I had a meeting yesterday with a local business owner that I am doing some consulting work with and the topic of business checking accounts and owner compensation came up. It is fairly common for new small businesses to have no idea how much money their business is actually making in a given month. Of course knowing gross sales is easy enough…but how much cash has the business actually made?
If you pay attention solely to gross sales and the balance in your checking account and spend accordingly you could find yourself in a serious financial pickle. It may seem obvious to keep business expenses separate from personal expenses, but it’s a fairly common thing to let those lines get blurred…especially if you operate as a sole prop.
What have you earned?
It is important to differentiate between revenue that you have “earned” (service provided/sessions serviced/products sold) in a given month versus general sales revenue. Of course you want to track both. But for spending and budgeting purposes the amount of money you have already provided services for is what you have actually “earned.”
For example, a new client buys a package of 12 sessions for $600 on the 25th day of the month and comes in and completes 2 of those sessions before the month’s end. In your reporting software it looks like you made $600 that month and likewise your business checking account has an additional $600 deposit. However, you only actually earned $100 of that package value…you only provided service for 2 of those sessions. This is where looking at your checking account balance and spending accordingly can get a small business owner in big trouble. It may look like you have a hefty balance and can afford to go out and buy a new GHD or other piece of equipment, but you need to account for the future demands on that revenue (paying staff, etc).
In the beginning I recommend paying yourself in the same way you would pay a staff member to do the same work. Even if your business takes off right from the get go…pay yourself a reasonable but modest wage…and allow your business capital to grow. It’s better to live a little lean in the beginning and allow the business to get its feet under it and thrive than to withdraw too much capital as owner compensation and leave the business lean. The more cash assets your business has the more options you will have in the future.
Nice to see you back, Nicki! You always have great ideas and advice.
I have paid attention to the distinction you point out, and the gym has met its own expenses, including paying an employee, from the start. What I am stuck on right now is how to determine when I should begin paying myself. Despite knowing the diff. between earned revenue and “what’s in the checking account” it is still hard to tell if I can afford things (including self-pay).
Fran -
In my opinion in the beginning you should pay yourself as you would pay any other trainer. For example if you are paying your trainers a % of their private sessions and/or a flat rate for group classes then you should pay yourself the same…in the beginning. As you build your business and you are seeing monthly profits increase then you can consider taking a “reasonable” (modest in the beginning) salary in addition to what you are making via training. In this way your model works. If for some reason you needed to replace yourself you could afford to pay a trainer to do the training you are doing. Does that make sense?
It’s great that you are continuing this tutorial. While I don’t currently own a gym, I plan to in the future. Your website is incredibly informative and insightful. Keep it up and thanks.
I’m in the process of starting my own business and I have only now just read through your site (thanks to Robb Wolf for linking it via FB!). It’s filled with a wealth of fantastic information and I’m so happy that you are sharing your experiences. This is going to be so helpful for me!
Keep up the great work Nicki!!
You bet Summer! Glad to help!
Very nice.
Thank you for this awesome blog, Nikki! It helps to read such sage advice from a fellow business woman. (thanks to rob for linking to it!) I have owned a yoga studio for 3 years and now, right across the street, is a new Crossfit gym that I work for now. Although I have my own personal business doing massage to feed myself, it took 2 years to even begin taking the minimum in pay from the studio when the it can bear it. I’m also training for free at the gym whilest trying to mentor the new owner about how to make it all work. So, thank you for sharing your wisdom!!
Hi Nicki,
I need your help. This is sort of off the topic, however it is regards to business. I am planning on oping up an new affiliate in the next month and have had a number of people who are excited about becoming members of CrossFit Fort Wayne.
One particular gentleman e-mailed me the other day and is very much into power lifting and strongman workouts. He mentioned that he has about 15 other guys who get together every now but have no place to workout in the area.
He would like to know if we would allow him to use part of our space with a power rack, platform, and bench. He’s willing to pay a portion of the rent however I’d like your opinion.
I like the idea of getting some extra money & spreading the word, however I do have some reservations. They are as followed:
1. I don’t know anything about subleasing.
2. Insurance. I am sure that our premium would go up.
3. I’m afraid it will change the environment of our box.
4. We are just starting & new to all this!
5. I’m afraid of loosing potential future clients.
6. Contracts. I’m assuming I’d have to write up a new contract.
Thanks for your help Nicki.
Andrew
Hey Andrew! Thanks for posting…I’m going to tackle this in a blog post…there’s some good stuff here…lots to consider and I’m sure others have similar questions.
Nicki,
Are you available for phone consultations? I have some specific questions I would love to get some feedback on…
Hi Jason,
Yes I am…I will shoot you an email.
Hi Nicki,
Would you mind emailing me as well? I too have some specific questions that I would love to throw your way.
Thanks!
You bet Bill…I’ll ship you an email right now.
Thank you so much for sharing yourself and your experience! Four years in and it still feels like there’s so much to learn. Thanks again!
Pam