When we think about strategies to increase your small business's profitability, our focus often goes to perfecting your sales process, gathering referrals, and creating packages that support your bottom line, which is all crucial to the success of your studio. But if you're only focusing on how you can increase revenue, you're only looking at half of the equation. There are two ways to maximize your business's profits; you can earn more money, or you can decrease your expenses. Even better, you can do both simultaneously and watch your business surpass all your goals. The less you spend, the fewer clients you need to bring in the door and the more space in your budget to give yourself a raise. Deep-diving into your expenses may not be your first choice of an afternoon activity, but what if you could increase your take-home pay by $500? $1000? More? Suddenly, that activity doesn't sound so terrible. When was the last time you checked into your bottom line and audited your cash flows? If it was more than a year ago or never (don't worry, you're not alone), chances are high; you're spending more than you need to be to keep your business running smoothly and are leaving money on the table.
At the risk of overwhelm, let's spend a moment to talk about why this matters. You don't need to be an accountant or even good at math to know your expense ratio, and this figure is important because it's directly related to how much money you make. If you have a bookkeeper, send a quick email and ask for your expense margin. If you do your own books, log into your accounting software and find your latest income statement. Now, all you need to do is divide your total expenses by your gross revenue and then multiply by 100. Let’s do it together.
For example, assume your gross revenue (total revenue – cost of goods sold) is $16,000 per month, and your studio's total monthly expenses are $5,000. To find your expense margin, you'll calculate $5000/$16,000=.31 *100= 31%. The lower that percentage, the better the expense margin and the more money you take home at the end of the day. Is your ratio closer to 80%-90%? It's time to red-line your expenses. Let's break it down.
Your Average Monthly Expenses/Your Average Monthly Revenue=.___ X 100= ____%
Average expense percentages vary widely by industry and state, but a general rule of thumb in the fitness industry is that you want to be at least below 70%. Again, the lower the expense percentage, the more money you make. Look at the calculation that you just determined, and let's set a target goal for the coming year. Can you shave 10% or more off of that figure? It may seem unattainable now, but remember, the more you save, the more you keep. Here's your step-by-step to start saving money.
If you're going to make the most of your self-audit and maximize your profitability, you'll need to have all of your financial documents printed and ready to go. Export a list of all of your accounts by running a report from your accounting software. If you have a habit of using your personal credit cards or bank accounts for business expenses, you'll need to print those as well. No formal accounting software? That's a little trickier but still completely achievable. Simply grab a pen or a new google sheet and list all of your business bank accounts, credit cards, and loans. Red-lining your expenses can get confusing once you start printing out your statements, so this document will keep you organized.
Now that you have your master list print out 12 months of statements for each account and paperclip them together. 12 months of data will ensure that you'll catch any forgotten annual subscription during your audit. Why hard copies when we live in a digital world? Because it will be much easier to stay organized if you keep everything together, especially if you have a mix of personal and business credit cards and bank accounts that you're sorting through. When you've finished gathering your data, you should have 12 statements in each stack.
Saving money is fun, and so is watching the savings add up. If the idea of sorting through pages of expenses makes you want to run, start a new document and add the savings each time you find an item to cut or negotiate. Watch your newly identified savings accumulate by keeping a running total. Now make a plan for where you'd like to allocate your new windfall!
As you make your way down your expenses month by month, ask yourself, "Is this purchase essential for my business?" If the answer is yes, move to the following line. If the answer is no, it's time to dig a bit deeper. "Does this expense improve the clients' experience dramatically? Does it make my job significantly easier? Is it crucial to my studio's atmosphere or culture?" Often, we end up with recurring expenses that don't serve the purpose we originally planned for. Run each item through your checklist and either eliminate or reduce the ones that don't actively improve your studio.
It's called red-lining, but you'll actually want to dig out your red and blue pen (or at least two colors that aren't black and don't look similar). You'll circle any expenses you want to eliminate in red and any expenses you can negotiate in blue. As an example, we'll start with a common one that many studios find- duplicate purchases for the same goal. Perhaps as you comb through your statements, you find that you've been paying for three different music streaming services over the last year. On its own, a $15 subscription won't move the needle much, but together, you're spending $540 a year on services that all essentially do the same thing. Wouldn't you rather put that money in your profit account or rainy day fund? Going back to your goal, if your plan is to slash ten percent from your expenses, at least one if not two of these services should be canceled. Choose the one that stays and circle the other two red. You've just saved yourself almost $400, and you just started! Remember, each time you highlight an expense to be cut, write those total savings down on your tracking sheet.
Are you the kind of person who looks for deals, or does the idea of bargaining at the car dealership make you nauseous? This can be a tough one if you're in the latter group, but we'll walk you through it. There are a few easy phone calls you can make to practice your negotiating skills that don't involve tackling something big like your lease- although, if you're up for renewal, you can and should negotiate your lease. Start with your internet, phone, and security providers. Your internet and phone will almost always have lower rates available. All you have to do is ask. Here's your script if you're not one for negotiating,
"Hi, I'm shopping around, and I noticed that I'm paying more for my wifi than my budget allows/my neighbor/the going rate according to a Google search. What options does your company have available right now to decrease my monthly bill?"
Chances are, there is an offer waiting that will save you money, and they're happy to give it to you because it means you won't look elsewhere. Circle anything that you might be able to find a discount for. Even if the answer is no, you're not any worse off. Try your mail service, CRM, accounting software and services, even utilities. Anything that has a monthly subscription or fee can be reduced. You won't know until you ask.
Let's say you've made it to the end of your 12-month statement stacks (congratulations!), and you're looking at your list of expenses to save, cancel and negotiate. Take a moment to zoom out and look for trends in your spending. Are you a last-minute buyer? If you're spending more because you or your staff regularly have to run to the nearby grocery store to purchase your cleaning and studio supplies instead of planning ahead and ordering through a wholesale distributor, this is your starting point. If you have team members, put someone in charge of inventory or set a reminder on your phone that the first of the month is inventory day. Create a list of everything you use in the studio each month and spend 20 minutes checking everything from toilet paper to glass cleaner to printer ink. Now you can order from discounted business supply stores and save a ton of money by thinking ahead. Wouldn't you rather pocket $100 by purchasing early instead of last-minute buying paper towels at your local Target with markup? It might seem small, but you've already noticed how those small savings snowball into big profits.
Here's another common one, do you find yourself spending more money than you need to on items that don't directly impact your client? This can be as small as using branded pens at the desk to stocking name-brand water in the studio fridge. If it doesn't directly and significantly improve the client experience, try to find it cheaper or go without. Sure, your supply closet could be full of matching storage tubs, but no one has ever picked their fitness studio based on how organized their prop closet was.
Spending less may not come naturally to you at first; that's okay. We're conditioned to be avid consumers from the very beginning, and it can be hard to re-program your spending. Challenge yourself to leave your business credit card in your desk drawer, sign out of your Amazon Prime, and be intentional with your purchasing by shopping around and planning ahead. The good news is that the first expense audit is the hardest. After you make it through your first one, you should spend a few minutes each month scanning your statements to make sure everything was purposely purchased and necessary to your studio's growth. Once you discover how much less your studio can spend, you'll be amazed at how much more money there is for your profit account.