Well, I made it. I have officially survived 5 years of being in business. I guess technically we didn’t open the studio doors until September, but someone had to find the location, build it out, and train everyone—and that process started months prior to our first day of operations. Wait, the studio didn’t just build itself and everyone didn’t just learn how to teach class the night before? Nope, sorry! There was a lot that went into opening, including writing some very large checks.
Last week, I renewed my franchise agreement with Pure Barre for my second 5-year term. I also renewed my lease. And neither of these things seemed like great accomplishments, despite the fact that according to the U.S. Small Business Administration and The Bureau of Labor Statistics, only half of all the small businesses that stated in May 2012 are still open today. So, how did I beat the odds? I could go on and on about how business success is all about great client services and offering an amazing client experience, and yes, those things are important. But fundamentally, there are 3 things that are required to make it to the 5-year mark in boutique fitness: you want to have reasonable rent, you have to properly manage inventory, and most important, you can’t do it alone.
Your Rent Must Be Reasonable
This one is tricky because when you are trying to find your location, you don’t really have control over how much the rent is. Or do you? It’s important to remember that everything is negotiable, including who pays for your buildout. As a new business owner, you’d like to keep as much cash as possible in your own pocket before you open and one way to do this is to have your landlord pay for all or part of your buildout. Not the best negotiator? Get yourself a great realtor and she’ll negotiate for you. You’ll have the most leverage to negotiate if you’re looking to sign a long-term lease of 5 years or more. My landlords have paid for all or a portion of the buildout for each of my studios and that allowed me to have more cash on hand before each business opened, which is always a good thing.
But how much should your rent be? If your rent is lower than 14% of your monthly budget, then you have a reasonable rent expense. Another way to look at it is how many days sales does it take for you to pay your rent? If it takes you longer than the first week of every month to meet your rent obligations, your rent is either too high or you need to increase sales, which leads us to the importance of properly managing inventory or more broadly properly managing cash flow.
You Must Properly Manage Inventory
According to the U.S. Small Business Administration, the number one reason small businesses fail is because they don’t properly manage cash flow. In my experience over these last 5 years, the only reason I’ve had cash flow issues (meaning, more cash is going out than coming in) is due to mismanagement of inventory, or buying too much retail merchandise. Often, it’s the timing of cash coming in vs. cash going out that puts me in a bind. That’s right! Even I have problems!
How does a cash crunch occur? First I have to pay for the retail merchandise (cost of goods sold). The clothing or accessories ship (usually from California, which is about 1 week via ground shipping). Then we have to enter everything into inventory (maybe an hour, maybe an afternoon). Then the merchandise gets sold which sometimes happens right away if the clothing is really cute or there is anticipation built up to purchase. But sometimes it could take as long as several weeks or a month. Do you see the issue here? I’ve already paid for the merchandise and by the time I sell it at a minimum I’m out that cash a week at the maximum over a month.
This is where cash management really plays a role in the financial success of my business. If I have to pay my bills with the revenues from clothing sales, I have to make sure it’s hitting my account in time. Also, my vendors are trying to manage their cash flow as well so they usually send me my orders at the end of the month ensuring that they get to book their revenue when they need it. This means I usually book the expense of buying the clothing in the month before I actually sell it. Tricky.
How do I make sure that I have enough cash to pay my obligations? I work to keep my reoccurring membership payments for classes equal to the amount of my payroll expense and my fixed expenses, which are the expenses I have all the time and won’t typically change, like rent, utilities, insurance or carpet cleaning. If I keep all monthly reoccurring payments equal to my most critical expenses, then I won’t run into a cash crunch when I’m purchasing clothing.
When I evaluate the financial performance of my business, I’m looking at how many clients I have on reoccurring memberships. I’m also looking at how fast we can turn our inventory. And I’m keeping a close eye on any expenses that are larger than usual or not typical each month. Evaluating each of these things ensures I am managing my cash flow and it stays positive. Because after all, cash is king. And I’m sure my employees wouldn’t be too keen on not getting paid or my landlords for that matter. Let’s delve into the final consideration, hiring a team to help you run your fitness studio.
You Can’t Do It Alone
You probably know a lot of people who mistakenly believe they are running businesses, but in fact, just own jobs. The simple fact is: if you are doing everything and nothing happens without your direct input, then you’ve not yet built a business.
It’s important to remember that most businesses all start in a very similar fashion. At the beginning of your business inception, all you have is an idea, a product or service, and you to sell it. In the beginning, it’s just you. Eventually, you’ll have to grow a team to replace yourself otherwise, you’ll risk hitting the maximum threshold of work that only one person can perform and probably physically exhaust yourself in the process.
In business school, hiring more employees to grow your business is called “scaling your company.” And don’t let anyone fool you. Scaling is just as risky as going into business in the first place. So why risk hiring employees? In the business of fitness, you don’t have a choice—you have to scale in order to survive. Let’s review the definition of a fitness business:
Definition of a Fitness Business
A fitness business is a commercial, profitable enterprise that can be run without you so you can be a role model in the health and fitness community you are creating.
There is absolutely no way that you can operate a fitness business, teach all the classes yourself, keep up with your clients, manage all of your finances, marketing and all the other daily activities required to keep your studio open without hiring employees.
There are no guarantees in small business ownership, but it seems your odds greatly improve getting to that 5-year mark by making sure you have a reasonable rent expense that doesn’t exceed 14% of your monthly sales, properly managing your inventory and cash flow and then finally, hiring a team of employees so you can be the leader of your fitness community and have time to think up the “big” ideas.
Did the last section just blow your mind with awesomeness? It’s an excerpt from my book! That’s right, I wrote a book. And it’s being published for release by the end of August, which is probably why I didn’t pop the cork on getting to 5 years in business. I’m just so jazzed about what lies ahead.
I’ll share the cover design with you as well as my thoughts on publishing in my next post on Thursday. Click on the right column to join my email list to get notified when the book is for sale (I hate spam, so no need to worry about your email being used for anything beyond great She’s On Her Toes information). On Friday, I’ll share with you a new tool I’ve been using to think up big ideas. Because, what’s the point of thinking small?!
Until then, stay on your toes!