How to Read a Profit & Loss Statement for Your Fitness Business
By Sean Greeley
Facts and figures bore most people, and fitness business owners are no exception.
So when we talk about a Profit & Loss Statement (or Income Statement), most fitness business owners act like they’ve been asked to watch grass grow in the backyard.
But here’s a piece of hard truth:
Unless you want your business (and life) to get interesting in all sorts of BAD ways (hello, repo man), then you simply can’t ignore P&L statements.
Despite this fact, most people don’t know what a P&L means.
They don’t know how to read one.
And they don’t know how to set up one correctly.
Or rely on someone else to do it and trust that it is correct…
Consequently, they’re blind when it comes to making decisions about the financial profitability of their business (and how to improve and maximize it).
They focus on things that are comfortable for them, such as sales and marketing tactics, or training techniques for client retention … but don’t focus on mastery and understanding of the language of business, which is numbers.
Then when sales go up but they have less money in their pocket than before, they wonder why.
Or they get nailed with a huge tax bill they didn’t expect.
They guess at the best path forward when it comes to their business decisions.
We’re on a mission to change that for fitness business owners around the world.
And it’s not THAT hard to do!
You just simply have to put in some work to get things structured correctly. Doing so will allow you to make better business decisions to continually increase your profit, revenue, and happiness with your business.
What Is It and Why Does It Matter?
Your P&L tells the story about what happened in your business over a specific period of time.
Notice how I italicized happened? This report is an accounting tool that looks at the history of the business. Think about it like a rearview mirror of a car. It’s a story that’s told with numbers, not feelings.
That’s important because business owners’ feelings about their business often go up and down depending on what’s been happening in the past day or week. They may feel things are going well when they’re not. Or they feel like they’re going terribly, but they’re not that bad.
In the end, it’s the numbers that decide whether things are improving, stagnating, or backsliding. (And that’s why numbers are called the language of business.)
The numbers remove the emotional factor and clears mental space you need to make better decisions, decisions that powerfully impact the future.
You should be so in tune with your numbers that you will read your P&L and be able to know the “why” of the changes (called variances) for each month.
– One month you paid taxes and that’s why “other expenses” went up
– During one month, you had three pay periods and that’s why payroll went up by a third
– Or you purchased equipment and that’s why capital expenses increased.
There’s another reason why P&L’s matter: If you are thinking about selling your business, expanding it, getting an investor or minority owner … your P&L matters. No one will give you money if your P&L is a “hot mess.”
Now let’s look at the P&L itself. Basically, your P&L answers this question:
How Much Money Are You Making?
Your P&L statement summarizes the gains and losses in revenues, costs, and expenses over a specific period of time. It shows how your “top-line” revenues will ultimately become either net profit (net income) or net loss.
P&L is used to calculate metrics: gross profit, operating income, and net income. It gives you an in-depth look at your company’s financial performance and position. And plays an important role determining your business’ tax liability.
|Total Income (Add up all your revenue streams)|
|Gross Profit = (Total Income – Costs of Goods Sold and Cost of Services)|
|Total Operating Expenses (Add up all Operating Expenses)|
|Net Operating Income (Gross Profit – Total Operating Expenses)|
|Net Income (Net Operating Income – Other Expenses)|
Note: If you have accounting software (such as Quickbooks or Xero), you can just pull a P&L report (YTD with a month over month view). If you have an accountant, ask them to send you a year to date (YTD) month over month P&L (this allows you to compare each month’s performance).
Looking at the summary report is not as meaningful for you as the month over month view. Month over month allows you to look for variances across different accounts over multiple months. It’s these variances that tell your story, and you should be able to glance at your P&L and know why each variance occurred.
We are going to give you the simplest formulas and what’s included … but if you don’t have accounting software, get it. Also, find a good accountant who can help you save money on taxes and do tax-planning.
Here’s How It Works
You need a monthly cadence of looking at your P&L. Set a date every month to review your P&L and identify opportunities to increase net profit aligned to your long term goals. Reminder: Revenue doesn’t matter … it’s how much you keep.
In this simplest form, the equation you’re looking at is this:
Total Revenue – Costs – Expenses = Net Profit (or Loss)
Let’s look at this equation one step at a time.
1. Figure your Total Revenue
Also known as your “top line.” Add up all your sources of revenue. Memberships, private training, T-shirts, everything.
There are two ways to count revenue.
– Accrual basis: That means you count revenues and expenses when you earn them, for example, when you send an invoice. (Big businesses do this.)
– Cash basis: That means you count revenues and expenses when cash changes hands. Revenues are cash in hand. Expenses are cash out of pocket.
– Pro tip: For small and mid-size businesses, use cash. It keeps things simple.
2. Add up Cost of Goods Sold and Costs of Services, and calculate Gross Profit
This is also known as your Cost of Revenue.
This is the direct costs for you to deliver the goods and services. Cost of Goods Sold (COGS) includes – t-shirts, supplements, other inventory you sell in your PRO shop.
Cost of Services (COS or Cost of Revenue COR) includes trainer and coach wages, taxes paid on their wages, and benefits you pay to them.
You add up how much you spent to purchase and deliver goods and services.
Next, you calculate Gross Profit: You subtract Total Revenue from Cost of Goods/Services and you have your Gross Profit. Set that number aside for a moment.
3. Add up your Total Operating Expenses and calculate Net Operating Income
Add up all sales & marketing, general & administrative, and research & development expenses.
– Sales & marketing expenses: This include advertising, promotional materials, sales staff salaries and commission, travel-event costs for marketing, and sales/marketing websites or software.
– General & Administrative Expenses: Your studio rent, utilities, maintenance, accounting, consulting, legal fees, insurance, office supplies, other salaries and payroll taxes, and depreciation (loss of value of capital equipment based on a specific schedule) and amortization (a payment schedule like you would have for a mortgage, equipment purchases, or car loan).
– Research and Development Expenses (if applicable): Costs to develop new products and processes.
Next, calculate your Net Operating Income.
Take the Gross Profit and subtract Total Operating Expenses to get your Net Operating Income. Set that aside for a sec.
4. Add up your ‘Other Expenses’ and Calculate Your Net Income
Your costs were the direct money you pay to deliver the services. Your operating expenses are the money you pay to run your business, keep the lights on so to speak.
But there are other kinds of expenses, too, that are not directly costs for goods/services nor operating. These are things like interest you pay, income tax, bad debt when a client fails to pay a bill, or any other expense that’s not covered elsewhere.
Add these up for to calculate total other expenses.
Subtract Other Expenses from Net Operating Income. This gives you your Net Income (Profits/Earnings): This is the “Bottom Line.”
You either made money or lost money during the time period you have measured.
Words of warning …
The key to reading a P&L is to understand where the money is coming from, where it’s going, the trends over several months, and looking for “red flags”:
1. Owner compensation. You should be paying yourself a market-based wage, not “whatever is left over after you pay all your bills.” One key point of a P&L is to make your compensation part of the overall business plan. If the business can’t afford to pay you a market wage yet, discuss with your accountant as there ways to still include in the “books” to keep it clean.
2. Misclassified expenses (aka, coding to the correct account): Each Revenue and Expense type should have a number code. You have to get things in their correct category. Just as important, you need to do this consistently. So code all the expenses, in the same categories each month, so you can correctly see your trendlines easily (see variances across multiple months and be able to tell the story of the business using the P&L).
3. Cash/accrual accounting. You must choose one and stick with it. You can either count money when it’s billed (accrual), or when it’s paid (cash). For small and mid-size businesses, we recommend when it’s paid. You can’t eat receivables.
4. Increasing sales and declining profits. Your P&L should show you where the problem is. First you will likely look at your costs of providing services/cost of goods sold. These sometimes go up with increased sales. Other times, you have expenses (including taxes we haven’t estimated) that is chewing up your profits and cash. The key is you have it all laid out in a P&L and can spot where it is.
5. Increasing overhead. Expenses naturally increase with time. Rent and utilities go up; insurance policies get more expensive; coaches want raises. You will need to be aware of, plan for, and address increasing overhead issues. **PRO tip – check your ever growing subscriptions. Software and applications that overlap in features, things you don’t really use anymore, service providers charging you more, etc…
6. COR/S (cost of revenue/sales) increasing faster than revenue. Sales will sometimes increase costs. (Say you have to hire another coach.) If your costs (as opposed to expenses) increase, you need to look at your margins, pricing and packaging (or look to cut costs), and plan for increased costs.
At NPE, we have a P&L chart of accounts template and example P&L that we show our fitness business clients, and lessons on how to use a P&L to make good business decisions.
Our clients become experts in understanding the numbers so they aren’t caught flat-footed.
They can spot and address issues, identify 2-3 priorities at a time to improve your net profit, and then make a plan to implement strategies.
To learn more about telling your fitness business story “by the numbers” schedule a call with an NPE Success Coach. Our NPE Success Coaches have all “been there, done that” in the fitness industry and now they’re bringing their expertise to help fitness business owners like yourself clear away their biggest obstacles and show a new path forward. When you don’t have a background in finance, it can seem overwhelming to learn, set-up, and understand. But don’t let that stop you. Winners don’t avoid challenges, then face them head on.
Take charge of getting your financial house in order by scheduling a call with an NPE Success Coach today. And then get ready to grow your fitness business and create the life you want.