One of the biggest surprises to me upon entering the ski industry was the seeming lack of planning and control of capital projects and the effect that over-expenditure seemed to have on ski areas’ financial success. After quite a few years in the industry I now understand how this happens, and have felt challenged to figure out a way to reduce the over-expenditure. Unfortunately my methods to date have not performed that well, so I offer them more as a challenge to others to do better than to satisfy my own needs.
Readers of my previous articles will quickly detect an orientation towards planning and budgeting before a project starts, followed by a quick-and-dirty, every-Monday-morning control system which raises yellow flags of “caution, trouble ahead.” Previous articles have suggested that more GM’s might use techniques such as these to manage their ski businesses for greater profit.
Two factors make capital project decisions in the ski industry especially difficult. First, we’re never quite sure how our season will end up until the season is complete. Because of this we don’t start on our projects until the season ends, and we’ve had a vacation. Understandable, yes; but in today’s world, unacceptable, because lead times on much equipment are so long that a May/June decision leads at best to a Nov./Dec. installation under the pressure of opening for a new season. We all know what that does to our costs.
And then second, because we’re never too sure of our summer cash drain, we further postpone some projects into fall either hoping that the need will go away, or that unexpected cash will make them easier to justify. This, too, obviously leads to poor planning and very frequently poor execution at excessive cost. Far be it from me to lecture on the subject, because I do the same, but all general managers should realize we’re not managing our investment capital decently until we get out of this rut.
We must start much earlier!
Start by listing potential projects, almost regardless of cash available. Then refine the list into more and less critical categories. I suggest these two steps must be complete by mid-season. At this point most areas have a pretty good feel for how the season is headed. Then, look carefully at the list and reduce it to those projects which may realistically go forward. Until this point don’t waste time refining the details of projects. But now you can go to work on the realistic ones with full recognition that you may have to drop some.
Research and planning for the purchase of equipment such as new grooming machines seems relatively easy: find out what is available, evaluate the alternative characteristics, receive quotes, and make the decision. These steps seem to be instinctive for most of us. But also evaluate the terms, a part of the bargaining process too often forgotten, but very important to the correct investment decision. For example, delivery and payment for grooming machines can sometimes be timed to place it in the following year without hurting operations at all. This might permit you to do another project for which cash was not available. In my opinion too many general managers evaluate equipment on price alone neglecting their total need and plan.
New lifts, expanded snowmaking, additional trails, etc. require very different preparation and timing, and must conform to local laws. Rather than get into these, I want to emphasize the need to break the project down into appropriate components. The table shown (page 2 of a weekly report) is an illustration of this for a snowmaking job. Note how the Booster Pumphouse, for example, has various components which add up to a small sub-project, but an important part of the overall. Doing this forces you not to forget important things and to identify areas of uncertainty.
| Acct. No. | Description | Budget | Funds Expended | Funds Committed | Total | Uncommitted Balance |
|---|---|---|---|---|---|---|
| 5642 | Control Building | |||||
| Motor Control Ctr. | $ 5,900 | $14,812 | $ 14,812 | ($ 6,112) | ||
| Circuit Breakers | 2,800 | |||||
| Installation | 4,000 | 4,000 | ||||
| 5643 | Booster Pumphouse | 4,660 | 4,660 | ( 4,660) | ||
| Primary cable to BPH | 12,800 | 12,800 | ||||
| 300 KVA transformer | 7,200 | 4,300 | 4,300 | 2,900 | ||
| Concrete pad | 1,000 | 1,000 | ||||
| Transformer tap-off | 1,000 | 1,000 | ||||
| 600 amp-breaker | 1,400 | …not……..needed ….. | 1,400 | |||
| Installation | 4,000 | 4,000 | ||||
| 5650 | Mountain Distribution | |||||
| tools etc. | $ 1,593 | 610 | 2,203 | ( 2,203) | ||
| Pipe | 108,000 | 51,499 | 59,983 | 111,482 | ( 3,482) | |
| Couplings | 14,000 | 19,049 | 19,049 | 4,951 | ||
| Fittings | 10,000 | |||||
| Hydrants | 14,000 | 12,298 | 12,298 | 1,702 | ||
| Installation | 41,900 | 20,875 | 20,875 | 21,025 | ||
| 5660 | Capital Supplies | |||||
| Winch | 68 | 275 | 343 | ( 343) | ||
| Snowmobile | 2,500 | 2,500 | ||||
| Radios | 4,600 | 2,969 | 2,969 | 1,631 | ||
| 7 sets gun/hose | 7,700 | 7,700 | ||||
| 5680 | Contingency | 19,000 | 1,992 | 600 | 2,592 | 16,408 |
Having broken the project down into components, add a budget figure and anticipated timing. The budget frequently involves purchase decisions such as those discussed above. Don’t neglect to include figures for uncertainty which inevitably will exist. Sometimes it is easier to do the timing by working backwards from the desirable completion date. Remember that to complete a component by a designated date usually requires a purchase decision by a much earlier date. Trying to work all this out before the project really starts is a great help, because it becomes the basis for a control system once work starts.
If you’ve accomplished all this before the season ends, you are better than 99% of the rest of us and can wait to get a final cash count before proceeding systematically. You know when you have to place your orders, when delivery is due, when various components should be done, and how much almost everything should cost.
Once the project starts I suggest the table shown as one way of keeping track of progress routinely. Note how the project is broken down into components, each with its own budget. Also, note the column for “Funds Expended and Funds Committed.” The first shows cash actually spent to date, the second cash-value of orders placed but not billed. The total compared to the budget indicates quickly the status of each component weekly.
By now readers of this series on Yellow Flag Management know the astute general manager will circle the negative Uncommitted Balances and work to either bring them back under control; or, in the case of capital project management, more probably attempt to do enough better elsewhere in the project to keep the grand total in line. The yellow flags go up every Monday providing ample reaction time for developing problems.
Looking at the table, we see that the motor control centers cost $6,000 more than expected. Yes, question this; but there’s probably little you can do. So as general manager you’ve got to save $6,000 elsewhere or your project is in trouble. It’s good you know now, before you’ve spent all your dollars.
The same goes for timing, which could be added to this same report. If you have a plan, then you are better able to recognize trouble ahead and manage it! Today, the best planned project will not develop normally, but a well-developed project with good controls can end up very well executed despite many crises along the way.
So I say, start earlier, develop priorities, research, plan, and execute with full knowledge of your total capital project schedule and cash available. On complicated projects break them down into separate components for budgeting and scheduling. Then develop a report that tells you weekly how you are doing. Finally believe the report, react to it, and I guarantee your results will be better.
This completes the three-part series on Yellow Flag Management appearing in recent issues of Ski Area Management. The first article urged general managers to include revenues as part of their responsibility and gave some illustrations of how managers could influence weekly revenues. It illustrated a reporting procedure which identified problem areas swiftly, and suggested supervisors working for the manager could learn to use such reports to increase profits.
The second article applied the same yellow flag principles to labor costs. It developed two reports which general managers can use to improve profits with better control of labor costs. It also showed how budgeting labor hours weekly helped to make early and late season employment decisions easier.
And this final article applies both control and planning to capital project decisions in a fashion which still raises the yellow flag of caution very quickly after trouble arises.
However, in the final analysis a general manager’s success in using all this depends on his willingness to recognize the realities of what is going on, his desire to influence the situation, and his drive to seek more and more profit. As with an athletic coach, without desire, no strategy or execution will consistently win games; so yellow flag management without drive will not produce greater profits. But drive is not enough. A strategy, method of execution, and system of control assures a much higher level of success.
