Cash Basis Traps And Accrual Clarity For Gym Owners

Full transcript

Welcome back, guys. Sitting at the Neighbor Show. Today we have Megan, our CFO, on today. So we're gonna break into the financials of the gym industry and introduce yourselves. What do people screw up on? So, Megan, that is my first big question. With business as a whole, what do people mess up when you come in and say, what is going on here?

Oh my gosh. Well, first of all, the state of their books. I mean, they're usually on a cash basis, which means they recognize their revenue as the cash comes in. And they, whenever the money gets expended, that's when they recognize the expense. So whenever it's withdrawn from their account. So that doesn't really show an accurate picture of performance, meaning when the revenue is actually incurred and when the expenses are actually incurred. So it's really the state of their books, is really what I talked to them about first.

It's you mentioned a term that a lot of people don't know. Exactly. It took me a long time to get there, and it's accrual versus cash basis. What is the fundamental difference between accrual and cash?

Awesome question. And yes, a lot of people do not know that. So it is an accounting term. It's say a member prepays for three months of a gym membership. In a cash basis world, that could be all in one month, and that's what you recognize. In an accrual world, you would put that on your balance sheet, which I know people are like, what the heck is that? And then you would have to then recognize it on as revenue on your profit and loss system or statement. So instead of recognizing that full amount in one month, you would recognize it over three months. So if it's $1,000, you would recognize $333 the first month, $333 the next month, and $333 the next month. So really that's just matching the expense of a trainer that is training you. It matches that expense with that revenue.

Interesting. So if I'm looking at my account basically, and I'm seeing I charge this member $1,000 just to use the same example. I it's better for me to break that up three months, but I feel like that in and of itself is a discipline.

Yes. And that's why you need an account.

Because you see and you go, oh, I have a thousand dollars.

Exactly.

As opposed to no, I have to look at that as $333 and I'm just guaranteed to get it the next two months.

Exactly. Yeah. So they're prepaying, and you have to make sure that you're paying your trainers over those three months with that money. You have to just recognize that if it's cost you $100 for that trainer, then you only recognize $233 as actual net profit.

I want to get back more into this, but I want to just first even figure out what made you get into this. Like how did you get into this realm of financials, yeah, and numbers? Like what projected your life there?

Honestly, it was so funny. In high school, I had a great accounting teacher, and at the time it was 2006, 2007, which was the big boom of the recession. So I wanted job security. And I really just I understood it. I had a great mentor as my high school per uh teacher, and that's how I really got into it. It was just like it made sense to me. So why not go for something that makes sense and I was able to do it? And I mean, I have a good personality, so it helped.

So you became an accountant straight off?

Yeah, that's new. I knew that's what I wanted to do. It was for job security because I figured everyone needs accountants, but it was just during that time where everything was uncertain. So I wanted to go the safe route.

Gotcha. So why how did you eventually get to a CFO position? Like what why is that a service you offer? And then even more fundamentally, because yet again, things I've had to learn, what's the difference between a CFO, a controller, a bookkeeper, and an accountant?

Oh, there's yeah, that's a loaded question. And everyone has their own definitions with that. But yeah, so how did I get here? I when I went into college, they really push for public accounting, which means you're just going, you're either going the audit route or the tax route for either public companies or private. So I wanted to get my CPA, certified public accountant. I then went to college, graduated. I also got my uh concentration in fraud examination, which was just something I was really passionate about. I love like just solving puzzles and finding stuff that's not making sense and making it make sense with something, you know. Actually wanted to work like with FBI at one point. But um it was just really, I went into public accounting. Um, at the time it was Perenni Beard, now it's Baker Tilly, and did audit for a while. Found out public accounting wasn't really for me, but I wanted to get my license. At that time, you had to work two years in public accounting. Um I could talk forever about my background, but ultimately I hopped around into different accounting fields, private, where I was just working at one company, doing a close, and that I found super boring. Then I had my first child, then I worked for um my uncle who owns a small business, and I worked for him part-time, just getting him just set up with everything. With he was still doing like a paper ledger, it was pretty embarrassing. And I said, I am not doing this, I'm gonna convert you to QuickBooks and make my life a little bit easier with an infant at home. So that's where I kind of found my superpower is helping entrepreneurs with their finances. My uncle is not a finance person, and I'm sorry if you're watching this, Uncle Jeff, but he is not. Just was trying to find myself. I didn't even know at that point that I wanted to continue accounting. I was kind of in this like limbo of what do I actually want to do? Because I don't like working for a company, but I also don't know if this is truly what I want. And then I went back to school, and then I also got a new job as an internal auditor for like a hospital system. Wanted to give audit another try, see if internal was where I wanted to go. Then, oh goodness, that didn't then we were going through a restructure. I ended up leaving, and then COVID hit. We were trying to find remote positions, so I didn't have to go into an office anymore. By that time, I had my second child, so I just wanted to be home more. And I found a company that does remote bookkeeping. Um, so I'll be working with multiple clients. I thought that's maybe where I wanted to go, back to multiple client things and not being so bored because I I get bored pretty easily. I like to find different things, different challenges, and help others. So I I was there for quite some time, but um eventually leadership changed, wanted to move, um, move on to something different, hated my next job. It was so corporate, I couldn't take it. It was, I didn't last there very long just for personal. I I knew it was just kind of like one of those things you knew. I went to a smaller company again. I'm telling you, I went I went through a lot of transformations. I didn't know if I even wanted to get into accounting anymore. So kind of sidebar when I was at this other company that was too corporate, I'm not mentioning any company names. I actually was like, I love fitness. Should I just become a certified personal trainer and do online coaching? I got my CPT and kind of had a come to Jesus moment. It was like, do you really want to like market yourself like that? Like online coaching, that's a lot of camera time, a lot of marketing, self-branding. I'm not that type of person on social media, so it didn't make me feel comfortable. So I started my own business. Um, I was let go from a restructure of this newer company. It was a startup, and it was kind of a blessing in disguise. I was like, well, I have my own company for bookkeeping. Why not? Just I have to hit the ground running, I have to make money for my family. So I ended up just starting my own bookkeeping firm, accounting, controllership, CFO, kind of all the things. And all my past experiences have led me to this. So hindsight is always 2020. But what I found that I love the most is helping entrepreneurs with their books because I can really help them understand their numbers and see where they can make improvements. So, to answer your question, all of those things are different. Bookkeeping, accounting is like the encompassing of all of it. But there's bookkeeping, there's accountants, there's controllers, there's CFOs. A lot of companies think they're all one. They have different strengths, they have different ideas of things. So accountants know understand the flow of your numbers and what they mean. Bookkeeping is more like data entry. So it's categorizing financials or categorizing the transactions that come in through your bank and credit card. But the accounting of it is when you make a payment, a loan payment, what part is interest and what part is principal? It's kind of like they go on different line items on your financial statements. A controller, there's different definitions. So no one come at me in the comments, please. There's so many different definitions, but what I think of a controller is overseeing the entire financial statements, ensuring accuracy and what they mean. What can you tell an owner what happened in a month? And what internal controls can be improved if there's any missing links so that you could protect them. That's my biggest thing. I like internal controls. I like talking about that with my clients. Another thing I do specifically for my clients are an analysis of their financial statements. So at the end of the month, I see what is trending, what um is way off, what we need to improve on, different analysis of your income to your expenses, that sort of thing. So I do an analysis.

And what's the difference between a CFO?

CFO is more strategic. They work with forecasts and projections. They want to see you, they're more forward thinking. That's probably the best way I can look at it. Is CFO is forward thinking, accounting is past and present. So CFO uses the accountants, the controllers to see, make sure those numbers are accurate. Because in my projections, I need to know what to expect and what to go for. So that's why I work with Skylar on like, and that's Skylar in our company, that we have to make sure like his marketing budget is gonna make it through to the end of the year or end of next year. So we're looking forward into next year.

Looking at this as like a whole at what stage of business do you know you need a specific thing? Because I I'm gonna go back for myself because I think that's the easiest way to kind of dive through this. I mean, this is the first time I'm doing this. I I went from just having an accountant, mom and pop place, that did my books once a year. Then after a few years of that, realized I was overpaying a lot and they didn't understand specific tax laws that I knew about. And I'm like, how do I know more than my accountant?

Yeah.

So then I interviewed account uh other accountants, found a bigger firm, which is triple the price, and I saved a lot on taxes.

Exactly.

Yes, so it like that was the first big lesson I learned in this field is don't go for a mom and pop when you're trying to be a big business. Spend the extra money on a really good accountant because you'll save triple that in taxes.

I would have to agree with that. I think a lot of places, even that come to me, they might think I'm too expensive. And I say, I mean, that's fine. I want you to feel comfortable with your budget and with everything. But if you go somewhere cheaper to save a buck, you're gonna get that result. You are going to get what you pay for. And you want someone who is just doing it once a year at the very end, where you're like, oh shit, can I say that? Oh shit, I owe so much on taxes, or you want someone to be more proactive with you throughout the year to say meeting with someone, maybe a tax strategist, um, to say, this is what we need to do to prepare. So at the end of the year, you don't owe much, or this is where I would spend your money to reduce the tax liability.

Yeah, and then and then the next stage for me was bookkeeping through them, which was two years ago. But I didn't know what the hell I was looking at.

Exactly.

So, like that's the biggest, that's the hardest part about entrepreneurship. And I know it's probably the most boring topic to hear from people.

I know we're probably losing everybody.

But it's the most important because you like this is this is a truth. Yeah, I didn't look at my books for six years.

That's not uncommon.

I did not want to know where I was or go back and figure it out because at the end of the day, I knew if I didn't put every single ounce of effort into sales, we would have gone out of business. Because you don't have a business if you're not making sales, period.

And that's how most entrepreneurs are. They don't know. And but how do you know you're dead without sales if you don't look at your books? At the same time.

Because you're just looking at cash.

Exactly. That's the cash mentality, and it's like, I get it. That's how every business owner is as a as a startup to going into five, six years, they're like, okay, I need to finally understand my numbers.

That's typically where they come and get where should that line really be? Like, how do you know where to allocate your expenses as a business owner? And just do it off of not years, because a lot of it could be different for a lot of businesses, but more specifically, is it top line revenue? Is it net profit? At what point should I say, okay, I need just an accountant, or okay, I need a bookkeeper? Like, how should I allocate payroll to your specific niche?

I mean, that's it's a tough question to answer, only because everyone has their own comfort levels. But I mean, at the very least, I would get a bookkeeper that understands the gym industry. You don't want someone doing it on a cash basis because that's not helping you, as I said. You're just looking at, okay, well, this month I had a great big cash amount come in, but then over the next six months, I barely saw anything. Was that cash related? Was it sales related? Like what was drawing that? So, I mean, we had good conversations even yesterday about where we ended up so far this year. And it's, I mean, it's a lot different than on a cash basis. We were able to see the actual revenue hit versus when trainers were paid and all those things. So it's at the very least, I would get some sort of bookkeeper in so you can actually not wait to the end of the year to see where you are.

And but at what what timeline? Are you looking? Am I looking at my total top line? Like, does my top line have to be 40,000, 50,000 monthly?

Oh, I think.

Or is it more trying to figure out how much net profit I have and then squeeze it out? Like at what point should I allocate the resources that are more necessary to that position, like a bookkeeper in the beginning, as opposed to something else?

I mean, you can get a bookkeeper for $250 is just a bookkeeper just doing cash.

A month?

A month. I mean, you could probably go less if you go overseas, but I would not, if you want to stick within the US, it's gonna be probably $500 a month. But I would say the typical percentage is you I heard this from another CFO that made perfect sense to me. Usually you allocate 2% of your gross revenue to finance.

So if that's 2% of your gross revenue to finance, okay.

If that's helpful at all to anybody, so even if you know that number, if it's a hundred thousand, then you know for the year that's 2,500 for the year.

So then it's whatever that number can buy you is the position you hire for.

Exactly.

So if that just gets me a bookkeeper, that's a bookkeeper. If it gets me controller, that's a controller. If it gets me a CFO, because I'm gonna hire a level that gets me that.

Yes. So I like that number because then it just shows like that's where you can hire for exactly.

So what's another I know you said cash and accrual is a big issue, especially for the gym industry. And I think it's I want to give you an example. Let's do it this way. Here's a stat for you. I don't know if you're aware or not aware. Out of the US, the average gym owner take home is 40,000 annually. What is your best guess about why, at least from a financial perspective, that that is the case? Because that is low.

Yes, very low.

And that's average. That means most people like are under 60,000. That's that's I think it's like 70th percentiles under 60,000. It's not even livable.

No, right.

So why is that the case for most gym owners?

I would think because they want to pay their people first. That's just my my instinct, is that usually owners want to make sure their people are taken care of so they just take the bare minimum, which I guess that's personal preference. You have to see about utilization, um, what your trainers are are using to generate revenue. Are they fully utilized? So there's there's a bunch of different metrics we can use. Utilization's the first one I would look at is just to see how much utilization, how much time are is the owner on the floor? You know, like is that I think in the early stages, the owner is probably on the floor personal training or you know, coaching, doing something. So that's just what I would, that's what I see is that they want to pay their people first and make sure that they're taken care of so the business is still growing.

Yeah, and if you had the opportunity to talk to me a few years ago, if we went back in time and hopped on a time machine, I learned a really important lesson two years ago, and I wish I learned it seven years ago. But I read a book, it was called Profit First. If you ever read that book, but it but the theory behind it is pay yourself first because it releases the burden of a business and it makes it more enjoyable. And the biggest reason business goes out, it sounds stupid, but it's because they close their business. Yes, but they close their business because they're stressed. And I didn't pay myself for five and a half years, yeah. And then I read that book and I was like, oh, if I'm acting like a trainer, I need to pay myself at least like a trainer.

Oh, absolutely.

So I'm getting used to that payroll, and it doesn't, I don't overhire on positions.

Yeah.

What do you what's your thought basis around that? Like I'm starting a business, like there's a lot to be said to hustle, grind, don't pay yourself, throw it all back in the business. Yes, but then there's a lot to be said to pay yourself because then you're not gonna burn out. Where's your line with that?

I mean, for me personally in my business, I had to make money. I was the breadwinner, I am the breadwinner of my family. So when I lost my job, I was hustling. I was making sure I was getting paid because I needed to feed my family. So I think there is that fine line of when you have to live, you have to have your family fed, heat in the house, all those things. There is a line. But in the beginning, everyone does scare you. I it's funny that you brought that up because like I never not paid myself, I had to. I need to put it right back in the business or we close. So it's really about having that discussion with yourself to say what is what is a good take home, even just for the the short period, the short. Short time period. It's really, what can I do to be comfortable? I would say you should pay yourself. Is it $500,000 your first year? I don't know. You have to be able to support that. It's really just about finding that balance of what amount of money should I put back in the business and what should I take home? How do I pay my people so they stay and be happy with me? So it is the other side of business thinking rather than just being a trainer to business owner. Got to make sure everything is still functional, but I also have to pay myself. Yeah, you're working hard. So it may not be a lot in the beginning, but I think as you grow and you start depending on your people more, you're able to be a little bit more comfortable in paying yourself first. So there's different business theories with all of this. I mean, you brought up one, yeah, pay yourself first. That's you can. But other people are like, I can't, because then my business will go under if I don't pay rent.

And so then that begs the question is what are the red flags to know when it's time to close a business?

The cash flow.

That's be as specific as much as much as you can. Like what what cash flow basis? How much negative percentage-wise or financial wise, you're like, this is there's something unsustainable here, it's not fixable.

When you're missing payroll for your people.

Is it one payroll? Is it two payrolls?

If it's consistent, and I don't know about a number at this point. If you are consistently missing payroll because of cash flow, that's a big problem. You you need that cash flow. So whether it's the model of you have a lot of prepayments in the beginning, like during certain times of the year, and you're like, I can't even sustain that with just having a simple payroll every two weeks, and you just need to find those months. I know a lot of businesses have their peak times, and some gyms, if it's not just personal training, their biggest months of the year are around New Year's because people make the New Year's resolution, so they pay a lot either in December or January. Now I know it's different with different businesses and different models. So you have to make sure that, and this might be where an accountant comes in, is what's that projection look like? What if I get this much, how long do I have to sustain? Is and there's also like a cash burn um you know metric that you can use. And don't ask me about what the number is for that, because it's different for all different sizes, but you want to make sure that you have that ability to pay your people, pay yourself, um, ensure what model is working, how to retain your clients. If you see a high number of churn in your clients, is it at certain times of the year? Is it because of your people? You are you having rude, rude trainers? Like there's so many different like qualitative factors to go in because it's a service-based business. So you have to make sure your trainers are knowledgeable, personable, kind, and they're knowledge, they're knowledgeable. So um, I don't know if that answered your question, Anthony.

You good? Are you sure? Are you ready? All right, are you ready?

Ready as I'll ever be.

Welcome back, guys, sitting at the neighbor show. Today we have Megan, our CFO, on today. So we're gonna break into the financials of the gym industry and introduce yourselves. What do people screw up on? So, Megan, that is my first big question. With business as a whole, what do people mess up when you come in and say, What is going on here?

Oh my gosh, well, first of all, the state of their books. I mean they're usually on a cash basis, which means they recognize their revenue as the cash comes in. And they whenever the money gets expended, that's when they recognize the expense. So whenever it's withdrawn from their account.

So that doesn't really show an accurate picture of the performance, meaning when the revenue is actually and then based upon the service industry and margins as a whole, there's a a gold standard of business. It's the 30-40-30, which is basically 30% of your gross goes to payroll, 40% goes to non-payroll expenses, and then 30% of that is profit. That's always like that pushed out. Here's our gold standard. How realistic is that model in a service-based industry? And then where do you feel like are true healthy margins of a company?

Of any company or a gym?

Either or.

Okay. It is different across industries, so I'll leave out e-commerce companies because that's a little bit different. But in service-based, like you said, um, I mean, I've seen gross margins at like 70%, which is, you know, they they only like you said, 30% is salaries or cost of goods or cost of labor. Um, so I would, I would agree with that. I think that's a good healthy percentage because then the rest of that 70% would go to operational expenses, rent, utilities, payroll. That I would agree with. I don't know about the third, like I would say at the end of the day, 25% is usually like a good healthy net profit, net margin. Um obviously want to get that higher and higher, but I think that's a really good, like a gold standard. If you're at 25% of your net profit, that's that would be good. That's you should be sustainable.

So trying to hit that 25% number. Yeah, I want to break into one more thing because you said it's your expertise.

Okay.

And it's obviously personal to me. It's the reason I hired you.

Yeah.

And that's fraud. Yeah. So me specifically, I told you the story that I ended up saying, I need someone coming in because I had a hundred thousand dollar embezzlement keys. So what are some things you recognize for that? And like how how would you have helped me not even go through that in the first place?

Yes, uh, that's almost like my favorite topic. Like I said, I'm kind of a geek when it comes to fraud. It's that's why I give my clients kind of a trend analysis. So I usually provide them um a profit and loss statement month over month. And in this case, it would see it was gift cards in your case. Like there was a high higher sales in gift cards. For me, I would be looking into that specifically. I would have said, like, I would have asked you or Amanda and said, there is you have a sale? Like, what's going on? Um, I actually had another fraud case that I had with another client, and they embezzled 450,000 over a year's time, and that was through credit card fraud. So they were just using the company credit card and changing the vendor name and changing what account it would go to. So that was something that just by doing a cleanup or seeing like this is a lot of expenses. Like, what is happening here? There is a way that just by digging in and looking, that you can say what's going on. If something doesn't smell right, you're usually right. There's something going on. Whether it's an operational mishap, there could be things like, oh, they're just keying this in wrong. We train them, let's see what happens. But if something is not right, you have to go with your gut. There's there's something fishy.

Like the gut was why am I pulling from my line of credit to pay for payroll when we're hitting numbers we haven't hit before?

Exactly. And that sort of analysis is really like, what's going on? And remind me again, how long was this fraud happening for? About a year. About a year. So it's really at the end of the year, you saw your numbers and you're like, what's happening? Like, our revenue is up. Why, yeah, why is my cash flow wonky? Why am I pulling? So having somebody outside of the business looking at it, I think that would have just triggered it immediately. And most frauds, and I say most, almost all frauds are detected by accident. And usually when someone is out sick and someone else has to pick up their job, that's when it's discovered.

Who's the most likely person to be doing the frauding? Is there like a specific position that you should be on top of? Is it a fluke case about who it was?

I I mean it's usually someone with a higher authority. I mean, not necessarily, I don't want people coming at me. It's in the cases that I've done, it's someone where there was no oversight. So someone that was trusted within the company, and there was no control over that person. So in the case of the fraud that I discovered with my other client, there was no controls approving her expenses. She took trips to Disney World. It took her entire family on company dime. Went to Disney World $5,000, went out to dinners, went out. The day that I discovered it, she spent $400 at an Italian restaurant. It was, there was no controls, no receipt necessary. So just having a simple control of I'm gonna approve every expense over a certain dollar amount. That's a simple control, just somebody else doing a double check. Um that's where I've seen it. Someone in power that everyone typically trusts that why would they do such a thing?

That's what I've learned. It's usually the people closest to you.

And it's unfortunate. And it makes you feel really like I can't trust anybody again. And it makes you almost into like a how can I trust you, me, you know, myself. It's like you could do the the client that I had, I'm like, you could do a background check. Like, I have nothing to hide. It's all of like, I'm here to help you. And I couldn't believe how long they let it go for because they said they couldn't, they were thinking about it for a while. Why? And she ended up saying, Oh, my credit card got stolen twice within a year. So there was like things like that that she made known and like tried to hide it, and it was it was an interesting case, but it was a lot of money.

That's wild. I got to say the last final question, but just tweak it a little bit. Sure. So instead of asking you specifically what's something you would like to be accountable for, I want you to think of what's something you would like every business owner look looking at this podcast right now hold themselves accountable. What's one takeaway they should take away? Say, go do this now.

I would say it'll take you 10 minutes to go look at your bank account if you have an accounting software, see what state it's in. Have you not even looked at it and it's like since tax time, and you're like, I have a lot of cleanup to do. I would do it now before the end of the year, because now is a good time. You still have three months to kind of strategize if you need to do something, um, pay out bonuses to your people or whatever to reduce your tax liability. Take 10 minutes just to review your books and just see where you're at. If you have a lot to do, reach out to someone, say, Hey, can I help you? Like, or can you help me? And say, let just let me see where where I'm at before the end of the year. What that's all I can say is just take a look. Don't be afraid. Just look, rip off the band aid.

Dive right in.

Dive right in.

Thank you, Megan, for doing this. I appreciate it the guests listening to this week's episode of the Anthony Amos Show. Like, subscribe, share. See you next time.