Andrea Hovel Breaks Down the Finances of a Fitness Business

Eamonn_Curley
Eamonn Curley
05 March 20
24 min listen
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We talk to Andrea Hovel, the co-owner of Healthier Booking, which is an accounting business that specifically helps fitness businesses. The financial side of running a fitness business can be scary for some, so we decide to invite an expert on the show to ease any fears you may have.

Andrea explains the three main financial statements you need to understand in business and gives some expert advice to avoid any fitness business financial pitfalls! You can find Andrea at www.healthierbookkeeping.com

Transcript

Kevin: How’s it going everyone? Welcome to The Fitness Founders Podcast. I’m Kevin Mannion, VP Marketing here at Glofox. This week we talk to Andrea Hovel, co-owner of Healthier Bookkeeping, an accounting business that cater specifically for the health and fitness industry. Andrea gives some sage advice on the pitfalls of some businesses fall into when it comes to their finances. She’s a simple guide for what to look out for. It’s more interesting than you think so let’s get started. 

Andrea Hovel, welcome to the show. 

Andrea: Thank you! I’m happy to be here.

Kevin: Yeah, it’s great to have you on here. So, you Andrea, are an expert in finances for fitness businesses. I think like us, you share a mission around making more successful, profitable businesses. And I think you’ve got a unique insight to helping them understand the finances of their business. So, maybe, just tell me a little bit about yourself and what you do.

Andrea: Okay. So most people do the same thing I did. Went to school, started in corporate. I did a lot of operations, and inventory, and cost analysis and all that, and asset management fun stuff. I worked my way around that kind of thing and I was running myself into the ground trying to build a career there. And I wasn’t taking good care of myself so when I finally decided to make my own physical health a priority which I had never done in my whole life. I met a lot of fantastic people who were more than happy to help me get me on track, make something that was really stressful for me feel easy, and empower me to take control of my life. What I noticed was all of these amazing intelligent, wonderful people who were right there to help me were all very stressed about their businesses. And you have probably seen this just as much as I have. We have this incredibly brilliant, passionate personal trainers trying to help other people, and they go out of business or they wind up working somewhere, or they don’t feel like they’re fulfilling their purpose because they just don’t understand the backend of how to run a business; and finance is a huge chunk of that. Which is something I understood pretty well. So I decided that I was going to get really familiar with this particular industry and start helping those people keep their doors open, and build those business so that they could keep helping people like me. 

Kevin: Awesome. Like I know myself that personal finances make me nervous so it can be a pretty scary topic when it comes to running a business and something that I’m sure a lot of entrepreneurs ignore for as long as possible.  

Andrea: Oh yeah.

Kevin: So when you’re maybe having your first conversation with somebody, how does that go and how do you impress on them the importance of having control over their finance? 

Andrea: And this is one of my biggest [unclear – 03:24] with the industry too. It’s not that finance is hard. The first thing I kind of ask people is what they are comfortable with already and what they are familiar with. There is usually one thing that we’ll talk more about today – the profit loss, right. That’s where everybody goes. That’s the only place they look to see what their net profit is. Unfortunately, that’s not a great gauge and everything else seem to be very intimidating for them because it’s a lot of financial jargon and things that sound really complicated. So my main job is to, first of all when I talk to somebody, I calm them down because they are not the only person. It doesn’t make them unintelligent. My first job is to just make them understand that what they are feeling is normal. About 90% of every other business owner out there feels exactly the same way they do about finances, and it doesn’t have to be that hard. 

Kevin: Got it. Okay. That’s a good start. And I will dig into like some of the actual things people need to concentrate on pretty soon, but maybe just as a lead into that. When people come to you, what are they typically doing well and what are they typically not keeping an eye on. 

Andrea: Usually, for fitness people especially, they are usually marketing very, very well. Payroll tends to be kind of a problem for some I think just because of the nature of the beast you have to have service providers. But yeah, the one major thing they all do really well is they speak to their business. They can express to me the value that they provide but most of them could not tell me if they are actually getting a return on any of that marketing. Where they would find that information. They can tell me what they made last month and that’s about as far as it goes.      

Kevin: Got it. They can tell you what they are maybe bringing in subscriptions, or fees.

Andrea: Right. Yeah, membership. They could speak to membership and all of that. 

Kevin: And they’ve got 200 members. Yeah, okay. But maybe not how much wealth they are actually generating out of the whole enterprise. 

Andrea: Right.

Kevin: Okay, cool. Let’s get down to business because I think you have two or three key things that your actual financial statements that you think are really important to understand. An eye opening for people that are running a business. So, maybe take it away and just tell me a little bit about that. 

Andrea: Okay. So these are the, I call them the 3 Major Financial Statements. Well, I don’t call them that. Everybody in my industry calls them that because they are literally that they are the three building blocks for every business owner. You need to understand these. They are not incredibly difficult. They just kind of need to be broken down sometimes. The first one is the balance sheet, right. This is probably the easiest one out of all them to understand but it’s one of the fewest that people look at. So this one is literally just a snapshot of your business. It’s just a picture of where your business was in time and it contains the thing, I call them the 3 Os. So it’s your assets which are the things that your business owns. Your liabilities which is everything your business owes to other people. And then your equity which is your overflow. That’s what is left over for you as the owner, or for your shareholders, or however you’re structured, right. And it’s a great little way for you to keep an eye on things that are really important like your debt and how much value is actually in your business beyond your net profit, right. This is your building. This is all of your equipment. These are all things that are still valuable and they add value to your business. But most people never look at them. It’s also a great way to make sure that you are kind of keeping an eye on your debt. And you’re not just taking out loans but maybe you are looking for things that maybe an indication you’re not controlling your cash better. 

Kevin: Okay. And what specifically then. I’m sure maybe somebody has an accountant. They have like a balance sheet, and if I was to pull out, you know, if somebody listening wants to pull out their balance sheet. What would be the two or three things you tell them to look at that will be a good sense check on their business?

Andrea: So take your equity always which is at the very, very bottom. Okay. That’s everything after your liabilities are all subtracted from your assets. That’s what’s left over for you. It’s a very important number as a business owner obviously. And then just make sure you’re keeping an eye on your liabilities which are just the things you owe to other people. Don’t let that number get crazy because that’s going to be everything – credit cards, business lines of credit, everything that you owe to other people. It’s a really good way to just kind of manage that and see all of it. It’s really easy to just only remember that you have that credit card and forget that you owe two other investors. 

Kevin: Okay, so, I think in summary then the balance sheet is telling me how much actual wealth or how much value you’ve created over time in the business. 

Andrea: Yes.

Kevin: And be, while your profits and your memberships might look good, if you’re wrecking up a lot of debt it should jump off the balance sheet and should be something that you look out for. 

Andrea: Exactly. Yes, that’s exactly yet. Yeah, and I just tell people with this one, remember the 3 Os. Okay, it’s what you own, what you owe, and what’s overflow. What’s left for you. 

Kevin: Got it. Okay. So what’s next?

Andrea: Okay, so the next one is profit and loss. Everybody knows this one, right? It’s where everybody goes to see how much money they made. Or they don’t really pay attention to is how much money they spent. But it’s a very simple way to look at your business and how it operated. So it’s just your income, right, everything you made in sales, or your membership, all the pairs of sweat pants you sold with your logo on them, and then everything you spent. And what’s left over is your net profit. What I do is I encourage people to take a look beyond that net figure at the bottom because it’s a great place to start making kind of an expansion off of the way you think about where your money goes. It’s a great place to, right, you have an itemized list here of expenses. I can tell you if you’re paying more rent than the average person in the industry is. And then that’s a great place to jump off and evaluate is my location worth paying more for? Am I bringing more revenue than the average person. This is a really powerful statement and get really, really familiar with it. Get comfortable with where you’re spending your money. You should know all those little buckets that all your money goes into because that’s what’s going to start encouraging you to start asking more questions and setting financial goals as opposed to just looking at what your net profit is. 

Kevin: Got it. And some of the things I might have one that profit and loss might be who much I’m spending on marketing, or how much I’m spending on payroll?

Andrea: Absolutely.

Kevin: What would be, you know, some rules of thumb for what people should be spending on one versus another. How do you know if you’ve got that balance, right? 

Andrea: What I do is I actually pull that data from industry leaders or like club industries got them, IRSA has got them. There are all these fitness industry organizations that pull this data and they ask every club in your country, in your area. They break it up by type of clubs, or whether you’re a chain, or you’re an independently operated, or you’re a boutique studio. And they break it all down and tell you. It’s perfectly normal for your payroll percentage to be 45% if you are part of a chain. But maybe if you’re an individual owner, it’s probably closer to 50%. You know what I mean? So you have to either go pay for a report. If you are a chain you can usually get, your headquarters will have some metrics. You can kind of piecemeal there. And they can be kind of expensive. I think the one I like to recommend the most is from IRSA. Theirs is about $500 but they have so much information in there for you to jump off of and start making good decisions with.

Kevin: Got it. So for $500 there are reports out there that give you some rough guidelines if you’re, I suppose, proficient enough to understand.

Andrea: I pull them because I use those for my clients, so it makes sense for me. But I would say find one industry organization that you really like, you really trust. See what their report cost, see if there is a way you can get a discount, or maybe just kind of Google and we’ll see what you can piece together. 

Kevin: Yeah, okay. I know we’re going to move on to cash flow after this. But I think the question I have is if I take a look at our profit and loss, and then take a look at our balance sheet when it’s showing me the profit I make, when it’s showing me the wealth I’m building in the business. Which is more important, which gives me more a better idea of how well I’m growing the business?       

Andrea: It depends on the question you are asking. If you want overall total growth then that’s going to be your equity, right, that’s everything. 

Kevin: Yup.

Andrea: Your balance sheet, it’s everything that your business has within it, and this is what it’s worth basically. But your profit loss with your net income, I mean that’s starting to get into well what’s my business worth every month in cash flow generation, right. Because you can have a negative equity if you still owe people money. But it doesn’t mean you’re profitable. 

Kevin: Yeah, okay. So there’s different scenarios and maybe that’s one somebody needs some help to figure that out what the best approach is. But there are all different permutations of being profitable but having a lot of debt versus not taking about any debt but not really able to drive up a profit. So that’s when it gets tricky. 

Andrea: Right. And this is why I say get really familiar just with the basics of this going into business valuation, and benchmarking and all that, and cash flow forecasting. That gets really advanced if you just understand what you’re looking at with these three things. That is more than 80% of your competitors do every month is just sit down and look at the basics of these things and understand it. You made this much money, your business is worth this much, and here’s how much cash you generated for yourself. 

Kevin: Got it. And before we jump in to the cash flow, when you’re armed with this information, what kind of better business decisions do you see people making? 

Andrea: They are just more conscious of their spending. It doesn’t sound like a lot. But when you’re conscious of where your money is going, I always see, you know, we save 1% here and half a percent here. But overall, at the end of the year we added 2.5% to their bottom line. Now, if you are making $30,000 a year, that’s not a lot, but in those situations every penny counts. 

Kevin: Yup.

Andrea: And it’s always to scale, right? If I saved 2.5%, well on $500,000, that’s pretty good chunk of change I added to my bottom line. So just being more conscious of these things always adds to the bottom line.

Kevin: Got it. Okay. I think next one is probably the most confusing for me is the difference between a profit and loss and a cash flow. 

Andrea: Yes.

Kevin: So maybe help us figure that one out.

Andrea: This is the one I… when I bring it up most people have never even heard of this. It’s called your statement of cash flows and. You know, how everybody looks at their net income and they go, “Okay, well, that’s great. I made $5,000. But why I don’t have $5,000 in my bank account?” That’s where this statement comes in because it’s a really common misconception that all those expenses listed on your profit and loss are all of your expenses. They are not. The statement of cash flow is literally what it says. It is the way cash flows in and out of your business. And what it tells you is how all of your cash flowed. Your profit and loss doesn’t contain things like loan payments that you made, or checks you wrote to tax authorities. It doesn’t include money that you paid to yourself, right, if you just took a draw out of your profit. So the cash flow statement will have all of those things. And there are two numbers on the cash flow statement that I make sure everybody looks at and that’s really it. The first one is your net cash provided by operating activities, right, and all that is very simply how much money did your business generate just doing what you do. And then the total cash change is the very last number on that statement. And that one is what you actually added or subtracted from your bank account, right. After you paid your taxes, you made your net income and you paid yourself, that is the cash that you either left in your business or took out of your business. And it is possible to have a negative cash flow and a positive net income. 

Kevin: Okay, so, what do you do if that happens?

Andrea: It’s normal for that to happen but, again, this is why we are looking at this statements because if that happens and you’re looking at this going, “Well, it says that I have a negative cash flow of $5,000 last month.” You have a list right there that tells you exactly why. My net income was this which was positive, and maybe I paid $18,000 in taxes. It makes it very easy.

Kevin: Yeah, because I suppose everything stops when you run out of cash. 

Andrea: Right.

Kevin: Game is over. I think what you’re saying is the profit and loss gets you so far, you can establish if your business is generating a profit. But this cash flow is the real determinant of your future because of that goes negative and goes zero then you’ve got a problem. 

Andrea: But it’s normal to go negative a little bit. So if it’s negative one month don’t panic. What we don’t want to see is consistently negative because no business can sustain that. You need to figure out what’s going on immediately if that’s the case. 

Kevin: Yeah, so basically profit and loss is like on paper how well you’re doing, but cash flow is reality.

Andrea: Right. Yes.

Kevin: Okay. I understand. I hope people listening to as well. That’s makes a lot of sense. I suppose the question I have now is with the things that are probably people think about more than these finances are how much do I spend on marketing, what’s my cost of marketing are, how’s my retention going. You know, this is like, for a lot of businesses just the retention rate versus the new people coming in is complicated enough. How do those kind of things, do those things appear on this statements or how do you take those things into consideration as well? 

Andrea: Retention wouldn’t be on these statements. That will be just another thing that we tack on when… Like what I’ll do is I’ll breakdown some of the most important industry metrics. And that would be something like your club management software would bring in, right. And having club management software working with your accounting software is so powerful. I can’t even explain how many times I’ve used club management software in combination with accounting software to build reports for people that give them real, tangible ways they can improve their businesses. So if I know retention is 25% more profitable to me. I’m going to pay attention to that number and then I’m going to go to my financial statements and make sure it’s actually translating. 

Kevin: Yeah. I think what you’re saying is if you can make the link between the profits to be gaining from holding on to somebody versus the profit to be gaining from selling another membership that’s maybe going to walk out the door in 12 months. 

Andrea: Exactly.

Kevin: That’s when you can make some real decisions about your business. 

Andrea: Right, and you can start to feel like you have control over this and it makes it easier to make those decisions with confidence. 

Kevin: Yeah. Make it easier to decide whether you hire another person to purely manage retention or spend more money on Facebook ads. That’s what it’s down to at the end of the day. 

Andrea: Exactly. Yeah. And that’s a very realistic. That’s the reality of why, you know, looking at all three of this together is so important. It’s like going into a doctor to have your heart checked and all they do is check your blood pressure. That’s not going to tell me everything. 

Kevin: Yeah. Obviously, you yourself offer a lot of information on this and help the businesses. But where is a good resource for somebody to learn the basics of this stuff as they are getting started. 

Andrea: There is a book I really like recommending called Accounting for the Numberphobic. And then also LinkedIn actually has some pretty good learning material if you do LinkedIn learning. They have some really good just basic accounting learning material for business owners. 

Kevin: Okay, so LinkedIn is good and Accountant for the Numberphobic. It’s good name. Okay, cool. What I suppose, just to summarize everything like I’m sure people have learned a lot in this quite quick conversation. But, you know, what you would you say should be people’s maybe two or three takeaways from this. What’s next? If you are running a business, you’re not 100% on top of the finances, what are the next two or three things that you should do today? 

Andrea: So absolutely start pulling every single month all three of these statements. Okay. Don’t get overwhelmed just start getting familiar with them. If you are not sure, Google is a great resource. Okay. Once you’ve done that and you’re looking at this every month consistently start challenging yourself to just pick a metric and see if you’re competing with your industry in it whether it’s payroll, percentage, gross profit margin, whatever it is. Whatever you choose. Because those small incremental changes make a big difference in a long run. And the more comfortable you are with this the better off you’re going to be. 

Kevin: Got it. Okay. I think what you’re saying is just getting use to it. Get use to pulling these three things every month and then start looking at maybe what thing should be in the industry and straightaway you’re probably going to notice a couple of things to address in your business. 

Andrea: Exactly.

Kevin: Got it. Okay. Do you like that? That’s been very, very helpful. It’s been quick but I think a good… hopefully kick starter for some people to get some control over this stuff. Before we go and I’m not sure if is it finance related or not. The question we ask everybody is what’s the biggest mistake that you’ve made in business and what did you learn from it? 

Andrea: Okay. So ironically, and nobody likes to admit the financial mistakes, especially people in my industry. But my biggest mistake was I just threw money at everything when I first started. You know, everybody has got a really good reason why they need your money and why they are going to bring you more value for it. So I bought every tool, every service, everything I could afford to do, and I was trying to going to buy my growth and turns out that was just a really expensive mistake. The very next year I just had to kind of trim all the fat and it taught me to be very, very careful with where I choose to spend my cash. Cash is precious. So that was my biggest hard lesson learned.

Kevin: Okay. So I think the lesson for everybody is get familiar of where your cash is going and you’re probably going to appreciate it a bit more. Yeah, I get it. Okay. Alright, Andrea, it’s been absolute pleasure. Before we go maybe tell people generally how you help businesses and how they can get in touch? 

Andrea: Okay. So yeah, I mean, obviously my website is healthierbookkeeping.com. But bookkeeping is a lot more than it used to be, right. So what I do is I help people understand their finances and use industry data to start making their businesses better. If anybody wants to reach me directly I can be emailed at [email protected] or if you are coming to IRSA 2020. I will be there so you’re welcome to come say hi. 

Kevin: Okay, Andrea, I’ll hopefully see you there myself. And thank you very much for coming on the podcast.     

Andrea: Of course. Thank you so much for having me. 

Kevin: Thank you. 

This podcast is brought to you by Glofox a boutique fitness management software company. If you want to accelerate growth, work efficiently, and deliver a well-branded boutique customer experience then find us at glofox.com.