Financial Metrics - how is your business performing?

Several fitness studio owners I’ve spoken with have told me that the reason they opened their business had nothing to do with making money, but instead was to be able to live their passion, and to help people. “I saw such a dramatic change in my own health and fitness that I wanted to help others do the same.” For many it started out as a hobby, training friends and neighbors in their homes, until it became clear that there was enough demand to rent a legitimate space. It was the obvious next step, and they took the plunge.

This is when the passionate fitness enthusiast or other service professional becomes a business owner. Passion and expertise are certainly two very important ingredients in any business. Add in an affinity for numbers and tracking financial metrics and you’ve got a pretty solid base to grow a successful service business. There’s the rub. Most small business owners have passion and expertise dialed. It’s the numbers that are the hang up.

For some, money and profits can be a contentious topic. “I don’t really care about the money. I’m not doing this to make money.” This one always gives me pause. Making money is a good thing! A profitable business can afford to offer scholarship memberships to high school kids, can sponsor charitable events, and can provide the opportunity for others to earn a living doing what they too are passionate about.

That said, money doesn’t have to be the all-encompassing focus. Your focus can and should be delivering the best service possible to your clients. However, a business will certainly find more success with some attention to the bottom line. Just like a swimmer working on improving her time in the 100 m freestyle, you need to know how you are performing now in order to develop a plan to improve. If you keep an eye on some basic financial metrics you’ll have the information you need to devise an appropriate plan of action.

What to track?

Every business will have slightly different metrics that offer insight into its monthly, quarterly and yearly performance. If you are using business management software it should be fairly easy to access these numbers. Here are the biggies:

Total Revenue – this one is obvious, the sum total of all monies you bring in for a given month. How is your revenue changing each month? Hopefully it’s increasing as you gain new clients and retain your existing ones. Almost all business owners know this number.

Total Revenue Serviced – In my opinion this is a more important number for service businesses. This is not just a sales number. It’s the dollar value of services completed. For example, let’s say you sell packages of 12 sessions of personal training for $800. You may sell that package (or several of them) on the last day of the month. That dollar amount will show up as total revenue and make it look like a great month. However, that money has not been serviced yet and can be considered a liability (you owe 12 sessions of service to the client). Your business must still provide the service before it is earned revenue. It can be easy for a business to get into hot water by neglecting this fact. There may be a hefty sum in your business checking account if you sell several large packages, but you must not forget that you still have labor to pay on those sessions. This is why it’s important to look at other factors than your bank account balance when making purchase decisions.

By tracking total revenue serviced, you can see what the business is actually earning each month. Only revenue associated with completed appointments/sessions will be included in this figure.

Number of appointments serviced and associated revenue - It can be helpful to track how many appointments you are completing each month. Similar to Total Revenue Serviced, this is a figure of appointments or sessions that are completed. For example, last month you serviced 65 massages with associated revenue of $4,550, whereas the month before you serviced 60 massages with associated revenue of $4,200. If you offer several different types of appointments you may want to break this down by the specific appointment type (men’s haircut, personal training, waxing, massage, etc).

Total members on recurring billing or autopay (for membership-based businesses). This seems fairly straightforward and with any business management software it should be an easy report to run. If you are a membership-based business you hopefully know exactly how many members you have, and have a target membership goal (monthly target and annual target).

Gross Margin per revenue category – What percentage of each dollar does your business keep per revenue category? Put another way, after you pay labor on your services, what does the business keep? Calculating this per revenue category can give you insight into which revenue categories are the stronger earners for your business. Cost of goods sold, or cost of labor in the case of a service, is the variable to watch.

Take our massage example above. Your business serviced 65 massages with associated revenue of $4550. You will also need to know the labor you paid out to your therapists to service those 65 massages. You run your payroll report for massage and see that you paid $2500 in labor for those 65 massages.

To calculate:

Gross Margin Massage = (Total massage revenue – Total massage labor) /Total massage revenue

In our example: ($4550 - $2500)/$4550

Your Gross Margin for Massage is 45%. For every massage dollar coming through the door, your business keeps 45 cents.

Expenses – Your total outflow each month for rent, utilities, insurance, equipment, etc. If you keep your books up to date you’ll know exactly what you spend each month on overhead.

Gross Profit – Total revenue minus total costs to service that revenue. If we look at our massage example, Gross Profit for massage would be $4550 - $2500, or $2050. However, this would be calculated across all of your service categories.

Gross Profit Margin – This is a percentage showing you what percent of each dollar your business keeps (similar to our massage example above, but calculated across all service offerings).

Net Profit – Gross Profit minus Expenses. This is the bottom line and tells you exactly where your business stands each month, especially if you are using Total Revenue Serviced in your calculations.

If you are not a numbers person, you may consider finding someone who is to help you. However, I encourage you to also try to take an interest. As an owner you never want to completely hand your business finances over to someone else. You need to know enough, and be interested enough, to be aware of what’s going on. Having a solid grasp of the financials can give you the confidence that you are making the best possible decisions for your business.