If you been in business for any length of time you have heard the term KPI - Key Performance Indicator.
But exactly what is a KPI, and why do they matter?
Investopedia defines a KPI as: a set of quantifiable measures that a company uses to gauge its performance over time.
You can have many different types of KPI's that you track; financial, marketing, and quality metrics are just a few examples.
I like what Klipfolio, an app for creating dashboard, reports and visual analysis contends makes for effective KPI's - a KPI is only as valuable as the action it inspires.
In other words, all the data in the world doesn't do any good by just sitting there looking pretty, you need to know what it is telling you and by extension, what you need to do about it.
There are 5 KPI's I have adopted and call "Healthy Business KPI's".
Each of these KPI's has a goal attached to it, and we track monthly progress toward goal, and review and adjust goal as necessary. Note also that each KPI corresponds to a Profit First Core Account.
Here is a brief overview of each and how they align with the Profit First cash management model:
This KPI is as simple as it sounds. How much are we allocating into the Profit account?
Read this article for a discussion on MBW and why it matters. This KPI is tracked as a % of how much the owner(s) is actually paying themself compared to their Market Based Wage.
Again very simple. How much is being allocated into the Tax account? Don't be fooled into thinking lower is better. As Greg Crabtree says in his book "Simple Numbers, Straight Talk, Big Profits", if you aren't paying taxes you are either not making any money or you are cheating. Take advantage of every legal and smart way to minimize your taxes, but understand that successful companies are going to pay taxes. The more you are paying, the more you are making. And that's a good thing.
This KPI tells you how much Gross Profit you are making for every dollar of labor you are spending. As payroll is most likely your biggest expense, you need to be tracking this number carefully. This KPI can be used in forecasting what effect additional employees will have on your bottom line and what productivity (eg. more dollars earned) will need to be reached to regain your target Profits. An important note: we always calculate this two ways; actual Labor Productivity Rate (LPR) and True LPR.
True LPR is the rate when the owner(s) Market Based Wage is added in, which is a critical difference.
Here's an example:
In April company X had $25000 in Gross Profit and $12,500 in Total Labor Cost. In this case their Labor Productivity Rate is $2.00 ($25,000 Gross Profit/$12,500 Total Labor Cost). But this doesn't take into account the owner is paying herself $5000/mo, while her Market Based Wage is actually $7500/mo. To get the True LPR, we need to add the additional $2500 to the Total Labor Cost, which gives a True LPR of $1.66 ($25,000/$15,000). Ok, I'll stop with the acronyms already! In chart form it looks like this:
Why does this matter? Read this article, "Stealing From Yourself" for more detailed insight.
Debt reduces profitability, creates higher risk in an economic downturn, and less flexibility to direct your cash when opportunity arises. The unfortunate truth is many of the business owners I talk to know this, but do not have a system to pay it down. It starts with calculating and tracking your total debt load. You have to stop paying expenses with debt, and live within your means. The goal is to have this KPI as ZERO!
We keep these "Healthy Business KPI's" all in one place on a scorecard. At a glance we can detect patterns and trends, and take appropriate action when one is off track. The beauty is they all work together, so usually taking action on one effects the others positively as well. For instance a strategy to pay debt off more quickly will free up cash to get me to my Market Based Wage, which in turn makes my business more valuable to investors and/or buyers.
If all these numbers make your head spin, I get it. But I promise this is not as hard or time consuming as it looks. A few key pieces of data entered on a monthly basis will make these KPI's you can truly profit from. We can show you how.
Here's a dirty little secret about business that I learned pretty quickly - most entrepreneurs and business owner's aren't nearly as financially successful as they appear to be.
Early in my career I remember going to fitness conferences where we were regaled with stories how this or that business was producing record sales, had hundreds of training clients, and was moving into bigger and better real estate. Looking back now I don't remember profit ever being talked about, or how much the owner was actually taking home as pay.
The topic of owner's compensation remains a huge problem in most small business. It doesn't matter how much you are producing in sales if you are living in a van down by the river (RIP Chris Farley).
Here's the bottom line; the owner of a business needs to be paying themself a market-based wage.
The simplest way I have found to determine what a market-based wage in your industry and for your role is to ask yourself this question:
"What would I have to pay someone else to do the job I do?"
If you aren't making that, you are stealing from yourself.
I get it. Your business in new and you can't afford to pay yourself that much - yet. You actually have an advantage over a more mature business, as you most likely don't have the overhead that comes with a lot of employees. You have more control of the situation, but you still need a plan to close the gap between your current salary and your market-based wage. And you need to be tracking all this.
Now to the "not so new" business owner. What is your deal anyway? Why do you continue to add overhead (more employees, fancier "stuff") and leave yourself scrambling for scraps?
Let me put it to you this way. You have a job opening in your company which is slotted for a salary of $75,000. You decide you want the job, but only if the owner (you) agrees to pay you (the employee) $30,000. How long do you think a new hire would be satisfied in their $75,000 role if they were only getting paid $30k?
Why are you?
"But I'm NOT satisfied", you may be thinking. Then what are you doing about it? An owner who finds themself in this situation has some hard decisions to make, and too often just never gets around to making them. Getting serious about things like overhead, debt, and excess employees and wages is necessary for long term viability, not to mention your sanity.
But there is more to this than you just being your most underpaid employee, as bad as that is.
You are also severely devaluing your company. No matter the size of your business and how big you want to grow it, you need to think about the value of your business in the terms of an outside investor. Would I want to buy your business today? Why or why not?
When I sold my first service based business its value was directly linked to "benefit to owner".
In other words, what could the new owner reasonably expect to draw as salary, profit distribution, and other wage related benefits after purchase? Numbers don't lie. Your business is going to be far less valuable, if not practically worthless, if you can't show you have been making good money.
And realistically, these are just a few things in the "market-based wage" discussion. There are potential tax implications in paying yourself too little (in the eyes of the IRS). From a practical standpoint, if you can't pay yourself General Manager money, how will you afford to hire a GM and have anything left over for you?
You wouldn't put up with an employee stealing from you. How long will you put up stealing from yourself?
The first step to paying yourself a market-based wage is actually sitting down and doing the work of defining what roles you are currently filling and how much they are worth. What's the number you came up with? What's the gap between that number and what you are currently paying yourself? What are you going to do about it?
And one more pet peeve. You are just fooling yourself if you aren't adding in Owner's Compensation when you calculate your net income and margins. As we discussed before, the value of the business is related to how much benefit it is creating for you as the owner. An audit will reveal that. But beyond that, what would your net income be if you were paying yourself a market-based wage? I have seen margins drop below zero if you run those numbers. Not cool, and dangerous to the health and long-term viability of your company.
If you are a fitness professional you need accrue CEU's on a regular basis to keep your certification current. One of the very positive trends that many certifying bodies are adopting is allowing business courses to be CEU eligible. All the technical knowledge in the world on health, fitness and nutrition does the fitness entrepreneur and business owner very little good if they can't actually make a profit and stay in business.
My course "Maximize Your Profit Starting NOW", co-created with Jane Curth of FitFixNow.com, not only will help you understand the basics of a good cash management system in order to increase profitability, but you will also earn CEU's upon completion. A win-win for sure. Enroll now and get your knowledge on!
CEUs-NASM: 0.2; ISSA: 2.0; NCCPT: 0.2; NAFC: 0.2; ACSM: 2.0
Can you really make money in the fitness business? If you have ever asked yourself that question this course will help you gain the confidence and peace of mind that success is not only possible, but probable, when you have a winning cash management system in place. We will identify the common obstacles fitness entrepreneurs face, and examine why what you have been taught about business finance may actually be the root of the problem. You will then learn a step-by-step system that leverages the habits and behaviors you already have to manage your cash easily, create profit immediately, and grow your company more quickly.
Fitness Business, MRC, Dean Carlson, Jane Curth
First of all let's get this off the table.
Accounting and Cash Management are not the same thing, nor does having a cash management system in place mean you don't need to keep your books in good order.
Thankfully good accounting software, bookkeepers, and accountants exist. I look at accounting this way; it is necessary for me to maintain legal requirements, such as paying my taxes. It provides records that allow me build a credit history for my business. When I sold one of my businesses, the fact that we kept immaculate records eased the process of valuation and allowed us to prove what the business was worth. Accounting also summarizes business performance into quantifiable measures - sales revenue, profit, expenses, etc.
Well if it does all that, what else could I possibly need?
Here's the main problem with accounting. It wasn't designed for humans, it was designed for rational, number crunching robots (eg. Accountants)
For mere mortals like you and me, accounting fails miserably. For example when you look at your Profit and Loss Statement, and it shows you made, say, $7500 in profit this month, it doesn't always square with the reality of what is in your checking account, right now.
How can that be?
Because you already found a way to spend it, that's how. And that just means you are human.
The reason I love (no, that's not too strong a word) the Profit First cash management system is because it works WITH human behavior, not against it.
By allocating my profit FIRST, in a separate account from my primary checking, it doesn't get caught up in the "backwash" of my (over)spending, which is what we all tend to do too much of.
Remember Parkinson's Law?
"work expands so as to fill the time available for its completion"
In other words, if we are given 30 days to complete a project we will take 30 days. If we are given 7 days to complete the same project, we will figure out how to get it done in those 7 days.
The same thing applies to your finances. If we have $500, we will spend it. If we have $1000, we will figure out how to spend the extra $500, even if we don't really need to.
By putting away my Profit FIRST (that extra $500) I am using behavioral psychology in my favor. Out of sight, out of mind, and no longer in my account to spend.
The same applies to the other core accounts in our cash management system; Owner's Pay and Taxes. The best way to make sure I pay myself and have the money to pay the Taxman is to be putting it away BEFORE I have a chance to spend it on other things. The biggest benefit to this is the peace of mind that comes with earning a regular paycheck and keeping taxes up to date.
Once we have those things taken care of - profit, paying ourselves, and taxes, then and only then do we address our operating expenses. This forces you to think hard about every spending decision. You have to get serious about streamlining processes and systems to produce the same or more quantity and quality of work, with less resources. This is a GOOD thing, because it's going to make you more money.
So who needs a cash management system?
Business owners and entrepreneurs that struggle to understand their basic cash flow, don't want to waste time poring over accounting reports (and/or don't know what they are looking at when they do), and those who lack discipline in their spending. Yeah, that's pretty much everyone, including me.
If you haven't read the book Profit First, you can get the first two chapters for free right here, and get started on your permanently profitable business today.
One of the most stressful times of the year for many business owners is "tax season" - that frustrating period of time between about the end of January and middle of April, when your accountant or tax preparer is performing some kind of alchemy on all the receipts, documents and records you sent them from the past year, coming up with your tax bill for the year.
You spend that period of time hoping and praying (and maybe doing a lot of sweating) that you don't owe a bunch. Because you don't have any extra cash just lying around waiting to send to the government.
I've been there.
And it's not always about just sticking your head in the sand and hoping that taxes just get abolished so you don't have to pay them. One of the big mysteries surrounding taxes for me was how to know if I was putting away enough as our business scaled. We grew really fast over the period of three or four years, and the privilege of earning more is you get to "contribute" more to the tax man.
And while you aren't going to get out of paying your taxes, April 15th (or 30th my Canadian friends) doesn't have to turn you into a stress monster every year.
Implementing the Profit First Cash Management System in your business will ensure that will not be left scrambling at the end of the year coming up with money you don't have to pay a tax bill you don't really want to, but have to. You can delay paying your vendors, or yourself, but the tax man is GOING to get his.
NOW is the time to get your tax situation settled for next year, and once and for all.
Contact me today and let's get working on getting your taxes taken care of for next year, as well as creating your permanently profitable business.
Let's Do This!