#028: How to Make Your Gym Profitable Today

#028: How to Make Your Gym Profitable Today

If you’re one of the many gym owners who’s not seeing a profit yet, this show is for you. I can’t stress enough how important it is that you tune in tomorrow for Gymwright LIVE.

Our special guest, John Briggs, explains why the way you’re probably managing your gym’s finances is locking you into a never-ending cycle of trying to sell more and more memberships yet never really seeing much of a profit.

Join us every Friday at 10 a.m. PT on The Network where we’ll be airing live. Be sure to stick around for the live Q&A session at the end of the show so we can answer any questions you have.

This show was recorded live in The Network on Friday, April 20, 2018. 

Table of Contents

 

profit first

Image Credit: Edge Body Boot Camp

2:00 The “Profit First” Formula 

This week’s show explains the highly-regarded Profit First method from the book Profit First by Mike Michalowicz. You can get it on Amazon here in audio book or paper back.

What makes this show different from reading the book (which you should do also) is that this week’s guest John Briggs works primarily with affiliated gyms and so he breaks down how the method works specifically for managing gym cashflow. 

The first thing you need to know is this generally accepted accounting principle which you’ve seen before:

SALES – EXPENSES = PROFIT

This formula for calculating your profit has been around for 200+ years and it does make sense. Sell as much as you can, pay your expenses and you’re left with the profit. It’s the same as eat less calories than you expend. It makes sense, but it’s hard to actually do.

Spend less than you make and you’ll be profitable. Sure, but what the equation doesn’t take into consideration is the principle of Parkinson’s Law.

Parkinson’s Law: When a resource is made available we consume it all. If you’re given 5 hours to do a project, it’s done in 5 hours. If you have 5 days, it’ll be done in 5 days. What ever’s available to you, you will consume.

So let’s say we buy into Parkinson’s Law. How are you realistically going to spend less than you make if you see this big chunk of money in your bank account that could be used to help your business grow? It’s just so tempting to spending it all.

The trick is to reduce the amount you have access to spending for expenses which changes the formula to the Profit First Formula:

PROFIT – SALES = EXPENSES

 

 

profit first

Image Credit: Edge Body Boot Camp

9:50 Work with your behavior, not against it

Michalowicz actually got the idea for the Profit First Formula from watching a fitness expert on some late night fitness show who was explaining that the best way to drop body fat is to work with your behaviors, not against them.

The reason your ab abductor and Bowflex are gathering dust in your basement is because you’re trying to change the way you do things. Let’s take baby steps and work with what you’ve got.

This fitness expert’s suggestion was to throw out your dinner plates (which have doubled in size since the 1700s) and use smaller plates for your meals. If your behavior is to clean your plate, then lets work with that.

If it seems that’s how our humanly flawed financial behavior is as well – why not work with how we’re already doing things? Let’s take our profit out first and reserve it away along with some other must haves like taxes and the amount you spend for expenses will literally become a smaller plate.

You them can happily continue your behavior of consuming it all. You see how much you can really spend and you become innovative. You run leaner, you find out how to get things done with smaller expenses when you take your profit first.

So, how do we actually create the system of having smaller plates?

 

profit first

Image Credit: Edge Body Boot Camp

19:15 How it works

  1. Understand your current state. when a new member walks through your door, you do some kind of evaluation to see what they’re capable of. the Profit First Pros have a similar assessment you can do. John’s team has created a 5-day challenge for gyms to easily do this assessment. Get started with the free 5-day Challenge here. We’ve done it and highly recommend it.
  2. (22:16) Figure out the difference between total revenue and real revenue. This number is important because it tells you the true size of your business. If you make $1M in total revenue and you’re spending like you’re making $1M in real revenue you’re going to be in deep doo doo. You’ll learn more about this in John’s 5-day Challenge, but here are the Cliff Notes:
    1. Total revenue is how much money you get from your members.
    2. Real revenue = (Total Revenue) – (how much you spend on items you resell like supplements + how much you pay your coaches if they’re contracted and paid per the class)
  3. (24:40) Understand the amount of time you spend working in the business coaching classes, being the janitor, doing the marketing, etc and line item all of that. When you first start a business, usually you’re doing everything yourself so it’s “free”, but the challenge is when you grow, you’re still energizing those roles and you’ve never accounted for them in your expenses. This means you need to find the money to pay someone to do it. You don’t have accurate costs of what it takes to run you business which is why it’s so difficult for gym owners to hire out.
  4. Figure out your TAPs (target allocation percentages) or how much of your real revenue you’re going to allocate to different aspects of your business. More on that in the next section.

profit first

Image Credit: Edge Body Boot Camp

29:03 How & Where Should I allocate My income? 

This is the fun part. Even if you’re not making much money AT ALL, implementing this process will put you on the right trajectory towards creating a very profitable business right away.

You’ll first need to have 5-6 checking accounts with your bank. Stick with me here. It sounds like a lot of up front work but after this, it’s just SO easy to manage your income.

You’ll have your 1 existing checking account and create 4 or 5 more. After you set up these new checking accounts, you should have the ability within the bank website to give these accounts nicknames:

  1. Income
  2. Profit
  3. Owner’s comp
  4. Taxes
  5. OPEX (existing checking account)
  6. Equipment

**The percentages mentioned below are just generalized estimates based on John’s experience working with other gyms. Go through the 5-day challenge first or speak to John directly to get you unique TAPs**

Income: Direct 100% of the money you make to automatically go into this income account. This account is like your serving bowl. Now you need to divvy them up into the small plates for you to consume as much of as you like.

Profit: John suggests starting at least with allocating 1% to your Profit account because everyone can afford that. Increase this percentage incrementally in a manageable way as the weeks go on.

Taxes: Most of John’s gyms allocate 5-7% of their income for taxes which he finds to be more than sufficient. He notes you should work with a specialist who can ensure you’re getting the most out of your tax strategy so you’re not paying more than 7%.

Owners Compensation: The book suggests that businesses making less than $250K/year should be allocating 50% of the income to owners compensation. Johns says that’s usually not doable right away for most gym owners. At the beginning, you should sit down and figure out exactly what you need to sustain your lifestyle. If the numbers don’t add up, your current lifestyle may not be ready yet based on the health of your business. Figure out what this number is and find the percentage you need to take from your income account.

Equipment – this account is for a flat amount – not a percentage. Every time you sit down for allocation days (more on that next) you put in $50-$100 in you equipment account as you know something will need replacing or fixing.

OPEX – this is your operating expenses account. You can just rename your current checking account OPEX as you’re already using this account for expenses. Everything you have left goes into this account.

You get bonus points for opening the 2 accounts for Taxes and Profit at a different bank. The idea here is that you want to make accessing these accounts more difficult or out of sight of your daily/weekly view so that you almost don’t even know it’s there until it’s time for you to do your quarterly tax payments.

It like having this magical pile of surprise money. Already having the funds to pay your taxes waiting for you is glorious. The check you take home is YOUR money and you don’t have to worry about saving it for another aspect of the gym.

 

profit first

Image Credit: Edge Body Boot Camp

21:25 How do I manage this system?

Twice a month, let’s say every 10th and 25th, are your allocation days.

This is when you calculate the real revenue that you earned in the previous two weeks since your last allocation day then divvy up your income serving platter by your TAPS (the percentages we just discussed).

1% of your income goes to the Profit account. 5% goes into your Taxes account, and so on. . . remember, everything left over goes to Expenses.

profit first

Image Credit: Edge Body Boot Camp

45:08 A better way to pay your bills

Another thing to consider is bills. Many of us stress out about bills. We get them in the mail, we either put it away and think about getting to it in a while, or maybe we pay it right away to get it off of our minds. Here’s a strategy to stop worrying about it.

Make a pile for bills. When you get a bill in the mail it goes in there. Don’t touch it until your next allocation day. When you sit down for the 10th or the 25th (which ever comes next) you pull out your bills.

Anything that isn’t due until after the next time you sit down for allocation day – don’t worry about it. Put it back in the pile. Anything that’s due now or before the next allocation day, we’re going to deal with. This helps you understand your cashflow cycle.

Now what if you’re in a position where you can’t pay all of your bills?

Make a spread sheet of all of your expenses that go out during the month and find out which are absolutely necessary for you to run the business. Rank them from most important to least. You’ll find some ways to easily trim the fat with this process. You definitely need to pay rent for the gym, but you probably don’t need that second Spotify account. Rent goes to the top, Spotify near the bottom. If you only have enough money to prioritize the top 5, this is also a great list to have handy so you know which companies to call to ask them for an extension.

 

>>FREE 5-DAY CHALLENGE<<

CLICK HERE TO Jump Start Your Box Cashflow with The Cash is King 5-Day Foundation Program

About John Briggs

john briggsJohn Briggs is a CPA, Master Certified Profit First Professional, Lean Six Sigma Black Belt, Licensed Financial Advisor, and Owner of Incite Tax

John has been in the tax and accounting industry for over 11 years. One of John’s most existential qualities is his affinity for hating the IRS. He’s worked with about every industry and endless financial situations. He’s be serving the functional fitness community for over 5 years and currently Incite helps hundreds of box owners grow their wealth and decrease their tax. John loves functional fitness and appreciates the correlation between pursuing health physically and health in your business.

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Jessica Depatie About the author

Jessica is the marketing maven here at Gymwright. She's a business consultant and holistic marketer for fitness businesses. She specializes in the decision-making psychology of what makes everyday people want to optimize themselves. She dives deep into how people seek out growth in the pursuit of living happier and healthier.

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