accounting101

When I first opened my gym, Avenu Fitness in Houston, my accounting practice worked like this:

  1. Quickly deposit income in the bank.
  2. Spend income on whatever, whenever.
  3. Put receipts in an envelope.
  4. Balance my check registry once each month.
  5. Be happy if my records were within a couple of hundred dollars of the bank’s records.
  6. Sweat tax season, every year.

Being dyslexic, I had a built-in excuse for not scrutinizing my financial details; I was happy just to get the numbers in the right order. I told myself that I didn’t need to invest time to understand my financial story, because as long as there was money in the bank, business was good.

But the truth is that even while I was busy training, picking up new clients and bringing in more money along the way, I kept very little of what I worked so hard for. It was like there was a hole in my bank account.

Then one day I was reading a business article, and everything became clear. The article stated, “Profit is like oxygen—your business can’t hold its breath very long without it.” I quickly understood that my business was gasping for air and I needed to do something about it.

Like my clients who say they want to lose weight but refuse to nail down their nutrition beyond “I eat healthy,” I had been hiding behind my fear of knowing the truth: My business wasn’t as successful as I thought it was.

It was time to improve my accounting practices.

The goal of accounting is to show how a business is performing. And by avoiding looking over our financial statements, we’re no better than our clients who dodge the scale while trying to lose weight.

When we begin to grasp the story our finances tell us, we can make better decisions about our current services, our staffing levels, new equipment, expansion of any kind, and the long-term health and profitably of our business.

Cash Is King, Right?

In the end, money isn’t what we’re after, is it? Just like for clients whose goal is to lose weight, it’s not really about the weight. It’s about the feeling the weight loss can create. Money creates feelings of empowerment, freedom, security, choices, courage and the confidence to live life to its fullest.

When you pay attention to your numbers, you can take better financial care of your business, your team and the community you serve. Just as in any relationship you have in life, money loves attention. The more attention you give it, the more you will understand how to grow it.

To make the best financial business decisions, you need up-to-date financial information. That requires three simple steps.

Step 1: Organize
To see where your money is going, first you need to get organized. I learned this lesson when my wife, Cassie, stepped in to help me clean up my bookkeeping. I could never fully understand where I was losing money, because my expenses were all over the place. Cassie categorized my expenses into an organized list, which gave me a better grasp of my spending habits. That list looked something like this:

  • cleaning services
  • continuing education
  • donations
  • entertainment
  • equipment
  • online services
  • payroll expenses
  • phone, internet, and cable
  • rent
  • repair and maintenance
  • supplies
  • taxes
  • utilities

Step 2: Track
Initially, I had a tendency to rely heavily on my accountant to track my numbers. My CPA taught me a valuable lesson with this explanation: “Never forget that the financial health of your business is your responsibility. As the owner, you can’t use the excuse that someone didn’t teach you or you didn’t take an accounting class.”

There are three basic reports you need to review:

  • Bank account. On a weekly basis, compare your bank statement with your own accounting program. Invest 15 minutes to walk through your weekly deposits and expenses and make sure that your numbers match up. This provides you with real-time data to understand the financial health of your business.
  • Income statement (aka profit-and-loss statement, or P&L). This shows you your net profit (how much you keep) by subtracting total operating expenses from gross profit (how much you wish you could keep!). Use this report once a month to review all expenses from the previous month. Make sure that your expenses are placed in the right categories, and if you’ve set a budget, make sure that you operate within that budget.
  • Balance sheet. This is your business’s financial CliffsNotes®. Reviewing this “snapshot” gives you a quick handle on the financial strength and possibilities of your business. Look this over quarterly to plan for growth and new opportunities or simply to invest more in your team.

Step 3: Show Me the Money

Once you have a solid handle on organizing and reviewing your numbers, it’s time for the fun part: translating the story your money is telling you. The pulse of your business can be understood through this simple equation:

Net Income / All Income = Net Profit Margin

Stay with me here. When you plug your numbers into this equation, you will understand the financial health of your business. Decisions about pricing, purchasing, hiring and discounts help you become better equipped to grow sales and reduce expenses. Since profit is the main goal of a business, when you understand your net pretax margin—your company’s earnings before tax as a percentage of total sales or revenues—you’ll understand how best to classify your business and how to take the steps needed to achieve financial success.

Here are three ways to classify a business based on pretax margin:

  • on life support: 5% pretax margin or less
  • average: 10% pretax profit margin
  • world-class: 15% pretax profit margin

Once you’ve classified your business, you can prioritize what to do in order to become more profitable.

  • Life-support business. Focus on two things: setting (and stick to) a budget, and increasing monthly income.
  • Average business. Evaluate payroll, monthly expenses and productivity, to make sure you maximize each investment of time and money.
  • World-class business. This is like fine-tuning a Ferrari. Perform a thorough business evaluation, possibly with help from an outside group, to discover and shore up any slight imperfections.

Here’s the most important takeaway: If you have fewer than five trainers and you bring in less than $300,000 a year, your top priority should be to understand your numbers. As you begin to grasp your financial health, you’ll enjoy looking to the future with the knowledge that you have specific steps to take to build a thriving business.

Cash Is Oxygen

Since most of us aren’t accountants, overseeing the financial success of our facilities can seem totally foreign. What prevents many business owners from gaining financial freedom is the feeling that they’re in over their heads or it’s too complex. Maybe they use an excuse, as I did. Securing financial clarity doesn’t come from finding the right motivation, introducing new training methods or conducting a social media campaign. It comes from organization, from tracking and from understanding the true story your money is telling you. When you invest the time to go over your records on a weekly and monthly basis, you’ll gain the awareness you need to build the foundation of a solid business that will withstand the summer slumps and economic downturns.

Part of being an entrepreneur is taking risks and facing your fears. Stepping up to the plate and tackling money challenges helps you take better care of your family, and it assures your team and your community of clients that you’ll be around for the long haul.

Enjoy the journey.