Josh Peacock: Our hero today is Andrea Hovel, co-owner of healthier bookkeeping and an expert in accounting for fitness businesses. In this episode, she demystifies concepts like cash flow, profit, and loss, and reveals to us what financial metrics we should all be looking at to understand our fitness business’s financial health. If you’ve ever felt like you’re drowning in all the accounting jargon and numbers, you don’t want to miss this interview and if you’re an investor looking to partner with or acquire a fitness business. We even discuss what you should watch out for there. Without further ado, Andrea Hoffman.
Alright, welcome to the Gym Heroes Podcast. So go ahead and introduce yourself. Give your background in fitness. Well, I’m sorry. Give your background in finance and I’m actually interested to know how you ended up working specifically with fitness operators.
Andrea Hovel: Okay. Yeah, I started like most people do. I went to school for accounting and supply chain management. Then got a job in a corporate office managing inventory and purchasing and working in the accounting department and I got real tired of that. It was incredibly bad for my health. I was eating a lot and I wound up almost 300 pounds. So, I decided to kind of turn my life around, get my health under control and I got to work with a lot of really great trainers, instructors, nutritionists. And as I’m listening, I hear their pain points and because I worked in kind of the financial, business operations area, I would help them kind of figure out how to address some of their problems with their businesses and that kind of turned into once I got down to my weight and I realized how important these people are to keep around. That turned into everybody wants to become the next Zumba instructor or personal trainer or nutritionist and I really didn’t. I wanted to help those people continue to spread what they do and grow and that’s just kind of how I started. I began working with some small boutique gyms, some cycling studios, some of that kind of stuff and then, it just wound-up kind of becoming more of a more than a side gig and I left corporate and did this full time and I’ve been helping gym owners ever since.
Josh Peacock: Awesome. It’s always good to get out of corporate. So, what do gym owners need to understand about bookkeeping that they usually don’t?
Andrea Hovel: So, everybody thinks of bookkeeping as it’s this really simple task. You go in, you categorize, you make sure everything matches. Maybe you have to do some really advanced stuff like a journal entry, right? And that’s really all they think about? Well, and for the most part that is 80% of what it is. What we do is a little different in the sense that we don’t just stop it giving you those reports every month. We then turn around and go, let’s show you how to use this financial information because that’s really what it’s for. There’s no point in having organized information if you’re not using it. So, we try to do what we can to partner and teach them how to use this to benefit their business.
Josh Peacock: Excellent. So, there’s balance sheets. There’s profit and loss sheets. There’s a lot of stuff going on. What’s important for gym operators to focus on for the health of their business?
Andrea Hovel: So, you can drown in the accounting jargon, right? Essentially, here is what you need. You need a balance sheet which is what you own, what you owe, and then what’s left over for you is the owner. You have your profit and loss which everybody, that’s the one big one. Everybody knows what it is, right? It’s your expenses and it’s your income and then your profit and then you have what most people have never even heard of called the statement of cash flows. So, those months where it’s like, we made all this money on the profit and loss. Where did it go? That’s where your statement of cash flows comes into place because there’s a lot of things that affect your cash that are not on your PNL. So, you look at statement of cash flows and it’s exactly what it sounds like. It’s how the cash in your business flowed in and out that month. So, essentially, what you have at the bottom of that one in your net operating cash is what you added subtracted from your bank account balance and those are the three major ones that I encourage people to look at.
Josh Peacock: How regularly should they be in contact with those documents?
Andrea Hovel: Monthly.
Josh Peacock: Monthly?
Andrea Hovel: Yep. You should be doing it monthly, reviewing everything as a whole on a quarterly and annual basis.
Josh Peacock: Are there any particular numbers that they should focus on?
Andrea Hovel: So, net operating cash flow, obviously your net profit your gross profit is important too though. And then on your balance sheet what you want to pay attention to is your debt, your liabilities. So, making sure that those are not affecting you in a really negative way. It’s normal to have debt, it’s normal to leverage debt. You just want to make sure it doesn’t go out of control.
Josh Peacock: Right. So, you mentioned cash flow. How does that differ from profit and loss?
Andrea Hovel: So, cash flow is am I going to have enough money in three months to keep my doors open, right? This is something really important that we do with all kinds of operators because this is a universal thing. If I know that my business slows down in August and September, I need to know If I have enough cash in my bank account right now to float me those months when I know my operating costs are going to exceed, right? I’m going to spend more money those months than I make and I already know that. So, I need to make sure that my bank account balances are high enough. We’re not investing in big pieces of equipment right now, because then that means I won’t have enough money to stay open in my slow months. So, that is essentially what cash flow does is when you’re watching it, you make sure you have enough cash in your bank at all times. We watch it 3 months out, 6 months out, sometimes even up to a year out if we have enough data to make sure that businesses are staying healthy and operational and if they’re not going to be three months from now, we have a plan in place ahead of time before they run out of cash, right? Before your bank register goes negative.
Josh Peacock: Yeah, absolutely. I know that in marketing you can run into that. If you’ve just started and you don’t have a lot of capital, you can look at, okay, so I have a guy. I keep him for 6 months. He’s worth $2,000 to me. I can spend all the way up to this amount of money, but you might not have that much money in your account.
Andrea Hovel: Exactly.
Josh Peacock: So, you might get that guy but then, the return, you’re waiting in another 5 or 6 months to get that return and you don’t have money to spend on acquiring other members.
Andrea Hovel: Right. So, it’s extremely important when you’re making those big decisions for your business. Do we have it to invest in this right now? When should we wait to invest in this, right? What’s the best month to hire somebody and if we don’t need to hire them right now, right? So, that’s what cash, it’s a huge decision-making tool.
Josh Peacock: Yeah. So, how can gym owners use accounting to maximize their profit?
Andrea Hovel: Oh, so many ways. I’ll try not to make your eyes glaze over because this is where you get to like the math part and the spreadsheet part that everybody kind of goes, I don’t even know what you’re talking about anymore. But essentially, what we do with accounting is we’ll say, let’s look at marketing, right? You brought up marketing. What is your ROI? Well, if you know how many leads you got and I as your bookkeeper know how much you spent, right? And you know your conversion rate, we can then take those numbers and say, okay, which one of your lead generators converted the best for you made you the most ROI because even if we have 50% conversion rates on both of these marketing platforms you’re using. One of them might be far more profitable than the other. Well, you don’t know that until you’re using your numbers to really measure those things.
So, that’s one of the ways that we do this and we can also go through and do what’s called the benchmark, right? Where we’re comparing you to other businesses like yours or in your area and saying, hey, most people are paying 10% in rent. Well, you’re sitting here at twelve. That’s 2%, right? We’re going to then use that information and if all the other things are equal, you have a negotiating tool now with your landlord. And we’re going to try to save you as close to that 2% if not more as possible, which again translates to more profit on your bottom line when we do things like that.
Josh Peacock: Great. So, I’m sure you’ve worked with a lot of different gym management softwares. What are some of the problems you’ve had as a bookkeeper that gym management software providers could improve on to make your job easier as a bookkeeper.
Andrea Hovel: So, my whole job, right? Is to pull all as much data as I can in. The biggest issue I run into when I call them the new and shinies. When owners go for the new and shiny tool that looks really pretty, right? It operates really nice on a functionality level and that’s about it. It’s just the surface. What I run into then is it looks great and I can get some pretty general numbers out of it but we can’t dig in to any of the details, right? I don’t know what your payment processor is running you at. I don’t know what your average revenue per membership is, what your average revenue per that visit is, right? We can’t even dig through what your sales growth rate is because there’s no membership numbers in some of these. So, that’s my biggest thing is making sure that at least the core essentials of data are in a software, because as pretty as it might be if it’s not a helpful tool to help you make decisions on your business. It’s just a lipstick on a pig.
Josh Peacock: Right. It’s yeah, missing information is not a good thing as a business owner. Or as somebody we’re helping business owners.
Andrea Hovel: Right.
Josh Peacock: So, along the same lines of putting/aggregating that information and finding the information that’s really important, what sort of reports do you make for clients that really help them understand their books in a digestible way?
Andrea Hovel: So, I have what’s called a custom KPI scorecard and we really do it custom means custom, right? Not every business operator wants the same thing from their business. Some people are looking to buy, some people are looking to sell, some people are just a mom and pop that just want to make sure that they’re staying healthy, right? But we customize it to whatever their goal is We then track whatever metrics are important to those and I explain all of those to them, as we kind of introduce them to new numbers, new names, new things like that. So, we make that something that’s easy to digest in a quick snapshot format so they have like a dashboard of their major KPIs based on their goal. We also do 90-day cash flow forecasts. Again, I told you why that’s important. We want to know 3 months ahead of time when we’re going to run out of money so I can go talk to a bank today before it’s bad. We also do budgeting which is never fun. It never sounds sexy, but it is important. To know what your budget is and to have some kind of accountability to it.
Josh Peacock: Right. So, we talk a lot about building financial stability about optimizing profit and really keeping organizing and keeping our finger on the pulse of the most important financial metrics in our gym. If I wanted to sell my gym, what are gym, what are people that want to buy a fitness business? What are they looking for?
Andrea Hovel: So, your business is valued based off of your EBITDA. If you don’t know what that is, that’s earnings before, sorry I have to go through the letters in my head. It’s Earnings Before Interest Tax Depreciation and Amortization. So, all the things that are out of your control. Basically, they want to know what actual cash does it take to operate your business and what actual cash are you bringing in before the government gets their piece and you take your tax write offs.
Josh Peacock: Yeah.
Andrea Hovel: So, they look at that. They look at obviously revenues. They also look at things you wouldn’t really expect like your processes. They look at off of your profit and loss statement, they’re going to look at your salary and your rent. Because you’re going to give them your EBITDA number and then they’re going to take those numbers off your profit and loss and they’re going to plug it into their own little EBITDA calculator because I mean, you have an incentive to beef up your EBITDA a little bit.
Josh Peacock: Yeah, absolutely.
Andrea Hovel: They’re also, if they think that maybe you’re running a little leaner than you should to fluff up your numbers, right? So, buyers aren’t, typically buyers have a lot of intel behind them that you’re not aware of that comes from your financial statements. Some of the sneakier ones will send people in to actually try your business more than once, right? Because your morning class might be a little different than your evening class. So, they’ll send some people in and then they want to see how you’re following up with that person, how you’re interacting with that person when they come in. So, they look at that. They look at your location. That’s a huge one. They look at your lease. If you don’t have a renewable lease, that’s something that’s kind of a big deal. What else? They look at your leads. They’re going to ask you about your lead flow because most of these people know what their conversion rate is. And they’re going to look at your lead flow to calculate what they think they can produce.
There’s something called ancillary revenue, right? Which just means your secondary sources of revenue. They want to see if you’re utilizing that at all. A lot of people they have a membership and that’s all they’re doing, right? That’s Only revenue that’s coming in.
Josh Peacock: No gainers.
Andrea Hovel: Right. They want to see. Are you doing T shirt sales? Are you offering other services? Are you doing private lessons, and what are the profit margins on all of those things? So, there’s a ton that they look at but really the core things you’re going to get from a profit and loss are that the rent, your revenue, and then salary costs for your employees.
Josh Peacock: So, if I wanted to buy a gym, what should I be looking for?
Andrea Hovel: Well, that depends. What kind of buyer are you? Are you somebody who wants to operate their own business, right? Am I, do I want to be like a mom and pop? If that’s what you’re looking for, you’re looking for less of a plug and play model and more of somebody who’s in its day-to-day operating. So, if that’s the case, you’re looking for lower salaries than most people would because the owner is taking his own salary a lot of the time. If that’s the case and you want to, you’re going to look at all the same stuff but you’re going to look at are they using some kind of system for marketing and things like that. Because you’re probably not going to have those things in the bank ready to go. If you’re the other kind of buyer who I’m looking for something I can just plug my system into and it’s going to run by itself. I don’t have to do anything then you’re going to steer away from people who are the mom-and-pop shops, right? Who are still on the salary, who are involved a lot on the day to day?
But again, you’re looking at the same thing. You’re going to do the same due diligence with your EBITDA calculations. You’re probably going to still want to go check out their services if you can. Because a big part of fitness is culture. So, if that culture is absent, you’re going to know that walking in the door. If you don’t get agreeing walking in because that staff is not trained to do that. That’s something you’re going to have, you’re going to know you have to address. Um if they’re not active on social media. Those are all things you’re going to want to look at when you’re looking at buying and if you’re a seller, those are all things you need to be thinking about getting in into place if they’re not.
Josh Peacock: Absolutely. As a buyer, I’m not just buying the membership as it stands, I’m buying the business systems and the distribution channels and the ways that you get the brand out. So, I’m buying everything. And if those things aren’t in line, the business is not fundamentally sound.
Andrea Hovel: Well, here’s the biggest problem business owners have, right? Everybody wants, they see the service, right? They see the product or whatever it is and they go, I could do that, right? I’m an expert at this and they are. I get to work with some of the smartest people in this industry because they know their when it comes to fitness and training and the body and how everything works together. What they didn’t really plan for was how to also be a professional marketer, how to be a professional accountant, how to be a professional logistics specialist, how to do sales tax, and all of this other stuff that comes along with owning that business. So, if you have a business you’re looking at and the owner is wearing all of those hats, you need to be prepared to either have somebody in your pocket that you can outsource those to or be ready to learn some new skills, right?
Josh Peacock: Absolutely. So, what resources can gym operators look at to learn accounting?
Andrea Hovel: So, QuickBooks has a ton of like really easy tools you can actually go through their whole, they have a whole bookkeeping training that’s free.
Josh Peacock: Cool.
Andrea Hovel: All of my pro advisor people take, you have to take the basic stuff. So, there’s that. There’s also plenty of books out there. The Accounting for Dummies type of stuff that will give you just the basics you need to understand what everything is, right? What is an asset? What is a liability? What is equity? Because as you’re entering things into your software, it’s going to matter where you put it sometimes.
Josh Peacock: Right.
Andrea Hovel: Now, where people get in trouble is they don’t take it a step further and go, I need to know what is gap accounting. What is all these other things that become really confusing and overwhelming. So, I’m actually also a resource myself for business owners who maybe don’t have the resources or don’t need the time yet. I do private sessions where we walk you through how to do bookkeeping for yourself, right? And those are all a cart. We also do free consultations to get you set up if you want to pay to get set up. We have a quick system we put in place to get you set up in a little, maybe about a week. So, there’s all that to make sure that everything is correct because it comes down to your chart of accounts and if you don’t start off with a good chart of accounts, it can mess you up further tax years down the line, right? We don’t want you missing tax write offs. We don’t want you putting things in the wrong spot that then get you in trouble with the IRS when they do an audit 4 years later. So, make sure you understand what an asset, what a liability, and what equity really is and how your accounting software utilizes those accounts. So, when I make a deposit into an asset, it’s different than making it a deposit into sales. It’s treated differently tax wise.
Josh Peacock: Yeah.
Andrea Hovel: And so, it’s important to understand those things. Do your homework if you’re going to do this yourself.
Josh Peacock: Great. So, where can listeners find you if they want to work with you or they want to reach out and ask you questions?
Andrea Hovel: So, I’m at “HealthierBookkeeping.com” or you can call my office at 480-92309. Yeah, 934435 and I think you can book directly through my website. I’m revamping my website right now so I have to make sure my developers actually put that back in there. But you should be able to book directly through my website at “HealthierBookkeeping.com”.
Josh Peacock: Awesome. Thank you so much for coming on. I hope we can do this again sometime.
Andrea Hovel: Yeah, thank you.