Financing Replacement Course Machinery

The recent weather conditions have created severe cashflow problems for some Golf Clubs where courses have been closed for weeks on end. In this article, John Westrope, offers his current thoughts on the situation and suggestions as to how finance companies could help overcome the problem.

During times of unforeseen difficulty it is beneficial for Golf Club management to have firm control over the Club's cashflow. Acquiring new machinery, which is vital to the operation of a successful Golf Club, can often be a burden on its cashflow. However through careful planning, replacement machinery can be acquired with repayments structured to complement the Club's cash flow patterns.

There are a number of funding alternatives available to Golf Clubs in terms of finance. There are three main finance packages available - finance lease, hire purchase and operating lease.

Finance Lease

Private Members Clubs generally use this product. If preferred, the funding company can arrange for rentals to be paid annually to coincide in with the income generated from annual membership subscriptions.

The main benefit of a finance lease is that is spreads the VAT over the entire period of the lease rather than being paid in one lump at the time of acquiring the new machine. The benefits in terms of annual budgeting and the levelling out of cashflow year to year, when the bulk of the course machines are acquired on finance, is best demonstrated in the case study below.

Hire Purchase

Proprietary Clubs generally favour this product as VAT can be reclaimed. They may also be able to claim capital allowances.

Monthly hire purchase repayments can be geared to cash flow. For instance, higher payments can be made between March and October when income including green fees is high to compensate for low or nil payments between November and February. This can really help both in cash flow management and keeping the Bank Manager happy !

Operating Lease

This is a more sophisticated option, in which can include the maintenance of the machinery. When this happens it is known as Contract Hire. Operating leases have the following benefits :

Operating Lease rentals are reduced as the residual value of the machinery is calculated at the outset and computed into the rentals.

If a Contract Hire agreement is chosen with a tailored service and maintenance package, there is greater certainty of known operating costs throughout the lifetime of the agreement.

The return on capital can be increased as the machinery is removed from the balance sheet. This is particularly important to the shareholders of some Proprietary Clubs.

Case Study

A recent exercise was carried out involving a Golf Club, their preferred machinery dealer and Humberclyde Groundscare Finance. This produced some interesting results :

The Club and the dealer drew up a 10 year machinery replacement plan which included a year by year breakdown for the period.

Replacement cycles varied from 4 years, for the most regularly used machines, to 10 years for low usage, long life items.

This produced an average annual machinery requirement of £44,000 per year at current prices, but with huge variations year on year; as low as £20,000 in one year and as high as £60,000 in another.

An assumption was then made that each replacement machine was to be acquired on finance over a 4-year period. This reduced the average annual amount spent to £41,000. This reduction occurred due to lower payments in years 1, 2 and 3 before all the leases were built up, plus some outstanding rentals at the end of the period. There is a further benefit based on the premise that 'tomorrow's money' is being used to pay 'today's prices'.

The other major advantage of acquiring the machinery with finance was that the cash flow was levelled out year on year from nearly ± £20K to just ± £5K. This could have been reduced further with minor adjustments to the replacement cycles.

For a fundamentally sound business, and as part of an on-going replacement plan using finance, the sale and lease back of recently acquired machines (within the last 2 years) could be considered. This will release cash for any urgent requirements brought about by this winter's extreme weather and accelerate the process of putting major items of machinery on term finance.

Other Points to Consider

Finance companies will also consider other Club projects, such as :

Upgrading irrigation systems - many systems installed 25-30 years ago are in urgent need of refurbishment or replacement to operate efficiently;

Drainage projects;

Club house projects, i.e. Locker Room refurbishment. If this is financed over a long period, 7 to 10 years can be considered, this can make this almost self-financing if 'sold' effectively to the members;

Computer based swipe card access and till systems which give added to security for the Club and benefits for members in supplying easy payment methods for bar and restaurant purchases. Swipe cards also enable the management of clubhouse levies with an option of preferential prices for members.

Finally, the judicious use of the right finance can be very beneficial in terms of cash planning and management. The improved certainty of the Golf Club's cashflow is particularly beneficial during times of unforeseen difficulties caused by such problems as the recent extreme weather. Most finance companies will be prepared to undertake an audit of the Club's course machinery and recommend a tailored finance package to suit the Club's requirements.

For further information, contact John Westrope, Humberclyde Groundscare Finance, Basing View, Basingstoke, Hampshire RG21 4HL. Tel. 01256 377422. Fax. 01256 377379. E-mail : john.westrope@humberclyde.co.uk.

940/130 5 March 2001