Exploring Options to Improve Marina Income
Monday, January 30, 2012 at 5:59PM
Dennis Kissman in 1997, Financial Planning, Industry Articles, Management, Profit Centers

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

As the boating season is winding down for many marinas, a lot of you already have your eye on what changes could be made to improve the marinas income in the off season and for the next years boating season.  Those changes could include capital expenditures, staffing changes or product line changes.  In each case, if the wrong decision is made, the expected increases in income could turn into decreases before you realize what happened.  Under these circumstances, the cost to correct the situation usually far exceeds the cost involved in making the initial change.

I always recommend that marina operators work through the effects of those changes on paper before committing to the actual change.  For example, say that you sell new boats.  The new boat sales office is located in your ships store, and new boats are displayed on a limited basis in the stores retail area and outside at the marinas entrance.  Excess new boat inventory is kept in the marinas dry stack building in vacant racks.  New boats are rigged and warranty repairs are performed by your in-house repair department.

While reviewing your last 12 months of boat sales, you determined that you lost $100,000 to your bottom line from selling new boats.  You believe you have three options.  One: Get out of the new boat business.  Two: Set up your new boat salesperson in business for him by letting him take over the new boat sales profit center.  Then have him lease space back from the marina.  Three: Understand why you lost money and make the necessary changes to make new boat sales profitable.

At this point, you’re psyched up about options one and two—getting out of the business and letting someone else have the headaches.  This is where I make a simple request: Prove that you lost what you said you lost.  The majority of marina operators in this situation cannot provide proof, and often stop at: “I just know.”  If you make your decision on the strength of that statement alone, your chances are good that it will be the wrong one.

Now the question becomes: How do you go about making the right decision?  Begin with the assumption that if you lost $100,000 of profit in boat sales, it would be fair to assume you should have made a profit.  Say that, based on your sales volume; you should have made a $200,000 profit.

Now step back and look at the options again: Which option is best?  With option one—getting out of the new boat sales business—would your profits increase by $300,000 (the $100,000 loss plus the $200,000 you should have had in profits)?

There is a good chance that they would not have.  Here are three reasons.  First, boat sales are an intricate part of your business and the overhead and operating costs that were allocated to the boat sales profit center will have to be absorbed by the remaining profit centers.

Second, the repair business would most likely decrease because of the reduced volume.  If the rigging and warranty business is not as profitable as other types of repair business, and if you do not have the billable hours to take up this void, then your non-productive labor could increase.

How many boats do you sell that remain in the marina?  Those boats become the third reason that you may not profit from the decision to get rid of boat sales.  If you have to look elsewhere for new customers, can you attract them at the same rate as you do when you have a captive audience with the dealership on site?  If the answer is no, then the storage rate increase you planned this year—because occupancy increases warrant it—might have to be put off for another year.  All of a sudden, that $300,000 increase in profit you thought you would get is rapidly decreasing and option one may be losing some of its appeal.

With option two, you have a different set of circumstances to consider.  First, can you get $300,000 in rent to offset the income potential if the profit center was run right?  Most likely, you can not.  Taking into account that you will still have a dealership on site, you may not lose repair and storage spillover but you will lose some control over how those services are sold by the dealership.  With both option one and two you will still have fixed overhead and expenses that you cannot eliminate.  They will have to be absorbed by the remaining profit centers, including some of it charged back against the dealership rental income.

The other thing to consider is turning over or selling the dealership to someone who was not able to make a profit for you.  Chances are that if this person could not make a go of it for you, then he most likely will fail on his own, leaving you with a bigger problem than you leave have now.

This brings the example full circle, to the third option—the one that was the least desirable to begin with.  This may still turn out to be the least desirable, but until you know what is causing the problem, you cannot take steps to solve it. 

The first step in analyzing the problem is reviewing each revenue, cost and expense line reported in your financial statements.  Do not just list what is in them; understand in detail what makes up each line.  This is not an easy process; plan to go back through the list more than once.

Then ask yourself: What would I change if I followed each of my three options?  List each line item as it is in the financial statements, then set up a column that represents the total actual amount from the financial statements as well as a column for each option to consider and an area for notes to jog my memory as to why I made the decision I did at the time.  In each of the option columns, I either add or subtract an amount that I believe would affect that option.

For example, take the sales office and display area in the ships store.  By eliminating the new boat, sales as proposed in option one, what will change?  It probably will not change the utility cost since it was all in the same building.  It will add retail floor space, but do you really need more retail space?  If so, then estimate how much your gross profit on sales will increase, but remember to subtract the carrying cost of the additional inventory required to generate those sales.  Also, ask if it will require an additional salesperson.  If it does, then add the additional employee cost and related employee benefit cost.

If you ask the same question about utilities for option two, the answer would be the same as for option one.  This time you would be getting some additional rental income that you would not have had before, but on the other hand, there would be no opportunity to expand your retail sales as suggested with option one. 

Back to option three, again, there is no change in utility cost, but you do have other choices to make.  Maybe the best solution would be to eliminate the indoor new boat display and convert it into additional retail space that will generate more income without negatively affecting new boat sales.  Now you are beginning to solve your problem.  You have taken some non-income producing space, turned it into income-producing space and concentrated your new boat sales area.  The utility cost that could not be eliminated now has a larger profit base on which to be allocated.

This is but one simplified example of how to analyze a profit or cost center in your marina.  Every profit or cost center could be reviewed in a similar manner and each would produce its own set of results.

In this example, even though the utility cost line item did not change with all three options, the impact it had on the operations profitability did change because you figured out a way to increase sales without increasing utility costs.  Often just eliminating the problem and not understanding what the real problem is makes you fall far short of your intended goal.  The bottom line: Understand your bottom line before you start making changes.

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: dennis@marinamanagement.com.

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