Apart From Your Club Members That Is
Sometimes, when you are a fitness industry small business owner you feel like your gym is a boxing ring with your office right in the middle of it. You might even feel like you are the punching bag from time to time. Owning a small business is hard work and not something to take lightly. Of all the things that will give you stress and worry the one that you must deal with most effectively is financial pressure.
That pressure is the question of profitability or the net income that your business brings in. This is broadly compiled in three stages:
- Your revenue
- Gross adjusted revenue
- Net income
Your revenue is everything you earn. Gross adjusted revenue is revenue less the cost of making each sale. Your net income is your gross adjusted revenue less your overhead costs.
Out Of Cash Out Of Business
Looking at your income is vital to understanding how well or badly your business is running. It is a common practice to look at your income before the issues of taxes and interest payment because hypothetically you can always get an investor who has cash to solve any problems in your operation. Any problem that is, except income.
Cash is king as much as it has ever been. It is true that cash may look different than it did fifty years ago. It is as abstract and digital as any other type of information you work with these days. Whether it is a stack of bills, deposits in the bank or the line on your credit card, when you run out of access to cash you are out of business. But you still need to earn more than you spend on a regular basis and that means making a profit.
The financial experts, who look at the books of companies every day, want to see information laid out in a standard format. There are so many variables to take into account that accountants and analysts have come up with some standardized measurements of profitability over the years.
The Bits And Pieces Of Profitability
One of the most common measures of net income is: Earnings before interest payments, taxes, depreciation and amortization or EBITDA. This is a familiar business school term that students of finance will recall readily.
This is intended to make it an oranges and oranges comparison with no apples involved. When you strip it down to only the numbers associated with the direct running of the business you should get a sense of what is going on.
It’s always helpful to break it down and to take a look at the components of anything technical. Considering accounting is, as they say, the language of business there are some standard terms that need definition.
- Earnings -You can withstand a multitude of sins if you have an adequate net income stream. What investors and banks look at to determine whether or not they are going to help you. It accounts for the "before" in the acronym.
- Interest – An investor may have cash in the bank or have access to substantial lines of credit at low interest rates. So your rates and payments are of no interest to them (sorry).
- Taxes – Investors each have their own unique tax situation. You might be facing a catastrophic tax bill but for wealthier investors losses might be worth the write-offs they get to set against other, juicier investments.
- Depreciation – A slightly abstract assumption about how your capital assets age.
- Amortization – Paying down on debt. Again, this may sound like a personal problem to an outside investor.
So, when it comes to imaginary versions of the dog and pony show, where gyms are compared to each other, the judges are looking at your earnings. They seek it in the bottom line of your income statement, the net income. Everything else is a matter of opinion and you might find that there is as buyer for almost every situation, as long as you can demonstrate a decent net income.
A Net Income Of Tough Talk
Yes, it can be tough for independent owners to fight their way into this industry. Unless you have very deep profits it’s a real uphill battle. The big box gyms are established and have piles of resources and of course there are others such as non-profits like the YMCA that still have massive resources behind them.
You might want to consider alternative business models; if you are an experienced trainer, possibly you could use public spaces or rent time in other studios. Franchises are also a way for the independent to get some resources. Anything that you can do to increase your net income as a fraction of revenue is going to help you keep your head above water until you start to fill your membership capacity.
Bibliography
Fagan, Lawrence. “Fitness Lessons For The Fitness Business.” Gym Insight Blog. April 7, 2015. https://blog.gyminsight.com/3248-fitness-lessons-for-the-fitness-business/ (accessed May 24, 2015).
Investopedia. “Earnings Before Interest, Taxes, Depreciation and Amortization – EBITDA.” Investopedia. https://www.investopedia.com/terms/e/ebitda.asp (accessed May 24, 2015).