Issue Date: January 2012 Web Features, Posted On: 1/24/2012
Entrepreneur: Planning the Flow By Cabel McElderry
When I first started in the fitness industry there were no marketing tools, business gurus, or any of the exciting business building methods and ideas that we seem to have at our disposal today. (Or if there were I was clearly clueless as to where to find them or how to use them.)
Now it seems there are many experts, or people like myself, who have learned a few of the pieces of the big puzzle leading to dramatic growth in a short period of time. One of the gaps I still see, even with the many coaches and mentors I have and still work with, is attention to the actual indicators of performance of your business. Often called Key Performance Indicators, or KPIs, it's my opinion that every single person self-employed or on their way to building an empire must know their KPIs -- what they mean, how to track them, and to be comfortable to review them often.
In our business we track a few different KPIs ranging from: session completion volumes, EFT growth/decline, prospect and conversion tracking, and cash flow, to name a few.
Cash flow for some reason had always been the most difficult for me to wrap my head around. For me it has taken many forms: a budget, an income statement, an expense sheet, and so on. I bet a few of you can relate. Cash flow planning is as much about the past as it is about the future and it's critically important to the long-term health and success of your business.
When it comes to cash flow planning I consider four primary variables:
1) Revenue Sources -- Depending on the products and services you offer you may have multiple sources of revenue. Within our studio we only have two currently: services and merchandise. (Don't confuse yourself by thinking that each service you may offer is a different revenue stream. For the purpose of a KPI you want to simplify and minimize the amount of additional information to be able to look at the raw performance.)
2) Fixed Costs -- Your fixed costs are all the obvious things like a lease, utilities, and consistent monthly expenses. They are an expense whether you do business or not and they don't fluctuate greatly based on the volume of business that you do. At first it may seem confusing but things like front desk employees and even class instructors are fixed expenses if their wage isn't fluctuating by the number of customers. (ex. Instructor costs are the same if there is 1 participant or 20 and you have a consistent class schedule.)
3) Variable Costs -- The only real cost I consider to be a variable cost is the wage/session paid to my trainers. Because the revenue they generate versus the wage they earn is completely dependent upon how many sessions of service they provide this cost may fluctuate significantly.
4) Service/Session Volume -- The final consideration for my cash flow plan is another of our KPIs, total session volume. Total session volume helps me understand the average costs associated with the sessions my trainers complete. This also helps with predicting future volumes and the training costs associated with those volumes.
Now if you've been in business for a while you can take your historical data and chart it out to see how your business is performing. By taking your total revenue and subtracting your variable costs you will know your gross margin or roughly the amount of income you hope to earn from each service package.
You can take the total amount of all of your fixed costs and divide it by the gross margin/service package to find out your break even point or how many service packages you will need to sell to cover your expenses. Anything extra is actual income.
The best part is it can even begin to serve as a crystal ball, as you track month by month you will see patterns both in your usage and revenues, which you can then make plans and assumptions for the months and years to come (based on more than just what your gut is telling you.) For example, perhaps it makes sense to purchase new items for your business in the fall where it seems the revenue and usage trends are consistently higher. Upon reviewing your monthly profits from the year previous you may discern that it may make more sense to spend a little more money some months on promotion to either attract even more clients or improve client attraction in a down time. Either way, by using math for the sake of comparison you are limiting the amount of emotional decision making from the future planning of your business. There are many, many more ways cash flow planning can both help you evaluate your current performance and predict the future.
Systems are the cornerstone to any business. This is an article worth keeping in the archives to read again! http://www.dougholtonline.com
Thursday, February 09, 2012 1:33:12 AM by John Mulry
Great Article Cabel,
You stuff is top, you provide a different spin on how to approach the business side of things correctly - your right - tracking and planning are crucial, you can't expect to know where your going if you don't even know where you are, wouldn't you agree?