By Ken Andrukow, TwoBrain Mentor
A funny thing happens as your business grows…so do your costs, both fixed and variable. You sign a new team to a training contract and you need to invest in 10 new rowers. Your PT is growing every month, and you think it is a good time to increase square footage. This can become a slippery slope. To make the right choices at the right time, you need to ensure you understand your margins.
Profit margin is a metric that helps to assess efficiency in running a business. While overall costs influence the net profit margin, variable costs are a specific determinant of gross profit margin. Variable costs are the cost of goods sold — for instance labor costs or material costs — and are different from fixed operating costs of running a business. By controlling variable costs you can achieve a higher gross profit margin and, therefore, in a more profitable business.
As Mike Michalowicz writes in “Profit First”:
“The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit.
It is simple, logical and clear. Unfortunately, it doesn’t give you the total picture. The formula, while logically accurate, does not account for human behavior. In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check to check survival.
Sales – Expenses = Profit
Sales – Profit = Expenses
With Profit First you to flip your focus to Sales – Profit = Expenses. Logically the math is the same, but from the standpoint of the entrepreneur’s behaviour it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.”
Understanding this accounting principle will help you protect your margins when you are making decisions about equipment purchases or hiring. (Variable expenses) In forums I often see gym owners asking what equipment they should spend their profits on. What they should be asking is how they can maintain a profit. It cannot be overstated, profits are the lifeblood of your business. without them you will not be able to pay yourself. Focusing on these principles will ensure your business can make money.