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Working Hard Or Getting Better

Earlier today I was talking to a member at our gym.  He asked me, “Why are y’all programming these watered-down workouts.  Are y’all trying to appeal to the soccer moms?”  First, I explained a bit of the rationale behind our programming – such as being in the first week of a new cycle and focusing on basic movement limitations we noticed during the last training cycle – which didn’t get through to him.  So then, I asked him, “Do you just want to work hard, or do you want to actually get better?”

We see this a lot with athletes.  They want to work hard…if they aren’t laying in a puddle of sweat and tears after a workout, then it wasn’t a great workout.  They are willing to “crush it” every time they come in the gym but when we ask them to spend time on shoulder and hip mobility so that they can move safer and more efficiently (aka: get better) – they don’t seem to have the time or energy.

As frustrating as this can be for a coach and gym owner, we do the same thing in business.  We work harder and put in longer hours to improve our business but we still don’t do the things that matter…the tasks that will actually make your business better.  We will try the newest marketing trends, spend hours programming workouts, updating social media, bookkeeping, sending emails, newsletters, cleaning, etc. but don’t spend the time to develop systems and train employees, network or get great at 1-2 marketing channels that will bring in new clients over and over.

I am not saying that programming, bookkeeping and emails are not important or that hard work is not required.  (For the record, bookkeeping is very important & I’d love help you out with it).  There are definitely tons of tasks that must get done and a lot of hard work that must go into a well-run gym.  The point is that often times we focus on putting in more effort rather than doing the things that will actually make your business more successful.

So, are you guilty of working harder without getting better?  I know I still am from time-to-time!  What can you do to get better this week?

IncomeStatement

Gym Bookkeeping 101: The Income Statement

In Part 4 of the Gym Bookkeeping 101 series, I’m covering the Income Statement.  The Income Statement is the 2nd of the 3 major reports that I’ll cover (I wrote about the Balance Sheet here and I’ll have the Cash Flow Statement out in the near future).  The Income Statement, also known as the Profit & Loss Statement or P&L, is the most commonly used statement by small businesses including gym and fitness businesses because it shows the profitability (or lack thereof) of over a specified period of time.  The formula for the Income Statement is:

Revenue – Expense = Profit

Here is an example of a gyms Income Statement for a 12-month period.

Revenue
Sales                                               $255,000
Pro-Shop Sales                              $  31,000
   Affiliate Sales                                 $  14,000
Total Revenue                                  $300,000

Expense
Cost of Sales                                  $  18,600
Advertising                                     $  12,000
Education & Training                     $  10,000
Insurance                                        $    2,000
Interest Expense                            $    1,350
License & Fees                               $    1,500
Meals & Entertainment                $    2,100
Payroll Expense                             $166,650
Payroll Tax Expense                      $  17,000
Professional Fees                          $    5,000
Rent Expense                                 $  36,000
Repairs & Maintenance                $    3,600
Supplies                                          $    1,800
   Utilities                                           $  12,000
Total Expense                                   $289,600

Profit                                                  $ 10,400
Revenue includes sales from your main operations such as training/coaching and pro-shop sales.  It also includes income from non-core operations, such as interest income from a savings account or affiliate revenue.

Just like the revenues, your expenses include costs incurred in order to earn revenue from your normal operations as well as from secondary activities, such as financing.

It’s important to mention the matching principle of accounting in this discussion.   The matching principle associated with the accrual method of accounting (which you should be using) states that your expenses should be reported in the same period as the related revenues.  For instance, if you have a client pay you up front for a 12 month membership, then you should not recognize all of the revenue when you receive the payment.  Instead, you should recognize the revenue over the 12 months that the membership takes place since that is when your expenses of servicing that client take place.  On the opposite side, when you buy $10k worth of equipment in cash, it is not automatically an expense.  It will be expensed each month over its useful life through depreciation.

The Income Statement is a great tool to use in analyzing your business but here are a few reasons not to rely solely on it for making operational decisions.

(1) You don’t get the whole picture by just using the Income Statement.
– The income statement shows revenue earned but it does not show if your company actually collected the money.  Likewise, it shows the expense but doesn’t tell you if those expenses have been paid         for…or even if you have the cash to pay for them.  Also, cash payments do not always mean that an expense has occurred (cash to pay down a loan reduces a liability but is not an expense.)

– In short, the Income Statement, shows you if you are profitable but it doesn’t show you how well you are managing your money.  And since cash is the life-blood of your company, it is important to              keep an eye on that as well as your profit.

(2) The actual formula for the Income Statement can work against human nature. Mike Michalowicz, the author of Profit First, made me first aware of this and it was one of those times when you don’t realize something that’s all around you until somebody points it out and then you see it everywhere.  Mike’s theory is that it is human nature to grow the things you focus on.  Thus, with the Income Statement, if you focus on Revenue and Expenses then you will grow those…both of them.  It’s human nature to spend more when you make more.  If you buy a bigger house, you will buy more stuff to put in it.  It’s just natural.

So, Mike recommends flipping the formula a little bit so that you focus on what’s really important…Profit!  Instead of looking at it as:

Revenue – Expense = Profit

Use the Profit First formula:

Revenue – Profit = Expenses

Guarantee your profit by taking it out before you spend all of your revenue on expenses.

Ego Is The Enemy

I’m taking a break from the regularly scheduled Bookkeeping 101 post to step back and look bigger picture.  I was listening to the Tim Ferriss Podcast the other day and he had a reading of Ryan Holiday’s new book, “Ego Is The Enemy”.  In this chapter titled, “What’s Important To You?” Ryan puts into eloquent words the ideas that I often think about & fail miserably at explaining.  So, since he does it much better, here are his words,

“According to Seneca, the Greek word Eutemia is one we should think of often.  It is the sense of our own path and how to stay on it without getting distracted by all the others that intersect it.  It’s not about beating or having more than the other guy.  It’s about being what you are and being as good as possible at it without succumbing to all the things that draw you away from it.  It’s about going where you set out to go.  It’s about accomplishing the most you are capable of in what you choose.  No more.  No Less.” …” Eutemia means tranquility in English.  It’s time to sit down and think about what’s truly important to you and then take steps to forsake the rest.  Without this success will not be pleasurable or nearly as complete as it could be.  Or worse, it won’t last.  This is especially true with money.  If you don’t know how much you need, the default easily becomes – More.  And so without thinking, critical energy is diverted from a persons calling and toward filling a bank account. ”

There is so much goodness in those words.  Read it a few more times to let it sink in.

Pat Rigsby always talks about building your ideal business.  What is implied in that is that your ideal business supports your ideal life.  Have you taken the time to really sit down and figure out what you want in life, what’s important to you, what you value?  If not, will your business ultimately be able to make you happy or fulfilled?

Your homework for the week is to buy and read “Ego Is The Enemy” (or at the least, print out this excerpt) and review these lessons regularly.  It will remind you that you only have one life to live.  Make sure that it is the life that you want, not one dictated by others or by your ego.

 

balance sheet

Gym Bookkeeping 101: The Balance Sheet

The Balance Sheet is the first of The Big 3 Financial Statements that we’ll cover (The Income Statement and Statement of Cash Flows are the other two).  An easy way to remember the Balance Sheet is to think of it as the “O’s” report.  It reports what you Own (Assets), what you Owe (Liabilities), and what’s left Over (Equity/Retained Earnings).  The formula for the balance sheet is:

Assets = Liabilities + Equity

As the name implies, the formula must balance so if you have $50,300 in assets, the sum of your liabilities and equity must also be $50,300.

Here is an example of a Balance Sheet as of 6/30/2016 from a training gym:

Assets
Current
   Bank Accounts:            $20,000
Accounts Receivable:  $ 1,800
Fixed Assets
Gym Equipment:          $25,000
   Office FF&E:                  $  3,500
Total Assets                      $50,300*

Liabilities
Current
Accounts Payable:        $ 2,200
Current Loans Due:      $ 5,800
Long-Term
   Equipment Loan:           $18,000
Total Liabilities                 $26,000

Equity
Retained Earnings:      $16,000
   Net Income:                 $  8,300
Total Equity                     $24,300
Total Liabilities & Equity  $50,300*

 

Assets (what you own) are what you use to run your business.  They are listed on the balance sheet in order of their liquidity (how easily they can be converted into cash).  So, all of the current assets are listed first and the non-current assets are listed next.
Current Assets – have a life-span of 1 year or less, meaning they can easily be converted to
cash.  Examples include cash, accounts receivable and inventory.
Fixed Assets – are non-current assets that have a life-span of longer than one year & will not be turned into cash
within the next year.  Examples include gym equipment, computers, buildings, goodwill (your
brand).

Liabilities (what you owe) are your financial obligations to outside parties.  Liabilities are also listed according to liquidity.
Current Liability – your bills that must be paid within one year.  Examples include accounts
payable, short-term loans and the current portion due of long-term debt.
Long-term Liability – debts and other financial obligations which are due in over one year.  The
main example for gyms would be a loan.

Equity (what’s left over) represents your company’s total net worth.  It is the sum of your initial investment plus or minus retained earnings.

That’s great but what does my Balance Sheet tell me?

First off, it’s important to remember that the Balance Sheet gives you a snap-shot of your company’s financial position at a specific point in time.

By analyzing the balance sheet, you can determine your ability to pay your bills, your operational efficiency and the net worth of your company.

One of my favorite ratios to use from the Balance Sheet is the Current Ratio (aka working capital ratio).  The Current Ratio indicates whether your company has enough short-term assets to cover your short-term debt.  If it doesn’t, indicated by a low Current Ratio (below 1), you may have a tough time paying all of your bills in the coming weeks or months.  On the flip side, a high Current Ratio isn’t necessarily a good thing either as it could indicate that money is tied up in inventory or receivables are not being collected.

There is definitely more analysis that can be done with the balance sheet but the first step is understanding the basics.  Feel free to contact me if you have any questions on the balance sheet.