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Absolute Dollars

In the hospitality industry, there is one financial tenet that takes precedence over any other business perspective.  In this industry, it is about putting the maximum number of dollars (ABSOLUTE DOLLARS) in the register after each day.  One of the most misunderstood business dynamics of this industry is the higher than average fixed cost to run the company.  Golf courses are a perfect example.  Golf courses qualify as one of several different types of hospitality based businesses and they have an extremely high fixed cost for operations.

During a typical day, the grass has to be cut on every green, about 6 holes require mowing and maintenance, all tee boxes and greens need to be watered.  And in addition, the pin placements must be changed on all 18 greens every morning.  Think about the high labor costs to maintain an entire recreational facility like a golf course.  This doesn’t count the cost of labor for the Pro Shop or the concession area.  Whether two golfers play or 200 play on any given day: the cost to operate and maintain that golf course is not going to change.  This is what is referred to as a high fixed cost based operation (business). 

Now there are some marginal costs to operate a golf course.  I would imagine it costs about 40 cents to recharge the batteries in the golf cart each night that is rented by the golfers.  Other marginal costs might be the cost of the water used when flushing the toilet or maybe about 50 cents worth of grass seed for the duffers in golf.  My point is: there really are no marginal costs in the overall scheme of things for a golfer to play this game.  So if the course can fill up every slot available every day, they will maximize the annual profit.  But they can’t really do that because weather and seasons come into play.  I live in the middle section of the United States; therefore the golf season is generally shorter.  This means that from a golf course operational viewpoint, every golfer willing to pay money is valuable to the bottom line.  Even if you could only get $10 out of that golfer, that’s $10 more to offset the fixed cost.  Once the fixed costs are paid, then every marginal dollar is pretty much pure profit!  But you must have absolute dollars to pay for the fixed costs first.  If not, then you will not make a profit; seriously, those fixed costs have to be paid first.

For those of you that don’t understand, fixed costs exist whether you make a sale or not.  If you desire a more thorough explanation of this basic business principle I explain in more detail in this article:  Fixed Costs – Explanation and Examples.

On a recent Saturday I took my two sons to a local golf course.  They have a great practice facility and both of my boys are on the high school golf team and this place is perfect for practicing.  So once we were done practicing on the range, both of them wanted to play nine holes. It was after 5 o’clock, again on a Saturday, and so we knew we could only get in nine holes.  When I go out with them, I traditionally will not play because I desire to work with them and teach them about course management (how to reduce your overall score with proper shot placement).  I usually get a golf cart for two reasons, first to speed up play and secondly, I need a cart to carry my alcohol which helps me manage my frustration with my sons’ various approaches to the game of golf.  I normally walk the course to work off some of the middle aged gut I have but the cart helps my sons focus on their game by eliminating the need to carry their clubs. 

Mind you, golf courses make most of their money on Saturdays and Sundays.  The demand is high, the availability is low.  I never play on Saturday or Sunday until after 2 o’clock because that is the earliest a golf course will offer any kind of discount to their fee structure.  I understand this, either pay the rate or another golfer will be there in a few minutes wanting to take your spot on the course.  It is simple ‘Supply and Demand’.

OK, so I have set the stage for this interesting interaction between a willing customer and a business operator that has difficulty with simple math.  Seriously, 2nd grade math!

So I walk into the clubhouse and there behind the counter is one of the assistant managers (of course he is the low man on the totem pole because its Saturday after 5 o’clock).  On this particular weekend we have two major sporting events going on in town.  First is a NASCAR race which attracts about 90,000 people, I would imagine that about 4 to 10 of them are golfers that would have been possibly here to play if not for the race.  The other is a minor league baseball team playoff game.  So there might be one or two golfers there that would be here if not for the championship game.  In addition, let’s not forget, its SATURDAY after 5 o’clock in the early fall and college football is on TV.  I’ve already been here for two and half hours working with my sons on the practice range.  There were four other folks out there that hit golf balls during that 3 hour time period.  We pretty much had the driving range to ourselves.  Prior to going into the Pro Shop, I scanned the first tee box and nobody is there, nobody is even on the first hole.  Actually, there are about a dozen cars in the parking lot altogether, one of them is mine, and I’m pretty confident another belongs to the guy behind the counter.  My point is this:  THERE IS HARDLY ANYBODY HERE!

Did I mention, it is SATURDAY, AFTER 5 O’CLOCK.  I really doubt there is going to be a sudden influx of golfers at this golf course to justify charging full rates.

So here goes the conversation:

Me:  “Hey, how about 9 holes with a cart for two junior golfers.  Both are in high school and I’m walking with them.  (Because they always ask) One of them is 16 and has a license to operate the cart.”

Assistant:  “So you need two carts”.  I guess he didn’t quite hear me state that I’m walking; but that is OK, I get that all the time.

Me:  “No, I’m walking with them”.

Assistant:  “Are you playing?”

Me: “No, I’m working with them in developing their game, and need to walk to work off my gut”.  I grab my gut and lift it about two inches indicating the typical middle age male problem from too much beer, sweets and lack of physical exercise.

Assistant:  “Let me see here”, runs the register.  “That will be eighty dollars ($80)”.

Me:  “Excuse me?”

Assistant: “$80”

Me: “No you misunderstood, two juniors, one cart, nine holes”

Assistant:  “No, it is right”

Me:  “Why so high?”

Assistant:  “It’s Saturday”

Me:  Pointing outside to the first tee box, “Nobody is here.  It’s after 5 o’clock.”  Looking at him perplexed I proceed.  “SERIOUSLY?”;  now I’m wondering why this guy doesn’t do what every golf course operator does for me when I show up wanting my two kids to play and nobody is on the course.  Invariably, I always get the guy behind the register to do a two for one discount or a ‘how about I just charge for an adult and you guys go play?’ This guy, well, I think he must think that this is Augusta, and I need to pay the $80.  If it were Augusta, no problem, I would fork over the money in a heartbeat; but this is a simple private golf course open to the public in a county with a population of 90,000 people.  There are about 8 golf courses within a 45 minute drive.  So there is some competition to keep the prices in check.

Assistant:  “It’s Saturday”

Me:  “After 5 o’clock, there is about 2 and half hours of daylight left?”  “Don’t you want some cash in that register tonight”.  Now I’m intimating to him about the value of cash in the till box over his insistence that “It’s Saturday”. 

Me continuing:  “Do you understand the concept of marginal dollars?”  “How about you charge me for one junior instead and make some money?”

Assistant:  “It’s Saturday”

Me (jaw open):  “No thanks, I’m not paying $80 for my two kids to play 9 holes of golf; even if it is Saturday!”  “AFTER 5 O’CLOCK” (emphasis added).

I left and we went on down the road towards home and stopped at another course (similar quality of a course, but their practice range isn’t as nice as the one I write about above).  The guy behind the counter at the second course gets it:  “$12 each” he says. “And I’ll throw in the cart”.  We were done by 8 on Saturday. 

The difference between these two businesses:  The second golf course’s register had $24 more in it than the first course (assuming similar number of players that day).  At the end of the year, the bottom line for the latter course is going to be $24 more than if I didn’t show up.  The latter guy gets it; it’s about ABSOLUTE DOLLARS to offset fixed costs.  Even if it is SATURDAY, AFTER 5 O’CLOCK AND NOBODY IS ON THE GOLF COURSE!   Act on Knowledge.      

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.  If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.

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About David J Hoare (414 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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