Having trouble with effectively managing your cash flow? In the light of this pandemic as a fitness business owner this is probably your biggest challenging facing you right now. If you effectively manage this part of your business, then you are more likely to make big purchases/investments in the future. In addition, you will be able to weather the storm during the bad times, I cannot tell you how many gym owners neglected this part of their finances and suffered tremendously when the shutdowns started last summer. If you hire an inhouse accountant or bookkeeper then they may not be able to understand or provide you the data, you need to succeed. Your goal as a fitness business is growth, that is why you should only hire an expert in the accounting field to get you there. The expert should be able to provide you with financial statements like the Balance Sheet, Income Statement and most importantly the Statement of Cash Flows. If you genuinely want to get a head start with effectively managing your cash flow, then you need to understand three key ratios
The first ratio is called the Current Liabilities Coverage Ratio, which measures if your business has enough cash to cover its current debts. Can you pay back that loan that you took out from the credit union or bank which will be coming due in the next six to eight months? The formula is simple! Take your cash flow from operations and divide it by the average current liabilities. Let us say that your average cash flow from operations are 250,000 and your current liabilities are 225,000 then your ratio is 1.1 to 1. Generally, 1:1 is considered solid, even better if its higher because that indicates sufficient liquidity to cover your debts.
The next key ratio to consider is called the Cash Flow Margin Ratio, this ratio is important because it explores relationship between how much cash your gym is generating through pure sales vs cash flow from operations. The formula for this is taking your cash flow from operations and dividing it by the net sales figure from your Income Statement. Let us say that your cash flow from operations is $350,000 and your sales are $250,000, that gives you a 1.4, the higher the number, the better. Essentially you are generating cash flows from operations at 1.4x your CF’s from sales.
Finally, the last ratio that you need to consider is the Cash Flow Coverage Ratio. While this ratio may not be of short-term concern, nevertheless it will demonstrate your ability to stay solvent and pay long term debts. A ratio of less than 1 will indicate that your business is in serious trouble and will eventually face bankruptcy, a ratio of over 1 indicates strong financial health. To calculate this ratio, you simply take cash flow from operations and divide them by your total liabilities (total debts). Let us say that your cash flow from operations are $350,000 and your total liabilities equal $185,000. You end up with a ratio of 1.89, putting you in good financial position long term.
Above all as a fitness business owner, you cannot put all your eggs in one basket. To be profitable in the health and wellness industry in today’s day and age you must expand your profit options. These could include online/virtual services, or strength and conditioning classes held outdoors, or having your members sign up for a monthly app that monitors their diet and number of hours they exercise. You want your members to be healthy and happy, The FitBiz CPA wants your finances to be in amazing shape so like your members your business can be healthy and prosperous.
