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