All resorts have financial data, boards, and managers, but these are the only factors that are the same in every resort. What is contained within the financial data, how the board sets budgets and gets involved in strategy, and how management performs their duties, differs at every resort. Each year, boards and management go through the budget process and (should) plan how to make things better. How do we get a higher rating? How do we get better owner engagement? How do we increase satisfaction and collections rates? All resorts have financial data, boards, and managers, but these are the only factors that are the same in every timeshare resort. What is contained within the financial data, how the board sets budgets and gets involved in strategy, and how management performs their duties, differs at every resort. Each year, boards and management go through the budget process and (should) plan how to make things better. How do we get a higher rating? How do we get better owner engagement? How do we increase satisfaction and collections rates?
The budget process should take into account many factors to answer these questions successfully. One of the key sources of information is historical financial data. Boards and management must consider the past to plan a successful future. They say history repeats itself, which is true. But the vacation ownership industry is experiencing new changes and challenges which often create an uncharted territory for purposes of future planning. To that end, an analysis of historical numbers can paint a picture that provides a solid basis for planning for the future.
What We Know
Generally speaking, over the past few years the budgeting for bad debts has not been reflective of the actual experience rates. This suggests that vaction ownership resorts are not realistically budgeting their collections. In the last few years, many boards and managers budgeted as if collections rates would improve relative to historical experience, which has not occurred. Collections percentages need to be closely monitored and historical trends reviewed when budgeting and during the year when results are monitored.We know that aging resorts require more capital replacements. This is not news to anyone. How your resort is handling this increased need for major repairs and refurbishments and an analysis of whether your savings will be sufficient to meet those needs is critical. If a resort has been assessing for major replacements annually based on a solid and realistic study, replacement reserves could be well funded and spending more in any given year then was assessed is not an issue. However, if this is not the case, annual spending in excess of assessments could be indicative of a potential future problem.
On average, half of the vacation ownership resorts have prepaid assessments at the end of the year in excess of cash and investments on hand. This could be indicative of accumulated inadequate budgeting. If your resort has ever had a discussion starting with “We will run out of money in …”, then some hard thinking is required in your next budget process. Often the desire in budgeting is to keep assessments flat or have modest increases. If a timeshare resort is consistently using next year’s money to pay this year’s expenses and has stable or slightly declining collections rates, holding assessments steady is not going to have a positive future impact. Some vacation ownership resorts are also experiencing operating losses and borrowing from accumulated replacement funds. Both of these are potential indicators of inadequate budgeting and can cause severe future financial issues if not addressed. Further, over the past 5 years, operating expenses have increased at a rate higher than operating assessments. It is fairly certain that employees expect raises and utility and insurance costs increase almost annually. The process needs to realistically consider what these impacts will be going forward and ensure they are budgeted reasonably.
Legacy resorts are seeing an increase in non-performing inventory for which they are now responsible. Access to rental and resale markets are key, especially for legacy resorts that find themselves owning significant amounts of interval inventory or have significant amounts of non-performing units. A performing unit with dues paying owner is most highly desirable, but having a solid revenue stream until such time that can happen is key to balancing the budget and providing necessary funds for operations.
What To Do
Here are some suggestions of things to do when the budgeting process begins so that you are armed to take your resort forward in the best way you can.
- Have a trended collections report showing your actual experience and compare that to what has been budgeted in the past.
- Ensure your reserve study is up to date and is inclusive of all known items. Having realistic replacement costs and timelines for replacement is critical to having funds available when needs arise.
- Look back over the last 5 years at the ratio of cash and investments on hand at year end to next year’s assessments collected. Determine if the ratio has been increasing or decreasing so that you can realistically view where you are and what you need to do in the short- and long-terms to remedy the situation.
- Review your historical financial statements and determine if there have been losses and if reserve funds have been used to fund operations.
- Analyze the timeshare resort’s interval inventory and the non-performing units not yet foreclosed, and make firm plans on how to monetize that inventory, but do it realistically. Rental rates are subject to the whim of the economy and market, and if the budget is not realistic for the revenue to be generated, the resort could be in a position of having to spend next year’s money, borrow from reserves, experience losses, etc.
None of these items individually are indicative of financial crisis for a resort. Rather, they are items that could be indicators of the future financial health. Reviewing past results in planning for the future is critical. Often there are “sins of the past” that need to be addressed before a strong financial future can be had. Being armed with information and understanding what the potential implications are is key to the solid future financial footing. In Part 2, we will look at a case study using sample financials statements of a vacation ownership resort to see where these indicators are present and how to look for them, which will assist in providing the tools to boards and management to perform their fiduciary duties and make informed financial decisions.