Not all businesses will survive the first few challenging years – with one of the reasons for this being financial mismanagement.
To give your business the best shot at thriving, below are five common money traps and mistakes a new business owner can easily fall into, and ideas on how to avoid them.
1. Forgetting the Difference between Session Accruals & Actual Sessions
Selling a block of sessions will give you a sudden cash injection, but remember this is actually income that needs to be spread out over time.
Selling blocks of sessions can mean sudden wod of cash, but these are sessions are owed to clients.
There is a difference between accruals and actual sessions.
Say you have just sold a 10-pack of sessions – that money has to cover all your expenses for the next 10 weeks. Meaning, if you instantly spend it, what happens to the next nine weeks, when there’s no money in your pocket?
2. Not Living within your Means
When you are enthusiastic about your fitness business, it is tempting to rush out and purchase all the latest equipment and set yourself up with a professional-looking website, branding and merchandise.
However it is best to take a measured approach, carefully tracking your income and expenses, and budgeting for any new purchases based on what will give you the greatest return on investment (ROI).
Sure, that cutting-edge equipment may catch people’s attention, but even more important than that is building rock solid trainer-client relationships.
3. Neglecting to Create a Dedicated Tax Account
When you are a sole trader, tax is not automatically deducted from your salary as it is when you are on a payroll.
Instead, it is up to you to set it aside.
Make a habit of instantly taxing every payment you receive, and transferring the money into a separate account, which you do not touch.
This way, when it comes time to pay your tax, you will not have the stress of trying to cobble together money to pay a hefty bill.
If you are earning over the threshold for GST/VAT, consider creating a separate GST/VAT account too where you set aside the relevant percentage of your earnings.
4. A Short-Term Sales Mentality
Short-term class packs are fairly common in the fitness industry, but this price structure means you are constantly under pressure to re-sell.
Far better than that – for the financial stability of your business – is to sign clients up to a longer-term membership, whether it be annual or term-based.
Ideally, payments should be via direct debit, to ensure ongoing cash flow without the need for continual reselling.
Having most, or all, of your clients on a direct debit plan can smooth out your cash flow, meaning less big peaks and troughs throughout the year.
Organising your expenses, for example insurance, to ‘come around’ the same time each year can aid cash flow.
5. Skipping that ‘Rainy Day’ Fund
Clients can sometimes be unpredictable, cancelling last-minute or perhaps not renewing their membership as expected.
What is predictable, unfortunately, are bills such as rent, which need to be paid no matter if you are fully booked or not.
If you do not have a rainy day fund set aside, you will not have a buffer to fall back on if your income is reduced.
Even if you do not need to access it, after a year you might have accumulated enough to maybe put on another trainer or move from your home studio into a different premises.