Critical Mass or Critical Mess?

“The cash flow statement is often the most interesting and at the same time the least understood part of your monthly financial reports…”
-Luella Schmidt, CPA, Fine Point Consulting in Madison, WI

I’m sure you’ve heard the expression, “Cash is King.”  If you haven’t, well, then I think I may have just done you a favor.  It’s a simple truth and in today’s current economic climate, I think those words ring as true as the liberty bell.  Because all of that money you had on paper in your 401K account?  Well, like I said, “Cash is King!”

Here’s another example…a client pays me $300 cash for a month of semi-private training, and I have two choices.  Take it to the bank where it becomes a number on a statement and earns interest (more money), or put it in my pocket, walk down to the local coffee shop and buy my friends a latte and a piece of marble bread.  Tip the barista, flip a 50 cent piece into the homeless guy’s coffee can, buy a newspaper in the machine, and save the rest for a rainy day at the bookstore.

Not all of those activities require cold hard cash, but about half of them do.

So what’s the point?

There’s nothing like a little cash in your pocket and in your bank account, and it will act like a magnet for more if you can manage it’s elusiveness, and understand exactly how it relates to your profit and loss statement and your balance sheet.  Cash is easy to spend, and can blow away in a good breeze if your money clip’s not on tight.  So hold on, there really is a lesson in all of this that even I’m only beginning to understand…my own private MBA program.

There are self-proclaimed experts in the fitness business that have ideas about how you should think about the early growth of your business, and what you can expect might happen in your first year or two.  The term they like to use is “Critical Mass.”  It refers to their naive belief that even though you might be spending aggressively, and in fact in excess of what you are actually earning each month in your fitness business, you will become solvent in the long run once you reach the magic land of critical mass.

In other words, it’s OK that you spent the 10K that came in this month in personal training sales already, even though you haven’t delivered those services to the client yet. Because assuming you spent it on business growth opportunities, your business will continue to grow, and another 10K in sales will come in again this month.  Only now, you have to spend twice as much time to deliver those services.  Do you see what’s happening here?

Eventually, these experts promise, you have a solid staff in place and they are delivering those services for you.  You can spend more of your precious time finding more clients and making more sales.  After all, you have more overhead in your payroll department now and someone has to pay that bill…

Can you see the problem with this unfounded, vague and unsupported philosophy?  I’ll bet you can.  I only hope it didn’t take you as long as it did me.

What you end up with instead of critical mass is a critical mess.  A monthly race in which you are always in last place, trying to catch the leader out on a cross country trail that you’ve never run before, gasping for breath and unable to see anything except the ground in front of you with any real clarity.  No matter what you do, you’re always one new trainer, one new client, and one $5 bill short of a financial statement that you can sleep with at night. If you’re reading them at all.

Tonight at my board meeting (yes, I now have an advisory board for my fitness business now.  One of the best things I’ve done for my business, ever) I reviewed with my accountant and other board members in attendance a 30 page financial report that provides a clear picture of exactly how healthy my business is right now.  A full report on how much of that cash I have laying around, and how much I can actually use this month to buy another piece of that marble bread from Starbucks I like so much.

I’m happy to report that in spite of tough economic times, mistakes on my part, and a little too much spending in 2008, we are in good shape and I’ve never been more clear about the numbers of my business, the bedrock.  This is important for many reasons that I will begin to communicate in future posts.

For now, I’ll spare you the details and instead bring you back to that statement I started with,

“The cash flow statement is often the most interesting and at the same time the least understood part of your monthly financial reports…”

My guess is that you might not even know what I’m talking about and that’s OK, because that’s the point.  And for those that do know, you are aware that the cash flow statement is only one of many reports you should be looking at each month in your fitness business.  And if you’re not, hold on, because you’re in for one helluva ride very soon.  Trust me, I’m just now returning from mine, and it will be nice to remove that seat belt that fit so tight for awhile.  It was beginning to constrict my vision.

“Know your numbers!”  And if you don’t, get to know them and get plenty of help.  It will become one of those life lessons that pays dividends forever, in your business, your personal life, and probably both.  It will make you a KING (or Queen)!

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