnings divided by total loan repayments). In addition the bank generally undertakes an annual review, which includes not only looking at the past year’s results of the club, but also at your forecasted budgets for the next 1-2 years. Obviously when dealing with any bank, it is critical to ensure that these covenants are monitored regularly to make sure the club has a happy and successful financial future.
By looking at the above 5 areas within your financial statements, management and yourself can get a significantly better understanding of what’s going on in your club and can form strategies to improve the financial results. Your financial statements are much more than just your profit and I’d encourage you to have open and regular communication with both your management team at the club and your external advisors such as your auditor or accountant. They can help you understand and walk you through the complexity that is your financial statements.
If you would like a free consultation or support in this area, don’t hesitate to contact me.