What’s the most stressful part of your business? Is it your finances? When you haven’t learned how to deal with the finances of a business it can be very stressful. Simply, because you don’t know. But once you learn and understand how to manage your fitness business finances. You’re going to become more confident and relieved. At Fitness Revolution, we help fitness business owners at every step in their journey to shorten the learning curve. We don’t want you to put your business into any situation that’s going to make it hard for you to succeed. So, here are the three most important rules for managing your business finances.
Let’s jump right in and talk about the finance department. Its purpose is to measure and manage the financial data in the business. So, what we want to do is collect those financial transactions and look at them in an organized way. This will help you make powerful goals and decisions for your business. The goal here is to help you stay in business for a long time so you can help as many clients as possible.
2 Mistakes That Can Cripple your Fitness Business Finances
It’s important to point these out because no business is ever too mature to have the basics in place. These two pitfalls or mistakes are ones that can take any business out, regardless of how strong it is. If you don’t have these things in place you are putting your entire business at risk.
1. Unclear Bookkeeping
The first mistake is not having clear bookkeeping which means you don’t have organized or accurate financial records. Without that clarity you can’t make the right decisions for your fitness business. You could actually be slowly putting yourself out of business.
2. Inability to Pay Unexpected Expenses
The effect of not having clear bookkeeping creates the second mistake. This is not being able to pay unexpected expenses. Without knowing how much money is coming in and how much is going out then you are unable to plan for the future. What if something unexpected happens? Equipment breaks in the gym or some type of tax situation? You may not have the money to pay for it. If you are unable to pay that large expense then you will start to get behind on your bills. You can see how fast this can become an issue. One thing after another will pile up until you don’t have the money to keep your business going.
You’ve probably heard stories about these things happening. So, learn everything you can and be clear about your finances to keep your business healthy. You can do that by following these three rules: Separate business and personal accounts, record all transactions accurately, and create and utilize a reserve fund.
Rule #1: Separate Business and Personal Accounts
One of the key things that you need to do is have separate business and personal accounts. Business accounts for business-related expenses and personal accounts for personal-related expenses. Simple, right? This is going to make it easier to keep those transactions recorded for your business. (AKA: clear bookkeeping)
There are some other benefits. The first one is that it protects you from a possible audit. The last thing that you want is the IRS auditing your business and finding something wrong. They can levy heavy penalties and fees on you and your business. When you organize your books, it will make it easier for them to see where all the money is going. They’re not going to have to dig deeper.
The second benefit is that it will be easier to utilize your tax benefits or deductions on various expenses. It could be uniforms, travel expenses, or business insurance. There are a ton of great business deductions that can be maximized through clear bookkeeping. Often, fitness business owners don’t claim those deductions because their books are a mess.
The third benefit is being able to reduce your personal liability and create business credit. You do this by making some sort of corporate or business entity (LLC, S-Corp, etc.) This separates you from your business. Say an accident happened in your gym. That person wanted reconciliation. They would not be able to go after your personal assets like your house or your car. Instead, they would only be able to try and recoup funds from your business. That’s critical. If you start mixing your personal and business account it’s hard to receive that same protection. But to understand this and establish that corporate or business entity it’s best to speak with a lawyer.
Rule #2: Record all Transactions Accurately
Once you’ve separated your accounts then you need to record all your transactions accurately. The better the quality of the data, then the more effective your financial decisions will be. If your data is not good then you are going to be making poor decisions. You need to know exactly what’s happening. When you do record all your transactions accurately then you can improve your financial position. This means making more money, helping more people, and creating more jobs.
Here are two practices to make this happen:
1. Report Completely: Don’t pick and choose which transactions you’re going to report. Every dollar that goes in and out of your business needs to be reported. It needs to be reported accurately, which means the right date and time, where the money went or came from, and the exact amount.
2. Classify Accurately: You are going to want to make sure all those transactions are classified appropriately. This pertains to the bookkeeping side of things. When it comes back to deductions, every single transaction needs a classification. First, was it an income or an expense? For expenses, there are different classifications. Was it a rent expense? office supplies? Training aids? Making these classifications will help you put them into the right deductions during tax season.
Reporting completely and classifying accurately is the key to organized and clear bookkeeping. This is going to keep your finger on the pulse of your business so you can make good financial decisions.
Rule #3: Create and Utilize a Reserve Fund
You need to create a cash reserve account which is an emergency fund. It’s critical to have this account to pay for unexpected expenses. It could be for an emergency or an investment opportunity. What if the gym down the street closes and is selling their equipment for a quarter of the price? This would be a great chance to buy equipment at a low cost and save money in the long run. Having this equipment could help you get more clients or increase your current rates.
One thing to remember about this cash reserve account is that you shouldn’t be taking money out of it. Only for emergencies or investments. You need that financial cushion for any possible situation that could arise. A business that can survive in poor conditions is one that can thrive in ideal conditions. This separates businesses that can make it through an economic downturn and those that cannot. If you can make it through to the other side then you will succeed.
Ideally, you want to save at least three months’ worth of operating expenses. So if it costs $10,000 to operate your business then you want to work to get to the point of having $30,000. You’ll have a nice solid cushion. You want to start early and grow with your business.
Two ways to Make your Reserve Fund a Success:
1. Make it Separate
This is not your operating account. You shouldn’t be paying regular expenses out of it. Money should only be going into this account and coming out for those investments or emergencies.
2. Automatic Deposits
The best way to build this account over time is by creating automatic deposits. Set up a monthly withdrawal from your main business account that deposits into your reserve fund. It could be anywhere from $50-$500 a month. The important thing is to get it started!
Follow these 3 rules to fix your fitness business finances. If there are other areas of your business where you feel lost then take our Needs Assessment™. If you don’t know what to do next this assessment will give you the direction that you need for your business. Instantly receive a specialized snapshot of where you are in the Fitness Business Owner’s Journey. In two minutes you’ll know your next big step!
Success Coach, Fitness Revolution