Create a Reserve for Repair & Replacement Cost
Monday, January 30, 2012 at 6:33PM
Dennis Kissman in 1997, Consulting, Financial Planning, Industry Articles, Maintenance

This article, by Dennis Kissman, was published in Marina Dock Age – January 1997

This is the time of year when thoughts turn toward the coming summer boating season and what that will mean to the year’s profitability.  It also means that we must assess wear and tear from the past year and then look at the cost of putting the marina back in shape for the coming season.

Many marina owners subscribe to the old adages that if it’s not broken, don’t fix it.  This philosophy may work in some businesses, but in a marina, it could put you out of business.  Typically, marina facilities deteriorate over time.  Oftentimes, owners tend to ignore this gradual decline and learn to live with the problems it creates. 

This brings us to a common subject that is not frequently addressed in a serious manner: how to establish a replacement reserve for those deteriorating assets.  The key to establishing a replacement reserve is to make it part of your normal course of business.  One way that works is viewing the annual replacement reserve amount as if it were an insurance premium.  The next question is how to establish the amount of the premium since there are no guidelines on the subject.

As you know, many marina improvements are subjected to harsh environmental conditions to a far greater degree than most other businesses.  The effect often shortens the useful life of the asset and increases the annual maintenance cost. 

To properly account for this cost, an accurate assessment of the useful life of each asset as it relates to the local conditions at the specific marina, along with its estimated current replacement value, should be made on an annual basis.  Notice that the useful life is based on "local conditions," not what the IRS may set as the useful lives of depreciable assets for tax purposes.

Next, divide the replacement cost by the estimated life to get an annual reserve amount for the current year.  For example, if the current replacement cost of an asset is $180,000 with an estimated life (based on a specific marinas environment) of 15 years, the annual reserve amount is $12,000.  As part of a year-end calculation, be sure to delete all retired assets and include all those acquired during the year.

The annual amount booked to the reserve should equal the composite annual amount estimated for all assets, less actual repairs and maintenance costs recorded for the year. 

Assume your total reserve amount is $62,500 and during the past year, you spent $47,700 on repairs, maintenance and replacement of existing assets.  Based on these assumptions, the additional amount to be booked to the reserve is $14,800.  Do not attempt to relate specific asset reserve balances to repair and maintenance costs.  If the replacement reserve calculations are handled in an objective manner, the composite amount will be the most accurate over time.

Should the actual repairs and maintenance expenses for the year exceed the annual reserve calculation, the reserve amount must be reduced, provided there is a sufficient reserve balance.  At no time should the reserve account be less than zero.  If this occurs frequently, the estimated useful life of assets is too long or the estimated current replacement cost is too low.  If this replacement reserve exercise is to have any validity, you must discipline yourself to make the financial commitment.  The offset to the reserve account cannot just be a book entry.  If you really look at the reserve as a form of insurance premium prepayment, then any annual surplus amount must be deposited in an interest bearing cash or cash equivalent account that can be readily drawn upon to make necessary repairs or acquire replacements.

By using this method to control maintenance costs and keep your marina in good repair, there are some additional benefits.  You will be able to better control your cash flow, keep your customers happy and reduce competitive pressures from other marinas in your market area.

Dennis P. Kissman, president of Marina Management Services Inc. in Boca Raton, FL can be reached by phone at 561-338-5800 or via e-mail:

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