For months before a recession was officially pronounced in the United States, club operators noticed signals of a recession. Decreased revenue, increased attrition rates and slower prospect traffic leading to lower sales all pointed to a troubled economy.

In reaction, club operators focused on increasing revenue per member. Often, ancillary revenue categories, such as personal training, racquet-sport leagues and lessons, children's programming, massage, and food and beverage, had not been promoted effectively, so these non-dues categories offered room for growth and improvement. Recently, however, some push-back has occurred in these areas as the economy has caused people to curb their spending further.

Now, club operators must focus on the expense side of the equation. Industry data indicates that expenses have crept up in recent years as club owners have increased their revenue. Rather than strictly holding expenses to those of previous years, club management has allowed expense categories to rise to keep up with or exceed the percentage of revenue growth. Now is the perfect time to examine each expense item on a line-by-line basis. A dollar saved on the expense side will fall directly onto the bottom line.

It's a Plan

Cost-cutting starts with proper planning. Each year the owner and general manager should set overall guidelines for the club and each department (e.g. revenue increase of plus 5 percent and an increased net contribution of plus 8 percent over the previous year). Although management should know detailed information about the previous year's financials and performance, a fresh 2009 budget must be created from the ground up. This is often labeled as zero-based budgeting.

During the planning stage, the club owner should make clear that the department head (and ultimately, the general manager) will be responsible for the department's end result. Whether the department is a profit center or a cost center, this accountability should be tied to a reward system for reaching the year-end total net contribution.

Part of successful departmental budgeting or profit planning involves each department head forecasting each revenue and expense item by month with detailed, written back-up assumptions. These assumptions should hold up even if a new department head comes into that department midway through the year.

Obviously, results must be monitored monthly, so department heads can make mid-course corrections. Using a variance analysis report, department heads can study each line item, research why the actual result differed from the projected total, then explain the variance in writing. They can do this both for the specific month, as well as on a year-to-date basis. They can also project going forward the corrective actions needed to achieve the year-end net contribution total for that department.

Other forms and charts should be used to monitor data. Today, many sophisticated clubs create daily dashboards of key metrics, which means daily monitoring. Many club operators are even creating these for individual department heads so they will not be surprised by overlooked expenses at the end of the month.

The goal of the monitoring should be cost savings, which should allow for a month where expenses exceeded the budget because of factors that were unpredictable or outside of the department heads' control. In addition, a portion of the cost savings should be made available as incentives to the department heads at year's end.

To help decrease costs, club owners should consider a staff cost savings contest that would involve all staff (full-time and part-time) in every area. Each submitted idea that saves a projected $1,000 or more during the next 12 months would be rewarded. After all, non-management staff members are infamous for discovering areas for savings that are typically overlooked by department heads and general managers. The contest offers a participatory role for all staff in managing expenses, creates a culture of focus on the cost side, and eliminates the stigma that the club is "cheap" or is taking a "nickel and dime" attitude.

Focus on Large Expenses First

The most important cost category to study is the largest controllable expense: salaries and benefits. Club owners should research all elements of this category: payroll costs (full-time, part-time, commissions, bonuses and incentives), employee benefits and other employee-related costs.

The goal in any customer service business is to match the needs of the members with the resources needed to serve them. To do this, department heads need to study the usage patterns of members by each hour of the day, by each day of the week and by each month of the year. Usage typically differs depending on the time of year, which may mean less staff is needed at certain hours in certain months. By knowing usage patterns, club owners can shift their mix of full-time vs. part-time employees, eliminate a part-time position if necessary, or outsource or bring in-house certain employees, such as housekeeping.

When club owners decide to eliminate a position (i.e. a department head) and shift the functions to two or three other department heads, the net result is still cost savings, even after increasing the salary of the department heads who inherited expanded duties. In some cases, club owners can simply eliminate a position as no longer necessary. Obviously, it behooves club owners to avoid overtime pay. The use of more sophisticated time clocks and scheduling systems can help prevent overtime expenses.

Club owners with two or more clubs in close proximity also can use one person to perform services for two clubs to help save costs. A perfect example is the roving handyperson who can do basic repairs (electrical, plumbing, carpentry, HVAC, etc.) and save on outside service calls.

Other Payroll Concepts

Many club owners are freezing salaries rather than compensating full-time staff, especially department heads, based on increased hourly wages tied to cost-of-living increases (3 to 4 percent). Instead, department heads are being offered incentive pay often as much as 15 to 20 percent of their salaries. The incentive pay is tied to measurable criteria and is only paid out if the clubs achieve additional monetary gains (i.e. incremental revenue and/or greater cost savings) and have the dollars to pay out the incentives.

More cost savings are possible in the recruitment, hiring and training process. To gain maximum benefit from all staff, club owners must review the recruiting, screening and hiring process to ensure the process is efficient and results in selecting the best employees. Club owners also must review the initial training system for new hires and offer proper performance reviews on a regular basis. Additional savings could be possible for club owners who use university interns, cross train staff, decrease recruiting costs, use teams for key club projects and ensure that department heads both "manage" and "do" the function.

Now is also an ideal time to review benefits (health insurance, club membership, club discounts, parking, uniform, holidays, retirement plans) and comparison shop where appropriate (workers' compensation insurance, health insurance, 401(k) plans, etc.). After doing this, club operators may decide that it is necessary to eliminate certain benefits (e.g. dental and vision care), change co-pays and increase deductibles. Club owners could also develop staff contests, rewards, recognition programs, unique bonus programs and other forms of reinforcement — often at very favorable costs.

Offering staff development is more challenging during tough economic times, but cheap yet valuable development options are available — e-learning and localized continuing education, using vendors to provide more training, combining with other local clubs to share the professional development costs and empowering some key senior staff to become "trainers."

Other Large Expense Categories

Other large expense categories include telephone, IT systems and utilities (oil, gas, electricity and water). Local utility companies will often perform free audits of a club's physical plant and systems and ensure proper classifications of the bill. Club owners that retain private expert utility consultants to go beyond the free audit often find additional long-term savings. Some club owners have bought energy in advance in an attempt to avoid severe price increases. In many cases, club owners have invested in energy-saving devices, partially underwritten by energy company rebates. Clearly, club operators have become more concerned about energy and are looking to create "greener" clubs over time.

Repair and maintenance of physical plant and equipment is another category that challenges club owners. Because repair costs add up quickly, more club operators are trying to reduce the cost by tracking each piece of equipment, making the replacement vs. repair decision in a timelier fashion, committing to more regular preventative maintenance on all equipment (not just fitness), and shifting the burden of fitness equipment repair costs to manufacturers through longer warranties. Club owners also should provide better security for the physical plant and computers, do more regular bidding of vendors and shop around more for equipment and vendors.

Supplies also offer a host of opportunities for better shopping and inventory controls. Department heads may share in certain supply categories, so someone has to take specific responsibility. The wide range of supplies to review include office, medical, locker room, pool, cleaning and sales.

As clubs struggle to attract prospects, owners may consider decreasing their marketing budget, but when doing so, club operators must increase the productivity of the marketing they continue. They need to put in place better lead tracking, and do more research on recent joiners to see which marketing tools are working. As operators have shifted away from newspaper, radio, cable TV and other mass marketing vehicles, they must find new effective marketing tools. For many, direct mail may still be effective. The Yellow Pages has lost its power. Instead, club owners are using online lead generation services and their own Web sites. Of course, encouraging member referrals is still a focus. More owners are looking to guerrilla marketing techniques to reach out to their local communities with off-site marketing, open houses, special events and lectures.

Fixed Costs

Landlords may be interested in revising lease terms and common area maintenance (CAM) charges for lease extensions. Club operators have successfully protested real estate taxes. When the debt markets clarify, club operators may have more opportunities to re-finance and re-do their banking relationships. More attractive equipment leasing deals may become available. Business insurance is available at attractive prices, so either club owners may reduce their costs or gain enhanced coverage with no price increases. Depending on a club's claims history, insurance companies may be able to offer some insurance savings.

The Little Expenses

Typically, a plethora of small items get overlooked because club owners either do not assign them to a department head or they seem too small or elusive to focus on. Some of these little expenses, which can make a real difference in total to the bottom line, include an alarm system, medical supplies, garbage removal, professional fees, EFT charges, banking fees, dues and subscriptions, postage, printing, cable TV, computer maintenance, delivery and freight costs, document storage and travel.

Club operators also could consider trading out with vendors, having sub-lessees pay part of the club CAM charges, renegotiating independent contractor deals, eliminating underutilized club programs or services, using the Internet in greater ways (e-billing, program registration, e-newsletter, e-mail, etc.) and reducing the number of vendors in a category.

Many club operators can benefit by benchmarking their metrics against other non-competitive clubs and industry data.

Club owners should recognize that expense management leading to real cost cutting is the most efficient and effective way to improve their bottom line, especially in difficult economic times.

Rick Caro is president of Management Vision Inc., a consulting company to clubs and an expert in club finances, market analyses, club valuations, expert witness testimony and operational analyses to improve existing clubs. Management Vision Inc. can be reached at 800-778-4411.

Caro is a member of Club Industry's Fitness Business Pro Editorial Advisory Board.