When you’re running a fitness studio or gym, one of the most important ways to measure your success on an ongoing basis is to analyze your financial statements. How much revenue is your studio generating? How much money are you putting into the business? Not being able to answer these questions is like flying blind. The only way to get a clear picture of your studio or gym’s profitability is to do a deep dive into your financial statements, and there are a number of expenses you can and should be tracking.
We asked a few small business experts what to look for when analyzing your financials. Here’s what you need to know to get better picture of your studio or gym’s financial health:
Cash Flow is King
Cash is the lifeblood of small businesses. It’s what allows your studio or gym to pay employees, operating expenses and more. Without it, you can’t grow, invest in or market your studio or gym. “Small businesses need to understand their cash flow more than anything else,” says Jeff White, a finance writer at Fit Small Business. “Understanding when their debt and expense payments are made, and how that lines up with their income streams is vital to the success of pretty much every small business.”
The goal for a cash flow ratio should be 2-to-1, advises Mike Ornelas, author of How to Profitably Market Your Business. “This means the company can afford to pay its liabilities twice,” he says. “The higher the cash flow ratio, the better.”
Using your financial statements, here’s the formula to use to figure out cash flow:
cash flow from operations
__________________ = operating cash flow ratio
Identify and Track Your KPIs
Figuring out your KPIs (key performance indicators) go a long way toward better understanding your financial statements and diagnosing your studio or gym’s health. If you haven’t gone through this exercise, start by making a list of what you want to track. Examples could be your number of members, average class attendance, average daily attendance, member retention rate, average revenue per member or cash deposits. “Let [KPIs] drive your decision-making,” says Ornelas. “If a strategy sounds good, but the KPIs up to that point have consistently not been up to par, scratch that idea and focus on improving the KPIs.”
Figure Out Your Member Lifetime Value
Customer lifetime value (CLV) is one of the most important numbers you can calculate, especially for studios and gyms that build long-term relationships with members. CLV is the dollar amount that represents the total profit a member is expected to bring to your studio or gym for the entire duration of their membership. “It all begins and ends with this number,” says Vic Patel, founder of Forex Training Group in New Jersey. “Once you have calculated this figure, you are in a much better position to understand customer acquisition costs.”
Here’s how to calculate it: Take the annual profit per member and multiply it by the average number of years that they remain a member. “For example if the average annual profit per customer is $150 and they remain with you for an average length of 1.5 years, then your CLV is $225,” Patel says. “This is essential for fitness centers and studios to know and monitor because once they know this metric, they can make realistic budgets on expenditures.”
Once you calculate CLV using your financial statements, what’s next? Here are two examples outlined by Patel that will help drive your marketing decision-making:
Example 1: Your fitness center is running a print ad in a Valpak or Money Mailer and the cost to send out 50,000 mailers is $2,500. As a result, you get 10 signups. That would mean that 10 signups cost your studio or gym an average of $250 each. We know that your CLV is only $225. So this means that this advertising medium is a net loser for your studio. We know this by comparing your $225 CLV with the $250 average cost of customer acquisition.
Example 2: Your studio is running Google ads and for the same $2,500 budget, you get 2,500 people to your website. Of those visits, you can convert 1 percent, which means you have acquired 25 customers for the same $2,500. Doing the math, your customer acquisition cost is $ 2,500/25 = $100. You know your CLV is $225. By using this advertising medium you are spending only $100 and getting back $225 in return. This is a winning investment for your studio.
Keep a Close Eye on Payroll Costs and Expenses
While there’s no universal payroll equation that can be applied to every studio or gym, payroll costs are important to monitor on every financial statement. This is especially true with fitness studios and gyms, where there are hourly employees whose compensation may vary week-to-week and month-to-month.
“Regularly check and make sure each employee is properly being accounted for,” says Ornelas. “Sometimes, it’s easy for payroll to come around and be unnecessarily inflated. It needs to be kept under control or else the business runs the risk of paying employees for work, while being unprofitable.”
Finally, when it comes to your spending, it’s important to have it all in one place so you can easily see fluctuations. Using a small business credit card is the easiest way to keep track of all of your studio expenses in one place. “It will make your taxes much easier to do and you’ll have a better handle on what you’re spending every month,” White says.