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Know Your Numbers - November 2016

Accounting best practices for family entertainment centers

by Mike Bederka

To the detriment of a family entertainment center (FEC), accounting often ranks fairly low on the priority list.

“Most owners and operators tend to put out the fires first—anything that impacts the physical business right here, right now, such as dealing with guest services or human resource challenges,” says Jerry Merola, managing partner at Amusement Entertainment Management LLC in East Brunswick, New Jersey. “The accounting function always seems like the one where you have the ability to address it at a later date, and, unfortunately, it doesn’t receive the attention it deserves.”

Merola compares this misstep to a person who doesn’t visit the doctor for regular checkups. In this case, FEC owners and operators skipping “wellness exams” about their businesses fail to understand the facility’s financial health and the best way to steer it going forward. In particular, that means they lack the info to make appropriate decisions on capital expenditures and how to control labor and general operating expenses.

“FECs are very expensive endeavors, with big investments at stake,” he says. “As a result, accounting is the most critical of all functions in a business today. It really lets you access where your performance truly stands at any given point in time.”

Having an appreciation for this data can fuel an FEC’s growth and success. Merola and Brandon Gray, consulting department lead at the financial consulting and accounting firm Crabtree Rowe and Berger in Huntsville, Alabama, discuss ways to get a better handle on the numbers.

Avoid Common Distortions

Numbers can lie, especially when people look through the incorrect lens, Gray says. One big goof comes from owners incorrectly stating their compensation.

“Typically, they pay themselves too little,” he explains. “Owners have to realize they get paid for what they do. If you went out on the street to hire someone for your job, what would you have to pay them?”

For example, if an owner gives himself a yearly salary of $50,000 when it should be $150,000, he’s overstating the FEC’s true profitability by $100,000, Gray says. “It’s an easy distortion present most of the time.”

Watch Your Language

Owners often put an emphasis on revenue when they really should be more concerned with gross margin (revenue after direct costs), Gray says.

“Not every bit of revenue is the same,” he says. “A dollar of food sales may be worth more than a dollar of bowling. The margins are different.”

Keep It Simple

Eyes can go cross when dissecting overly complex profit and loss reports, Gray notes. “You might have several different utility lines for things like the garbage disposal, gas, and electricity. That’s OK, but you have to be able condense that data so you can look at trends over time. If you need a deeper dive, you still have that information and you can do that as well.”

Take the Long View

If owners just examine one month of data, they can be at the top of the mountain (say a dry, picture-perfect July) or so far down they have to look up to see the bottom (a snowy, miserable February), Gray says.

“Neither is true for actual performance,” he contends. “A month is too short of a time period to make any important decisions.”

Instead, Gray recommends a “rolling 12” as the gold standard for analyzing data. This snapshot of all the seasonal ups and downs looks at 12 straight months of numbers, so it goes from Sept. 1, 2015, to Aug. 31, 2016, and in the next column covers Oct. 1, 2015, to Sept. 30, 2016, etc.

Market More

FECs often spend far too little on marketing efforts, Gray says. Typically, those that market will have greater success than those that don’t, and a healthy company will spend a minimum of 10 percent of its overall budget on marketing.

However, owners can’t just indiscriminately dump money into various campaigns, he says. To get the largest return, FECs should examine their marketing efficiency ratio, which measures what portion of each dollar of gross margin is spent to generate the sale.

Attend a Class

While a bookkeeper or controller may run point on the nitty-gritty figures, owners and operators should take an accounting seminar to further their understanding of the basics, Merola says.

This class can help for two reasons. First, it will help to ease the overwhelming fear that sometimes surrounds managing dollars and cents. Second, it could limit any potential fraud risk if the bookkeeper or controller does something improper with the numbers.

“You never want to put all that responsibility on a hired individual when it comes to controlling finances,” he says. “The owner needs to be savvy enough to be a second set of eyes.” 

How Often Should You Meet with Your CPA?

Most FEC owners stroll into their accountant’s office just once a year—usually during tax season, says Brandon Gray of Crabtree Rowe and Berger. In reality, this valuable relationship should be beefed up to help make the soundest business decisions. Gray recommends a “candid conversation” about the facility’s performance at least quarterly and perhaps even monthly to get a floundering operation back on track.

Go with the Cash Flow

To help build a solid business foundation, owners should follow the “four forces of cash flow,” suggests Brandon Gray of Crabtree Rowe and Berger.

First off, set aside money for taxes. FEC owners and opertors need to know every month where they stand in terms of what they owe for the profits they’ve made, says Gray, who recommends moving the designated money out of an operating checking account and into a tax savings account.

Next, owners should repay any unstructured debt—typically high-interest lines of credit and credit cards.

Third, Gray advises starting to building core capital in the business. In addition to the money earmarked for taxes, FECs should strive to have at least two months of operating expenses and funds for direct labor in their bank account at any given time. “If you spend all the money you made in June, July, and August in September, what are you going to do in October, November, and December? You need to set aside money for cash flow purposes. It gives you a cushion if you see an opportunity in the marketplace. Just say you come across an A player you want to hire, now you have the money to do it.”

Finally, patient owners get to take a return on their investment. (He recommends being at 15 percent profit before dipping in.) “The problem is most people want to do this first, but if you don’t put aside money for taxes or a rainy day or to repay debt, you will end up in a bad situation,” Gray concludes. “If you’re disciplined and follow this approach, it will pay off in the long run.”

Focus on 5 Key Financial Metrics

Acknowledging that financial statements can sometimes be tough to interpret, Jerry Merola, of the consulting firm Amusement Entertainment Management, says owners should key in on five critical metrics to help determine the overall health of a business.

1. The ratio of labor expenses to gross revenue. “This needs to be elastic,” he says. “As your revenue changes, your labor components have to change with it.”

2. Overhead-related expenses. This includes everything from marketing and promotions to general supplies purchased each week. “You need to keep an eye on it,” he says. “If you’re not watching your outflows, you suddenly have discovered that your profitability has eroded over time.”

3. The generation of revenue broken down by attraction. If game operations represent half of the total revenue, for instance, owners need to take a step back and review their mix, Merola says. “It’s an early sign they’re relying on too few attractions to drive the revenue base.”

4. Debt service line items. These monthly payments to banks and finance companies determine if the business is being choked by debt. In some lending agreements, businesses might be required to make a bulk payment to a lender on a specified date. “Have you stockpiled sufficient cash for that upcoming responsibility?” he says owners should ask themselves.

5. Gross and net profitability variables. When the gross profit margin changes for the worse, that indicates the portfolio of attractions is starting to underperform from the previous period, he says. Along the same lines, when net profitability drops, owners have to figure out why and, importantly, how to correct it.