Financial mismanagement is a key cause for small business failure. According to Investopedia, almost half of the entrepreneurs who had a small business fail, said lack of funding or working capital was the reason. Digging a bit deeper, small business owners usually mess up financially for two main reasons:
- Not staying current with their business’s financial state. Not having day-to-day clarity on your gym’s key financial metrics (e.g. cash flow, how much money you’ve collected, how much money you’re owed, how much money you owe to staff, vendors, etc.) and trend lines (e.g. how much money you bring in vs. how much you spend on various things from month to month) is the easiest way to mismanage your budget, overspend, and leave money on the table. Using a gym management software package that provides a detailed financial management dashboard is vital for you as a gym owner to have immediate visibility into the state of your gym’s finances.
- Trying to figure out your best financing options on your own. Stop being the lone ranger. There are wise and more experienced people out there who can help you figure this finance stuff out with less effort. Go seek advice and guidance from financial professionals, including your attorney, tax advisor, and financial planner. Expert assistance is out there — use it!
We want to give you a foundation from which to research options and have valuable conversations with your financial advisors. Let’s discuss how to finance your start-up, managing cash flow, and how to track and analyze your gym’s financial health.
Where to look for start-up capital
As a budding small business owner, you have multiple options for finding startup capital. Indeed, you’ll likely use a mixture of resources to put together the initial funds.
- Self-financing: Talk with your personal and business financial advisors to determine how much personal cash would be cost-effective for you to invest in your new gym. For example, they may well advise against incurring tax penalties by cashing out your retirement funds to finance the gym and offer you some alternative ideas.
- Asking family and friends: People have mixed thoughts on asking for business loans or investment from family or friends. You can explore both sides of the question here and here.
- Bank loans: Depending on your personal financial health and credit rating, you may be able to get a bank loan on good terms. The Small Business Administration runs loan programs with particularly advantageous terms. SBA programs also come with extra assistance and mentoring that as a new small business owner you may find helpful.
- Hard-money lenders: Hard-money lenders, also called alternative finance companies, are private entities that make business loans. They are not banks, so they aren’t regulated like banks. That means they can process loan applications and release approved funds faster than banks. It also means they aren’t subject to the consumer protection laws that regulate banks. If a bank won’t give you a loan due to bad or poor credit, a hard-money lender may be an option. Understand that a hard-money loan will always be more expensive than a bank loan. Furthermore, many won’t provide startup funds, only working capital to an on-going concern.
- Getting creative: Here’s how one new dance studio owner started a “Founder’s Club” to raise $60,000 in startup funding. She then used it to secure a bank loan for additional startup capital. There are other loans and investment instruments that a community-focused business can use from local investing opportunity networks (LIONs) to digital fundraising platforms.
The availability of startup capital doesn’t mean you should borrow every cent you can get. Borrowing money costs money. Setup a realistic budget, look for a variety of funding sources, and don’t borrow more than you need.
Managing cash flow and getting past the bumps in the road
Of small businesses that fail, 82% of them identify poor cash flow management as the cause.
Simply put, cash flow is the status of how much money you have coming in each month compared against how much money you need to spend each month. Managing your cash flow is the best way to limit what you may need to borrow to keep your gym’s doors open. Some keys to managing cash flow include:
- Not overextending your business
- Using tools like automated monthly billing and automated late payment reminders to ensure incoming revenue
- Keeping an eagle-eye on every expenditure made with your gym’s funds
- Staying on top of financial trend lines so you can avoid or minimize any upcoming shortfalls
You can also seek a revolving line of credit to help cover operating costs from banks, credit unions, alternative finance companies, or business credit cards.
However, you don’t want to stay in a cycle of having to borrow money just to keep your doors open. Your startup financial plan should have set timelines for breaking even and starting to turn a profit. If your gym isn’t trending towards those targets, you need to revisit your financial assumptions and management. Getting a bridge loan is a band-aid, not a solution.
Tracking and understanding your gym’s financial status
As the owner of a children’s gym, you have two main sources of financial information.
- Know how to read the three critical financial statements you need consult on a monthly basis: your gym’s balance sheet, profit & loss statement, and your cash flow statement.
- On a daily basis, you should review the status of key financial metrics such as actual income, income trends, past-due (or “aged”) accounts, actual student churn (new signups less leaving students), student churn trends, actual expenses compared to budgeted costs. The easiest and most accurate why to do your daily financial checkup is to use a gym software management solution that provides a visual, detailed snapshot of your gym’s finances.
Your gym can’t grow until it’s financially stable
No business can sustain itself without sound financial management. Borrowing to raise startup funds is expected. Needing to bridge operating capital early on is also not unusual. However, relying on borrowed financing is no way to grow your children’s gym into your full vision. Your goal should be to get to a place where get your gym’s finances are sufficiently stable to allow you access low-cost loans or investments to fund your gym’s expansion, not daily operating costs!