- Author: Tom Smith
- Posted: August 23, 2020
Challenging Times for Australia’s Clubs
Op-Ed by Joseph Vitalone CFO, FCPA
Your local club is an iconic part of Australian society, for decades providing a safe and friendly meeting place and true sense of community. Most registered clubs are not for profit in the sense that no dividend is paid to members but profits are re-invested into the community asset. The basic conduct of business is largely directed to extend service offerings, enrichen member experience and improve community facilities. A typical clubs service delivery model reaches into the fabric of society through financial support of sport and wellness programs, payment of taxes to the state and commonwealth and most importantly being a significant employer of people in both a direct and indirect capacity.
Through recent years, the hospitality industry has operated in a vibrant commercial climate, with a rich history of consistent predictable revenues allowing for precise strategic objectives. The financial performance of your typical club dictates the gravity and timing of capital works programs and the extension of product suite. The investment cycle repeats itself with a demand on cash and a reliance on predictability and consistency of revenues forward. With predictability of revenues along with significant fixed assets, financiers were comfortable to loan money to aggressively improve the product. This state of play has continued largely unfettered through the last decade.
Unpredictable Business Environment
The Covid-19 global viral pandemic raised public health awareness and from early March 2020, never before seen trade limitations were imposed on non-essential services including your local Club. The venues we all know for community social gathering were now considered a public health concern. As the public health concerns intensified, this led to the eventual forced closure of non-essential services including your local club. The financial and social implications were immediate with revenues decimated and the hospitality industry forced into a rarely considered review their business sustainability models. Information and trading conditions continued to change as sustainability plans were being considered, trade was for the first time unpredictable.
Registered Clubs for the first time in their history traded in a period of revenue uncertainty. The investment cycle threatened as tomorrows dollar no longer predictable. This new unpredictable business environment was on the back of decades of trading 365 days a year with business plans committed in reliance on consistent, repeatable future revenues.
Practical measures taken across the hospitality industry included a forced stand down of their workforce, stop orders with suppliers, a cessation of work with contractors and stand still arrangements with financiers. On a social level, many people were unable to congregate with their friends or step away from life’s pressures at work or home. Sport and community wellness programs were in many cases suspended due to social distancing measures.
Cashflow is King
Common to all business, cashflow became the single most important aspect of business sustainability. A substantial fixed cost base threatened to rapidly deplete cash reserves. Ongoing operational expenses included employment costs, utilities, contractual arrangements, leases and maintenance. In addition, taxes were due for prior periods revenues, capital projects suspended in various stages of completion and repayments of principle to financiers deferred amid an uncertain path to future revenues. The question became, in the absence of revenues indefinitely, for how long can the operations of a club (or any business) be sustainable? Each registered club in a unique predicament, a different stage in their investment cycle, with varying cash reserves, differing financial commitments, their respective positions resting on the once reliable assumption of predictable future revenues.
Clubs sought to work within public health directives to engage their members. Some clubs revised their Food and beverage services for take away or delivery. This was in many cases a small contributor to their revenue streams and often the activity risks outweighed a financial return, otherwise operations sitting dormant awaiting for encouraging public health data and restrictions to be eased.
Financial Relief a Crucial Industry Lifeline
Fortunately, there was a substantial set of financial relief measures from federal government, most prevalent the JobKeeper subsidy program and the cashflow boost initiative. The impact was a lifeline for clubs by attending on the employment costs. Government also provided for a deferment in the payment of tax liabilities and the relaxing of insolvent trading legislation provided club directors a moratorium for 6 months to consider their business sustainability model forward. These measures greatly assisted the sustainability of many registered clubs
As Public health data in NSW became more and more encouraging, Public Health directives began to be relaxed with a gradual introduction of venue capacity limits and best practice Covid safety protocol. Clubs began to trade in an attempt to first meet fixed costs and ultimately re-engage the community to gradually return to normal activity when Public health directives allowed.
Registered clubs have shown best practice with respect to Covid safety protocol, conservative of capacity restrictions, requirements for patrons to be seated, implementing social distancing measures, revising dining methods, venue Covid safety plans established, cessation of activity to limit visitation, employment of safety marshals to enforce compliance, hygiene awareness signage, removal and segregation of furniture, contactless payments, removal of common use condiments, increased cleaning of common contact areas, installation of bollards, markers, separate ingress and egress paths for patrons, hand sanitizer stations, temperature checks, high level contact tracing and in most venues staff wearing face masks.
The industry body ClubsNSW has well represented the industry in both seeking out practical operating conditions and best practice covid safety protocols to respect public health orders as well as protecting employment by communicating financial viability issues of clubs to legislators for appropriate relief measures.
An Uncertain Future for Clubs
The September / October trade position stands to retest club’s sustainability plan, the Job Keeper program due to expire for many clubs, financiers looking to initiate principle repayments and review of covenants, tax deferments set to expire and the moratorium for insolvent trading revert to previous legislation.
Clubs rely on visitation to exist, Covid-19 has tempered with visitation to all hospitality venues. The changes come September/October 20 will again test the financial strength of clubs, some clubs may not survive into 2021, some clubs may amalgamate to survive through increased synergies and many with the support of their community shall return to normal activities. Perhaps without the assumption of predictable repeatable revenues but with an adjusted reality of longer term business sustainability plans.
Author – Joseph Vitalone, Hospitality CFO, FCPA
Joseph Vitalone is a highly ethical Senior Executive with 20+ years evolving Corporate Governance practice and driving organisational performance. Joseph’s dynamic commercial background extends from SOX compliant Multinational ASX companies, to national public practise corporate advisory and most recently local community hospitality venues. His approach to business is to reach beyond industry guidelines, to challenge protocol and bring about innovation from a wider commercial standpoint. Joseph is Fellowship Status member of CPA Australia.