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Leisure Services Financial Management
248 Pages
Leisure Services Financial Management equips students and professionals with the knowledge and skills to plan, implement, analyze, and report on the financial operations of leisure service agencies, businesses, and organizations. This unique text examines financial management systems, standards, and practices in recreation, leisure, tourism, and related fields, making it an essential reference for both future and current professionals.
Leisure Services Financial Management prepares students for the roles and responsibilities of entry-level to middle managers in public, private, and nonprofit sectors of the leisure service industry. Readers will learn
• foundational knowledge used in economics, accounting, finance, and marketing;
• the technical and technological skills involved in managing the financial aspects of a leisure service agency, organization, or business;
• how to develop a financial management philosophy and practice ethical financial management; and
• interpersonal skills useful for financial managers interacting with various stakeholders on fund-raising and development initiatives.
Leisure Services Financial Management presents current financial management approaches, giving students an understanding of the differences in accounting methodologies and financial report methods across the private, nonprofit, and public sectors. By examining and working with varied examples of financial reports and analyses, students gain experience in creating and interpreting a range of financial report models.
A comprehensive package of online ancillaries, including an instructor guide, presentation package, and test package, assists instructors in delivering engaging lectures, facilitating class discussion, and creating effective assessment tools. The instructor guide includes chapter overviews, learning objectives, glossary terms and definitions, learning activities, critical thinking questions, case studies, web links to additional resources, and sample financial reports to assist instructors in planning lectures and student assignments.
A student web resource offers a range of learning resources, including learning activities that replicate the work professionals do on the job. The student web resource also contains examples of management case studies, which offer insights into the realities of the economic, political, and financial workings of the leisure service industry. Both the instructor guide and student web resource contain sample financial reports from each sector (private, public, and nonprofit). Included with each of these reports are problem-solving activities, which provide students with practice in reading, understanding, and analyzing financial reports similar to those they will encounter as professionals. Problem-solving activities in each sample report help students show their understanding of how to interpret these financial reports.
Leisure Services Financial Management offers students in-depth discussion of the knowledge and skills necessary for beginning a career in the varied and dynamic leisure service industry. This foundational guide to financial management will serve as an essential resource to both future and current professionals in the leisure industry.
Chapter 1. The Leisure Services Environment
Leisure and Leisure Services Financial Management Defined
How Leisure Services Began in the United States
Leisure Services Sectors
Challenges Facing Managers Today
Summary
Chapter 2. Managing Resources
Basic Economics
Basic Finance
Summary
Chapter 3. The Art of Accountancy
History of Accounting
Accounting
Posting Transactions
Codes of Ethics and Conduct
Dimensions of Complexity in Leisure Services Accounting
Summary
Chapter 4. The Private Sector
How Greed and Power Affect Business Management
Size of the Private Sector
Focus on Customer Needs
Making a Profit
Debt Versus Equity
Taking on New Owners
Summary
Chapter 5. Private-Sector Accounting
Accounting Standards
Generally Accepted Accounting Principles
Advanced Financial Accounting Concepts
Transparency
Reading Important Financial Reports
Summary
Chapter 6. Private-Sector Reporting and Analysis
Due Diligence
Budgeting
Financial Formulas
Summary
Chapter 7. The Nonprofit Sector
Noncharitable and Charitable Nonprofits
Nonprofit Charitable Status
Fund-Raising and Donations
Boards of Directors
Role of the Nonprofit Manager in Fund-Raising
Financial Challenges
Summary
Chapter 8. Nonprofit Accounting and Reporting
Fund Segregation
Fundamentals of Nonprofit Budgeting
Federal Reporting
Summary
Chapter 9. The Government Sector
Federal Government
State Government
Local Government
Summary
Chapter 10. Government-Sector Accounting
The GASB and the FASB
Annual Financial Reports
Special District CAFRs
Managing the Finances of Governmental Leisure Services
Summary
Chapter 11. Capital Financing and Construction Management
Capital Assets Financial Management
Sources of Financing for the Private Sector
How Nonprofits Fund Capital Improvements
How Governmental Units Fund Capital Improvements
Financing Public Projects Through Referenda
Managing Construction Projects
Summary
Chapter 12. Future Trends
Transparency Requirements
Online Scrutiny
Changes in Financial Reporting
Changes in Technology
Focus on Revenues
Summary
David N. Emanuelson, PhD, has three decades of experience working in the leisure services, serving for 12 years as department head of two parks and recreation departments in Illinois and Indiana and 20 years as a park district executive director in Illinois.
Emanuelson also taught courses in parks and recreation administration, public administration and political science for 14 years. Before retiring, Emanuelson held the post of assistant professor at George Williams College of Aurora University, teaching administration, financial management, commercial recreation, facility management, and the economics of parks and recreation. Emanuelson currently works as a consultant in the leisure service industry.
In 2003, he received the Gold Medal Award for Excellence in Parks and Recreation Management and has received nine consecutive Certificates of Achievement for Excellence in Financial Accounting. He is a member of the National Recreation and Park Association, Illinois Park and Recreation Association, Wisconsin Park and Recreation Association, Midwest Political Science Association, and the honorary fraternities Rho Phi Lambda, Pi Alpha Alpha, and Beta Gamma Sigma.
Emanuelson worked closely with his wife, Sharon, on the creation of this book. They reside in DeKalb, Illinois, and enjoy traveling, boating, water sports, and golf.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn more about Leisure Services Financial Management.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn more about Leisure Services Financial Management.
Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
Save
Learn more about Leisure Services Financial Management.
Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn more about Leisure Services Financial Management.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
Save
Learn more about Leisure Services Financial Management.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn more about Leisure Services Financial Management.
Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
Save
Learn more about Leisure Services Financial Management.
Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn more about Leisure Services Financial Management.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
Save
Learn more about Leisure Services Financial Management.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
Learn more about Leisure Services Financial Management.
Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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Learn more about Leisure Services Financial Management.
Learn about challenges facing commercial, nonprofit, and public leisure services managers
Leisure services managers have their challenges, making them no different than managers in other professions.
Challenges Facing Managers Today
Leisure services managers have their challenges, making them no different than managers in other professions. Leisure services managers, however, are especially vulnerable to changes in the economy and the political environment. When the economy is bad, people defer their vacations until times are better and the government cannot afford to spend money on publicly provided leisure services. This provides challenges to leisure services professionals, particularly financial managers who have the task of funding the services. Unfortunately, when the economy is bad, more people have forced leisure time on their hands because of high unemployment, but the government is not in a position to accommodate their leisure needs because there is no money to do so.
Managing Commercial Leisure Services
As a leisure services manager, you need to understand that each of the leisure sectors—commercial, nonprofit, and public—has its own rules for financial management, some of them formal and others informal. These sectors have their own traditions, rules, and standard operating procedures that not only make them different from each other but also make them different from other services in their sector.
For-profit leisure services need to identify human needs and offer services to meet those needs. These businesses must focus on the customer because it is the transaction between the business and the customer that provides the business its lifeblood. This is known as taking a marketing approach.
This singular focus on the customer provides challenges to commercial leisure services that don't exist in the public and nonprofit sectors. With no taxes or donations to sustain commercial leisure services, there is no safety net. These managers walk a tightrope without a net. Stockholders and owners expect a return on their capital, and lenders need to be repaid with interest. Customer needs change and there is a constant threat of competition. Like their counterparts in the other two sectors, commercial leisure services are susceptible to economic downturns and must comply with government regulations.
Leisure services managers in the commercial sector also have advantages compared with managers of nonprofit and public organizations. For instance, much less transparency is required of businesses. The media do not have access to the financial records of privately owned companies, and they have limited access to those of publicly traded companies.
Another advantage for managers in the private sector is that their employees have fewer rights than do employees in the public sector. The salaries and wages of corporate employees can be kept secret from other employees. In some cases, it is actually possible to terminate corporate employees for divulging their pay, allowing managers to use pay as a motivational tool.
Leisure services providers in the private sector do not have public board meetings like governmental units do. There is no state open meetings act requiring that their business be done in public; in fact, to do so would be providing competitors with strategic information. Therefore, setting prices for services is not open to debate in the private sector the way it is in the public sector. And board members of commercial leisure services can be paid substantial amounts of money for attending meetings, but board members of nonprofit and public leisure services agencies are not compensated.
Another advantage of being a commercial manager is the compensation. If a manager is the owner of the company, she is entitled to all of the profits. If the manager works for a corporation that he does not own, there is an opportunity for pay to be commensurate with performance. It has been said that there are only two ways of acquiring wealth in the United States: one is investing well, and the other is owning or being the senior manager of a business. That's the upside. The downside is that the majority of businesses fail.
It takes a business-minded person to manage in the private sector. With a focus on the needs of the customer and the art of the deal, managing in the commercial recreation sector can be rewarding. But walking a high wire without a net has its risks.
Managing Nonprofit Leisure Services
With their primary source of income coming from fees and donations, nonprofit organizations need to focus on revenues to remain financially viable. Just like commercial endeavors, this focus causes nonprofits to be creative in the services they provide to their clients.
Transparency is another issue for nonprofit organizations. Although freedom of information and open meetings acts do not apply to nonprofits, charitable organizations must file IRS reports that reveal financial information and some salaries. These reports are available to the public by request or through Internet sites such as GuideStar. Because they solicit donations from the public and their membership, nonprofits also have an ethical obligation to be transparent about their finances.
Boards of directors for nonprofits are usually appointed or nominated by other board members and then approved by a vote of the board. Sometimes nonprofits have annual membership meetings, where all in attendance approve or elect those nominated for the board or even nominate a different person. Also, board meetings are not open to the public or regulated by state open meetings acts, so replacing board members can be done without public scrutiny. Nonprofit board members are rarely compensated for their service to the organization. In fact, their primary responsibility may be to bring money into the agency through their fund-raising efforts.
Nonprofit leisure services managers share the challenge of customer relations with their business counterparts. But for managers of charitable nonprofits, there's a political dimension of maintaining the goodwill of customers who also may be donors. For example, you may feel it's time to raise prices, but in order to maintain the donor or customer relationship, you do not.
Managing employees can be different from the other sectors as well. Because employees are generally not rewarded by sharing profits, managing nonprofit employees is similar to managing public employees. It is generally done using sociological principles of group motivation, which suggest that people behave differently in groups than they do as individuals.
Nonprofit managers focus on how their agency generates revenues from fund-raising and fees, who receives free services, how the agency judiciously spends its money, and how the agency maintains an environment where clients can be donors and employees only have nice things to say about the organization.
The good news is that nonprofit leisure services organizations usually succeed. Of the new nonprofit organizations created each year, it is estimated that less than 2.3 percent fail each year (Bowen, Nygren, Turner, and Duffy 1994). This is partly due to the stability of their revenue streams and the safety net that donors provide. When nonprofits are chartered by states, the people who charter them usually have established a need for their services and sources of revenues for their operations. People who pursue a career in nonprofit leisure services often are intrinsically motivated, wanting the security of a stable environment while performing a service to the community.
Managing Government Leisure Services
It has been said that public administration is like managing in a fishbowl—nothing is private. Part of the reason is that government taxes its citizens. Unlike businesses or nonprofit organizations where revenues are exchanged through transactions that both parties agree upon, taxation is not voluntary.
To protect its citizens, the United States has built a system of checks and balances that permit taxpayers to see how their tax money is spent. Called transparency, these laws require all but personnel information to be public. In addition, meetings must be announced and take place in public, and individuals or companies doing business with the governmental unit must bid competitively for that business. The salaries of public leisure services managers are public information, as are the salaries of everyone within the governmental unit, whereas salaries in corporate leisure services are private.
Another challenge in managing governmental units is that public employees have greater rights than do business and nonprofit employees. In most states, public employees cannot be hired and fired by managers without the consent of the elected board. This means employees have the right to a board hearing before termination.
Boards in the public sector are unique as well. The governing boards levying taxes and approving budget expenditures must be elected. Appointed park and recreation department boards may have advisory authority, but only the elected boards have the power to decide. This means that directors of park and recreation departments have two boards as their bosses, the city council and the appointed advisory board. Sometimes leisure services managers have three bosses: the city council, the park board, and the city manager. This can make managing a public leisure services agency the most difficult of all assignments.
Working for an elected board in an environment where everything a manager does is public information adds a dimension of politics to the management process. Nonprofit leisure services managers might worry about offending potential donors, but if governmental leisure services managers offend a member of the public, that person can run for election to the governing board, as can a disgruntled employee.
Another challenge of managing governmental leisure agencies is the need for two types of financial management skills. One is the management of tax-supported services, typically parks, which are used for free and supported entirely from tax revenues. The other is the operation of recreation programs and facilities, which generate self-
sustaining revenues from user fees. Managers in the public sector are, therefore, running governmental units, providing tax- and fee-supported services in a transparent arena where disgruntled employees or members of the public can run for their boards.
Governmental units that provide leisure services have had their tax funding reduced in recent years, forcing their managers to take a more businesslike approach to revenue generation. But taking a businesslike approach does not change the legal requirements of being transparent, adding another level of complexity to their management responsibilities.
Skills Needed for Managing Leisure Services
Managers in all the sectors need to be good communicators and knowledgeable about accounting, marketing, and organizational theory. Coursework should be broad, including economics, finance, political science, psychology, sociology, and organizational behavior. If you want to own or manage a large leisure services business, you might want to focus on business administration. If you want to be a manager in the public sector, you should take courses in public administration and park and recreation management. Some universities have niche programs in sport management, tourism, and nonprofit administration. Universities with programs in parks and recreation or leisure services administration should give you the skills and knowledge base to work in any of the three sectors, including coursework that provides a solid understanding of financial management.
To work in the public sector, you need to understand government accounting, which is different from business or nonprofit accounting. To maintain the required levels of transparency, governmental units have much more complex accounting rules compared with business and nonprofit accounting. If you oversee the operation of parks, your skills need to include those related to park maintenance and conservation. If you manage recreation programs or facilities, skills need to include marketing and financial management as well as skills related to the recreation facility or program.
If it seems that management in the public sector is the most difficult of the three sectors, why would someone choose to do it? The answer is that it is just as rewarding as working for a nonprofit organization. Serving the public has its intrinsic rewards. There are also long-term financial rewards. Government service is one of the few professions where there are still pension programs available that provide a defined annual income no matter how long the manager lives after retirement. In the private and nonprofit sectors, defined annual incomes are becoming less common. In those sectors, retirement benefits are the amount of wealth that can be acquired during the individual's work life. Whatever you have in your 401k or other investments is what you have as a nest egg for the rest of your life. But for a government retiree, a defined lifetime annual benefit provides security for life.
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Earn profits by budgeting
A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time.
Making a Profit
If profits are the retained earnings of businesses after expenses are paid, the question is, how do entrepreneurs make a profit? The simple answer is that they spend less than they receive in revenues. The more difficult question is, how does this occur? How does a business spend less than it takes in?
One way to spend is to begin with a plan called a budget. A budget is a prediction of how much money an entity will receive and how much it will spend over a given period of time. Typically, budgets are written each year, the beginning of which may or may not be January 1. Sometimes a budget year, commonly called a fiscal year, begins at a time when the business cycle for the entity logically begins or ends.
For the Walt Disney Company, the fiscal year begins on October 1 each year and ends on September 30. Many other leisure services corporations choose the same dates for the fiscal year because their busiest season is the summer, and by the end of September most of their revenues should be received and their bills paid. Using an October-to-September fiscal year allows the accounting system to match revenues and expenses, minimizing accruals.
Within a business budget, the first issue is the cost of goods sold, which is the cost of producing the product or service considering its direct costs. For instance, suppose a person started a coffee shop called Coffee Café. If the average cost of a Coffee Café cup of coffee includes the cost of the cup, coffee, and condiments, the direct cost might be $1.00. If Coffee Café predicts it will sell 50,000 cups of coffee in a year, the predicted cost of goods sold is $50,000.
The next budget consideration is the gross profit, the difference between the total revenues of the product or service and the cost of goods sold. If the Coffee Café sold 50,000 cups of coffee at an average cost of $6.00 each, its total revenue would be $300,000, and its gross profits would be $250,000. Dividing gross profit ($250,000) by total revenue ($300,000) generates a percentage (84 percent) called the gross profit margin, which is pretty good since coffee stores usually sell more than coffee and have other gross profits in the mix. But let's assume that coffee is all the Coffee Café sells. If that awakens your sense of greed and makes you want to start a coffee shop of your own so you can keep 84 percent of the revenue that comes into the store, hold on a second. There are other costs to consider in a budget.
There is the labor to staff Coffee Café, rent or a mortgage to pay, utilities, cleaning supplies, the cost of furniture and equipment, and advertising. These are the indirect costs of doing business and must be subtracted from gross profits. Let's say these indirect costs of operating Coffee Café total an additional $200,000. Then the gross profit ($250,000) minus indirect costs ($200,000) would be a net income of $50,000. Dividing net income ($50,000) by total revenue ($300,000) generates a net profit margin of about 17 percent from the coffee product line.
If the owner of the fictitious Coffee Café sold only coffee, he would not have $50,000 at the end of the year, however. He would have to pay taxes on the profits. For the sake of argument, let's say that the owner is in a 35 percent tax bracket. His taxes on the net profits from the store would be $17,500, leaving $32,500 as the profit. Table 4.1 reflects the budget for the coffee shop.
Included in the budget is a column for the actual revenues and expenses. Assuming that only 80 percent of the total revenues are received, and considering that the direct expenses of coffee, cups, napkins, and condiments decrease accordingly, the Coffee Café is no longer profitable. Because the business is heavy on fixed and indirect costs of labor, rent, utilities, and other expenses, a 20 percent decline in predicted revenues changes everything.
That is why it is so important to accurately predict revenues for a business venture. Unfortunately, revenue prediction is not an easy task. Market research helps, but the basic product idea is the foundation. Without an idea that costs less to provide than the market will bear in price, there is no real opportunity to make a profit.
The points to remember are as follows: Profit margin is the difference between revenues received for the products or services and the cost of goods sold. Gross profits are a function of the total number of products or services sold as well. But net profits need to consider the indirect overhead costs that are part of running a business. This is a somewhat simplistic view of profitability, but a more detailed view will be presented as we continue.
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Learn the fundamentals of nonprofit budgeting
The budgeting process for nonprofit leisure services is both technical and political.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
Fund-Raising Revenues
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children's Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Program Revenues
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children's Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it's important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren't.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash-Flow Management
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn't carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn't need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don't have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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