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.

Chart of Accounts

Gym Bookkeeping 101: Your Chart of Accounts

Hold on to your socks…today we are going to talk about your chart of accounts & I don’t want to blow  your socks off.  I understand, as a gym owner you don’t get out of bed to learn accounting basics.  But trust me, understanding this stuff will make you a better owner.  Just think about who your best clients are – are they the people that just show up because they know they should and don’t really care about learning anything or are your best clients the ones that are truly interested in learning about how to eat better and move better?  So, be that good client and get your learn on with this Bookkeeping 101 for Gyms and Fitness Professionals series.

First off, what the hell is a chart of accounts?

The chart of accounts is a listing of the accounts available in which you record entries.  The chart of accounts should be tailored specifically for your industry or even more specifically to your operations.

That’s simple enough, but the order in which they are listed deserves a little explanation as well.  The chart of accounts lists all of the Balance Sheet accounts first and then all of the Income Statement accounts.

Balance Sheet Accounts:               – Assets
– Liabilities
– Owner’s Equity

Income Statement Accounts:       – Operating Revenues
– Operating Expenses
– Non-Operating Revenues
– Non-Operating Expenses

(Check out the posts about the Balance Sheet and Income Statement for more info there).

Your chart of accounts should be simple enough that you are able to use them year-to-year yet specific enough to provide useful financial data.

To get you started, here is a sample chart of accounts for a gym:

Asset Accounts – Balance Sheet

1001      Cash (Checking Account)
1010      Savings Account
1200      Accounts Receivable
1400      Merchandise Inventory
1600      Prepaid Insurance
1700      Land (if you own your building)
1750      Buildings (if you own your building)
1760      Accumulated Depreciation – Buildings
1800      Equipment
1810      Accumulated Depreciation – Equipment

Liability Accounts – Balance Sheet

2000      Accounts Payable
2100      Wages Payable
2200      Interest Payable
2300      Unearned Training Revenue
2400      Mortgage Payable (if you own your building)

Owner’s Equity Accounts – Balance Sheet

3000      Capital – Owner X
3005      Draws – Owner X
3200      Retained Earnings

Operating Revenue Accounts – Income Statement

4000      Group Training Sales
4010      Personal Training Sales
4020      Specialty Program Sales
4030      Nutrition Coaching Sales
4040      Pro-Shop Sales

Operating Expense Accounts – Income Statement

5000      Cost of Merchandise Sold
6010      Advertising
6020      Bad Debts
6030      Bank Charges
6040      Charitable Contributions
6050      Dues & Subscriptions
6060      Gym Equipment/Supplies
6070       Insurance
6080      Janitorial & Cleaning
6090      Lease Expense
6100       Legal Expense
6110        Licenses & Permits
6200      Meals & Entertainment – 100% Deductible
6210       Meals & Entertainment – 50% Deductible
6300      Office Expense
6400      Payroll Expense – Group Training
6410       Payroll Expense – Personal Training
6420      Payroll Expense – Specialty Program
6430      Payroll Expense – Admin
6440      Payroll Expense – Owner’s Pay
6500      Payroll Tax Expense
6600      Rent
6610       Repairs & Maintenance
6650      Training & Education
6670      Travel
6700      Utilities (I include gas, water, electricity, phone, internet, cable)
8000      Amortization
8050      Depreciation

Non-Operating Revenues & Expenses – Income Statement

8500      Interest Income
8600      Interest Expense

 

Use this chart to get your bookkeeping started.  Let me know in the comments if you have any questions.

Bookkeeping101

Gym Bookkeeping 101 – Definitions

In the first of several posts Bookkeeping Basics for Fitness Professionals, I’ll define some basic terms used when managing your finances.  This list is not exhaustive & I’ll continue to add to it over time.  However, my goal is to make it helpful to Fitness Professionals so I’ll only include definitions that apply to most gym businesses & fitness professionals.

Definitions

Asset – resources owned by a company and which have future economic value that can be measured and can be expressed in dollars.   Assets are found on the Balance Sheet.

Common examples in gyms include: cash, accounts receivables, equipment (tvs/computers & exercise equipment), inventory (apparel, supplements, drinks and bars), and buildings.

Accrual Basis Accounting – an accounting method that measures the performance of a company by recognizing economic events regardless of when cash transactions occur.  Revenues are matched to expenses at the time when the transaction occurs rather than when the payment is made or received.

Income example: A client pays $900 for 3 months of training.  Even though you received $900 in month 1, you would recognize $300 in month 1, $300 in month 2 and $300 in month 3.

Expense example: You pay $1000 for 100 t-shirts ($10/each).  In month 1 you sell 40 shirts for $20/each for $800 in revenue.  You would recognize a cost-of-goods sold expense of $400 (40 shirts x $10) in month 1 and you would still have $600 in t-shirts in inventory.

Balance Sheet – one of the main 3 financial statements.  It reports the assets, liabilities and owner’s equity at a specific point in time.   It’s a “snapshot” of what the company OWNS and OWES.

Assets = Liabilities – Owner’s Equity

Cash Basis Accounting – an accounting method in which revenues are recognized when cash is received and expenses are recognized when paid.  This method is typically followed by individuals and small companies.  It is inferior to the accrual basis accounting method.

Cash Flow Statement – one of the main 3 financial statements.  It reports the sources and uses of cash by operating activities, investing activities, and financing activities.

Equity – found on the Balance Sheet, it is the difference between assets and liabilities.  It represents the net amount of funds invested in a business by its owners, plus any retained earnings.

Expense – an expense is the money spent or cost incurred in a company’s effort to generate revenue.  They are the cost of activities directed towards making a profit.  Expenses are found on the Income Statement.

Common Gym Expenses: Rent, Payroll, Utilities, Supplies, Credit Card Processing Fees

Fixed Costs – costs or expenses that do not change in response to changes in sales or other operations.

Example – Rent & Utilities

Income Statement – or Profit & Loss Statement (P & L).  It is one of the main 3 financial statements.  The income statement reports revenues, expenses, and profits or losses for the company over a specified time period.

Revenue – Expenses = Profit/(Loss)

Inventory – a current asset whose balance should report the cost of a company’s products waiting to be sold.

Example – unsold apparel, supplements, bars, drinks, etc. purchased for resale

Liability – An obligation of a company such as an amount owed to lenders or suppliers or advanced payment for a future sale or service to be performed.  Liabilities are found on the Balance Sheet.

Profit – found on the Income Statement, profit equals your sales minus your expenses.

Revenue – the sum of all money taken in.  This is the first item on your Income Statement.

Variable Cost – expenses that vary with some activity.

Example – your payroll expense for coaching will go up as your revenue from coaching increases.