Whether you’re an independent personal trainer, manage a team, own a studio or a franchise, cash is king! Let’s face it, if clients or members aren’t coming in the door, your doors wouldn’t be open. We love the fitness industry because we’re fitness nuts ourselves. On our days off you can find us in the gym or outside hiking or cycling. So naturally thought we would pair one of our passions with another here at iAccounting Solutions; help businesses plan and better manage their taxes and finances.
Income & Expenses
This may be a no brainer but we’ve met so many business owners that don’t do track their income and expenses. Here’s a little test: Can you tell me, within a few mouse clicks, what your net income was last month? If not, then you may want to consider upping your “tracking game” and here’s why.
Tracking your income and expenses is a major part of your cash in’s and out’s. Knowing what expenses are higher than normal, or if your revenue is on track, or not, can mean you’re working for nothing! You also get what I call “the magic number”, or Net Income. Net Income tells you how much profit your business is making and is a gauge for knowing how much tax you’re going to pay. For example, you “think” you’re making money because you have cash in the bank, but your Net Income is less than you think. Conversely, you may think you’re not going to pay tax on much at all but your Net Income could give you a higher bill.
Additionally, using software connected to your bank can make this process of tracking much easier. And if it’s easy, you’re more likely to do it! Revenue is not the only thing to be aware of. Expenses play a large role in whether or not your business is profitable. Having a report where you can look at all the revenue and expenses with a critical eye can be invaluable when you’re figuring out if you’re meeting your goals. This should be your first step in managing your cash flow.
Lastly, keep in mind that any loan payments do NOT affect Net Income. Instead, those payments are tracked on a different report called the Balance Sheet. More on loans later.
If you’re tracking income and expenses then you can figure a very important thing: how hard you’re working for your money! Looking at your net income and cost of sales as a percentage are referred to as your “profit margins”. This is good measurement of how efficient your business is using its resources or charging for products and services. For example, a Cafe may have a 9% profit margin, which is really good for the industry. However, if you run a personal training business that number should be closer to 15%-20%. If you’re lower than what you should be then that means something isn’t right. It may mean you’re not charging enough, or it may mean you’re expenses in proportion to your income is too high. But if you know the number then you can start analyzing and drilling into the problem areas.
If you don’t have one, you should map out a “Profitability Formula” for your business.
If you don’t have one, you should map out a “Profitability Formula” for your business. That sounds complex but it’s really not. All it is is planning how much you’re going to charge vs. your costs to make sure your business is going to turn a profit.
Keeping your debts under control and knowing how much you owe is paramount to keep your business thriving. Not only cash flow wise but mentally. If you feel like you’re on a sinking ship and there’s no way out then you’re not going to be able to manage your cash effectively to “dig your self out”. One of the best ways that I’ve advised clients to get themselves out of debt it to do what I call “Skim the gross”. Skim the Gross means that you’re choosing one debt to focus on and you’re taking a certain percentage from your Gross Revenue and paying it towards your debt. You do this as soon as it enters your bank account. The idea is that if you take it off the top that you won’t miss it. It’s kind of like taxes being taken out of your paycheck, you don’t see them so you never miss them!
One of the best ways that I’ve advised clients to use to get themselves out of debt it to do what I call “Skim the gross”
Perhaps one of the largest expenses we have as businesses is your Labor costs. It’s a no brainer that labor should always produce more than they require in cash but how do you measure and know if you’re getting enough out of your staff? One way is to figure out how much your staff costs are in relation to your revenue. This is often called Labor vs. Revenue ratio and is simply calculated by dividing your staff costs by your revenue and getting a percentage. That percentage should be in the 30% to 40% range for a healthy gym or personal training studio.
For example, let’s say your business’s Gross Revenue is $30,000 in one month. Your staff costs are $10,000, which works out to be 33%(10k/30k)–you’re within range. Let’s say the same example but your staff costs are $15,000. That’s 50%–that’s too high.
If you’re too high you need to focus on getting that number down to a reasonable range of 30%-40%. A few things to look at are your pricing for services, your staff pay rates, and also the market or neighborhood you’re in. All those come into play when determining if this is a healthy cost for your business.
Unless you like working for free (I don’t know how does!) then you have to figure out how to pay your self for your blood, sweat, and tears that you’re putting into your business. Now the “how-to” of paying your self has a lot to do with what type of entity your business is–that’s a whole nother topic for a future blog post. However, when all is said and done you need to plan and budget your compensation into your profitability formula for your business. Whether it’s a salary, commission on sales, or hourly rate, plan and do it! If not, then it’s like you’re working for free and will most likely burn out and lose interest. If that happens, “adios” to your business!
We all love taxes right?! I don’t know anyone that loves having the conversation at the end of the year where they learn they owe tax! A good way to manage this, and also sometimes required by the IRS, is to pay Estimated Taxes. In short, this is basically prepaying your tax liability for the upcoming year. This is a great way to manage your tax liability and not have a huge bill at the end of the year. Plus, when you attack your taxes proactively your whole mindset changes and something you used to fear goes away and you can devote more mental energy to positive things in your life.
There are different ways to do this but the simplest approach I’ve found is to again use the “Skim the Gross” method that I explained earlier. Skim some off the top of your Gross revenue and transfer into a savings account that is hard to access. That way you won’t be tempted to dip into it and you’ll have funds ready to make your quarterly payments.
when you attack your taxes proactively your whole mindset changes and something you used to fear goes away and you can devote more of your mental energy to positive things in your life.
Be Open to Change
While these all may sound great, it takes some planning and structure to succeed at mastering your cash flow. If you need a system, give us a shout. We’ve help clients with this all the time and have it down to an art and can help you make it easy.
Lastly, Be open to change so you can “roll with the punches”. Because the punches will come and you’re going to feel like giving up before you become successful–100% guaranteed! But don’t give up, make changes in your business to make it profitable, try new services, re-write your business plan after a year or two, you get the idea. Do-what-it-takes to get your business where you want it and throw some elbow grease into the mix. Everyone I’ve seen do this have met their goals and is getting what they want out of their business, which is Financial Freedom!