consultants to the trade

Marina Dock Age, January/February 1995

Are You Charging Enough?
by Dennis P. Kissman

Management of marinas offers situations that can be advantageous and profitable—provided the correct steps are taken. Dockage or storage rates are a perfect example. Many marinas base their dockage and storage rates on what their competitors charge rather than on what they need to take in for a desired level of profitability.

How much money do your marina slips and/or racks have to produce per foot per month to compensate for all costs and produce a fair return on your marina investment? While the answer is a number that’s different for every marina, the method of finding it isn’t.

When projecting this number from a total revenue or gross profit perspective, costs are often underestimated or ignored, leaving the end result far short of the required amount. With an initial look at an income statement, the first element to catch the eye is net income. Generally, if net income is positive we assume we made money. And, conversely, if net income is negative we assume we lost money. These assumptions are not wrong, but they don’t tell us how much profit we should have made or could have made.

A more appropriate approach is to set your rates working backward from the net profit you want. By working backward from the desired return on your investment, you take into account all costs, no matter where in your operation they may occur.

The first step is to identify the return on investment you want to earn from the marina. To arrive at this amount, take the total investment in your marina and multiply by the desired percent return. Keep in mind your investment is the total amount invested in the marina, including borrowed money and equity.

Next, taking your desired return on investment, or ROI, work backward to determine the needed rate for dockage or racks. Remember, your desired ROI is an after - tax amount, so first, calculate the pre - tax income you need. To do this, divide the after - tax amount by the historical percentage of operating expenses to revenues. Your answer is the annual revenue you’ll need to achieve your desired ROI.

If your marina has profit centers other than dockage and storage rates, you’ll need to account for those too. Simply take the total revenue less all direct and operating costs (not included in the previous calculation) and subtract from annual revenue required to meet your ROI level.

Let’s put it to the test. Let’s assume we have a 100 - slip marina with a total investment of $1 million. If we want to make 10 percent return on our investment, we’ll need a profit of $100,000 ($1,000,000 x .10).

Following the process, take the desired return on investment ($100,000) and divide by the reciprocal of the tax rate (1 minus the tax rate, which we’ll assume to be 30 percent) to get the pre-tax operating income $142,857 ($100,000 / (1 - .30).

Note that when working through the income statement from the bottom line to total revenue, it is necessary to use the reciprocal of each specific expense to calculate up to total revenue. For example, for a tax rate of 35 percent, divide by its reciprocal, 65 percent, or (1 - .35), to get pre - tax dollars.

For our imaginary marina, let’s assume operating expenses at 35 percent of historic revenues. To figure required revenue, divide the pre - tax income ($142,857) by the reciprocal of operating expense (1 - .35), and we get a required revenue of $219,780. That’s our required revenue from all profit centers to produce a 10 percent return on our $1 million investment.

Assuming our other profit centers will produce a net operating income of $20,000, we’ll need $199,780 from slip and storage revenue to generate our desired ROI. Thus, each of our 100 slips must earn $1,998 per year ($199,780 / 100) to make a 10 percent return on investment.

To take this to the familiar per foot per month rate, divide the annual required revenue by 12 and divide that by the average slip or rack length. The result is the rate you need from your slips or racks at 100 percent occupancy.

On a monthly basis each slip has to earn $166.48 ($1,998 / 12). Assuming our average slip size is 30 feet, we need to charge $5.55 per foot per month at 100 percent occupancy ($166.48 / 30).

As a side note, if there was no operating income from other profit centers, the $5.55 would climb to $6.11. In other words, the additional profit centers contribute $.56 per foot per month toward rental rates. If the marina is 80 percent occupied, the $5.55 rate would increase to $6.94.

What is the practicality of this exercise? I have seen many marina operations in financial trouble because they work return on investment calculations from too broad of a perspective and fall far short of their goals. Often the marina operator doesnt understand how financial hardship occurred or how to recover from it.