Your Assessment Dollars -- Part 1
by Joe Reynolds

Many members of the Ocean Pines Association (lot owners) pay little attention to the association's financial reports. For the most part they tend to place confidence in the Board of Directors, the General manager and staff, often relying on the typically glowing commentaries from the OPA president presented in the Ocean Pines Report.

While OPA certainly has no serious financial problems overall, some of the various business-type amenities produce losses year after year and there seems little inclination by management to stop the bleeding of assessment dollars, dollars that could be better used. In fact, management tends to look for excuses to explain losses rather than looking for solutions to turn things around.

The Ocean Pines Yacht Club food and beverage operations are a perfect example.

The Yacht Club lost $126,208 on operations alone based on the full audited financial report for the fiscal year ended April 30, 2007,  a loss double that of the prior fiscal year. Would an association member find this information in the audited report available on the OPA web site or in a copy of the audit available in the lobby of the Administration Building? No. Unfortunately the publicly distributed reports do not include the entire audit; they exclude the operational revenue and expense reports on the various OPA departments, like the Yacht Club. Even looking at the full audit, one cannot find out that $267,000 (or more) from assessments was spent on capital improvements at the Yacht Club. Thus the total cost from assessment dollars to keep the Yacht Club open last fiscal year was at least $393,000.

An association member could obtain the entire audit report if the member were savvy enough to visit OPA Controller Art Carmine and ask for the full report. Obviously OPA management wants to make it as difficult as possible for association members to obtain any real insight on how their association assessment dollars are spent; one can reach no other logical conclusion.

It must also be noted that combined catering income from the Yacht Club, Country Club, and Beach Club for 2006-2007 was about $377,000; the vast majority of this is probably from catering at the Yacht Club. The catering apparently accounted for about $200,000 in operational profit.

Thus, if one were to look solely at food/beverage service operations not including catering, operation of the bar and restaurant business at the Yacht Club for fiscal year 2006-2007 may have lost a whopping $326,208.

While the numbers clearly indicate current importance of catering income, they also highlight an unconscionable loss on normal operation as a bar/restaurant for a business that pays no rent or capital maintenance costs. Nor is the Yacht Club charged for any advertising promotions published in local papers or television; nor is the Yacht Club charged for any part of OPA's finance or general administration expenses. These costs, perhaps $30,000 or more are buried in other departments.

The Yacht Club is no small operation; total sales in 2006-2007 fiscal year were roughly $1.3 million. A reliable local source, operating a business with total food and beverage sales similar to the Yacht Club, provided numbers related to costs as a percentage of sales. Comparing those to the Yacht Club is an interesting and revealing exercise.

Labor costs should represent about 27% of total sales, or $351,000. The Yacht Club labor costs were about $627,000, or 48%.

Beverage costs should represent up to a high of about 20% of total beverage sales, or $80,000 on sales of $399,000. The Yacht Club beverage costs were about $95,000.

Food costs should represent about 35% of total food sales, or $308,000 on sales of $881,000. The Yacht Club food costs were about $366,000.

While costs of beverage and food, relative to income, is not extremely off the norm, those costs are a combined total of $71,000 higher than might be anticipated -- over half of the operational loss last year.

Given the audit numbers include catering in the total sales and total salaries, it is likely the cost of labor as a percentage of total sales on normal bar/restaurant operations is even higher than 48%, an already astronomical and financially disastrous number.

In a 2006 article examining the requirements for successful restaurants, author Richard D. Williams, President of HVS Food & Beverage Services, wrote: "The restaurant business, like many businesses, is managed by ratios of expenses to gross sales. There are fixed costs and variable costs that a restaurant owner must control in order to run a profitable operation. The two largest controllable cost categories are cost-of-goods-sold and labor. These two cost categories are called Prime Costs, and the two together cannot exceed 62% to 68% of gross sales if the restaurant is to stay in business and be profitable over the long run. All other expenses together, including rent, or occupancy cost, should be held in the range of 24% to 32% of gross sales if the restaurant is to run at a profit."

So, what is the Prime Costs percentage for the Yacht Club, based on audited numbers for 2006-2007?

Cost of Sales for food and beverage = $450,217
Cost of labor = $628,000.
Prime Costs (Total of above two items) = $1,078,217
Total Sales = $1,279,978
Prime Costs / Total Sales = 84%

With Prime Costs at 84%, the Yacht Club can never break even, much less make a profit. Again, keep in mind the Prime Costs include numbers for a profitable catering operation that mask the true sad state of affairs for the normal food and beverage operation.

The obvious questions are-- What experts in this field are analyzing our numbers? Does OPA really have any idea what is going on at the Yacht Club when compared to businesses of a similar total income from bar and restaurant operations?

It is probably safe to say the answer to these questions is "none" and "no."

Finally, does anyone even care that poor management is probably wasting hundreds of thousands of assessment dollars every year by making excuses instead of finding solutions?