Welcome to From Passion to Profit, where we talk about all things related to creating a successful health and fitness business that works for you, the owner as much as it does your clients. I'm your host, Nichola Page and in this episode, I'm going to talk to you about the profit first model, and how using this model allows you to see how profitable your business is, and can be. Now I use what I'm about to share myself in my own business, and I use it with my clients, especially when I first start working with them, I take the time to go through it. But let me just explain to you, give you a bit of context as to why for me, I believe this is the absolute crucial first step you should be taking in your business and why I do it with my clients in particular. So I came across this model a few years ago, after I had made the decision to close my first business. I had a training company, I was delivering level two, three and four fitness qualifications, it was all going really well, we grew to six figures in the first year revenue, we were delivering great quality service, and I had built a small team of tutors and assessors, we'd won a Business of the Year award and we were nominated for training provider awards. So on the outside, it looked great but there was a problem that only I knew about. Whilst the revenue was great, the profit was not. After I'd finished paying all the bills associated with the business and pay my team, it was actually very little left for me sometimes nothing at all left for me, once you look at the VAT that needed to come off, which was a real shock to me when that first happened. VAT tax everything else there were months where I actually couldn't pay myself anything at all. So I thought well look, if you just deliver more courses, let's put some more courses on the timetable, get more students in surely that's going to be okay. And then I thought, Okay, what if I could deliver more courses across the UK? Because I had people asking, can you come to this area, that area? So I thought, right, great, let's put some centres up some satellite centres up across the UK, in various different places, surely, that's gonna make a difference. And I can start earning a decent amount out of it. One of the main reasons why I set the business up in the first place so I would have that financial freedom. So I added more courses to the timetable. We opened up satellite centres across the UK. And yes, the revenue did go up. But so did the costs. What I'd actually done was I'd created myself an extremely underpaid job. I was now travelling across the UK, I had a team, I was completely stressed out. And I felt like I was I was a complete failure. I buried my head in the sand for such a long time. I was like, No, you've got you can make this work. You can't fail at this Nichola. But eventually it came to the point when I just couldn't do it anymore. So that led me to actually closing that business and telling my team was one of the worst feelings was the worst part of it. Because I'd I felt, you know, obviously, I love my team, they were amazing. But I personally felt responsible for them financially as well. The problem that I had was that my business model, the way it was set up, didn't have the capacity to give me what I wanted financially. Only I didn't know that at the time, I had no experience in doing any financial projections or cash flow management. I knew the training provider business is what I had done for somebody else for years. I loved the business hype, the absolute passion for what I was doing. We were delivering a great qualifications, great service. But when it came to all the finances, I had no clue what I was doing. The only time I really looked at the accounts was when my accountant gave me the reports, which was obviously after the fact. I looked in the bank account at the end of the month, it was crap, where's the money gone? And it wasn't until after I closed that business down, that I came across a book by a guy called Mike Michalowicz, which in the book is called profit first. And reading that book, it made me realise exactly where I'd gone wrong. Why my business, the way in which I'd set it up in the first place was doomed from the start. It didn't, it was never gonna give me what I wanted. And after reading that, I vowed that that is never going to happen to me again. I didn't know what I need you to know. And now I didn't know what I needed to know. And also what I wanted now was for my clients To avoid those mistakes that I had made, and that's why I use the profit first model with my clients, when I first started working with them, we we look at it, I assess the business, and it's why I'm sharing this with you today, I don't want you to make those mistakes that I made. So here is a typical scenario that I see. And maybe this is going to describe part or all of what your business life is like right now. But this is a typical day in the life Week, Month in the life of a small business owner. So money is coming into your business, you're probably selling your memberships, your packages, your programmes, whatever it is that you're selling, so you're getting some revenue coming in. Great. But equally, the money is going out just as fast your your costs, maybe you're overextending every week, maybe you're not even thinking about what you should or shouldn't be spending. So you're on this hamster wheel of, you got to generate more clients, you got to keep your clients happy, the money's got come in, and all the money's going back out, you're probably thinking, right, if we could just get some more leads more clients into the business, that's going to sort that out. If I just had more more hours in the day to do more that might that might fix is me is the I need to be doing more, that's what's going to give me make more profit in my business, that's what's going to make the business work. So it's a mixture of got to some more marketing, we've got to get more clients in, we've got to sell more, I've got to do more as the owner, or maybe if you've got a team they need to be doing more, is all about more, more more in some way, shape, or form. But what if the problem is actually that it's your business model, that it's the structure of the way you've got your business setup, it's not your forte, you just don't know what you don't know. If you have got like I did, I had a business model that was flawed from the start. I didn't know that. But it was flawed from the start. If that's where you're right, right now, throwing money into more marketing is not going to solve it. Getting better at closing sales, signing people up won't solve it, you need to know for sure, if your current business model could actually ever be more profitable, or give you the amount of money that you want out of it, whatever that may be for you. Looking at your numbers, the finances within your business is not particularly exciting for some people they dread it hate that bit. They say no, I'm not good at numbers, all of that. But it's so crucial for you to do. So let me talk to you about the profit first module itself, how its structured and how you could then take a fresh look at your business right now from a financial perspective. So you can see if it has the capacity to be more profitable, and ultimately to give you what you want or not. And if not, then at least you can start to look at okay, in its current format, it can't give me what I want. So what do I need to change? The premise of the profit first model is this. If you have a business where your annual revenue, so the total annual revenue or income, same thing is less than 250,000 pounds. So less than 250,000 pounds per year, then your operating costs. So this is all the costs that go out of your business, for whatever whether it's just the operating costs, whether it's your team, where it's whatever you whenever you're going to be investing in a marketing budget, everything, your costs should not be more than 30%. So if you are less than 250,000 pounds of revenue a year total, the amount going out should be no more than 30% of that coming in. Now, typically, when I first start working with a new business, and I do this kind of an audit on their finances, I will see that where they are at right now is that their operating costs is usually around between 70 and 85% costs going out so a long way away from the 30% which is the ideal. Now, that might be the true for you as well. When you look at this, all you've got to do is get what your costs are the total costs. You could you could just look at this as a snoot across a snapshot of say three months worth of your time. Total costs been for the last three months, what has your total income or revenue been for the last three months, you do your costs divided by your revenue, and that gives you the cost percentage. So you can do, you don't have to do it for the full year, the longer you can do it, the more accurate is gonna be. But if you were to look at your costs at cost percentage, and it was as high as I said, that I see typically, anything from 70% upwards, oftentimes it's closer to the 80 85%. If I'm honest, then you need to look at okay, what if I put more clients into the business? If I have more members on my memberships, if I had more clients signing up to packages? Would now my rent, have I got the space for that? Will the revenue now go up? Because if the revenue goes up, but your costs don't, if they can, if they stay the same, then obviously that cost percentage is going to come down. But you need to you need to be able to kind of assess that business, does he? Where is he at right now. And then if you were to fill the spaces that you have got, will your costs go up? Or would they stay the same, if they stay the same? That's great, because now you can fill more people in, which means you're bringing in more revenue into your business, which means your cost percentage is gonna come down. If however, like I had, every time I bought somebody new into my business, because I was a training provider, there was registration cost per student, they were sort of certification per student, it wasn't that I was just putting them into a course each individual had a higher cost associated with them. So every time I bought somebody new into the business, into the class into the courses, my costs will continue to go up. If you have a businesses that is like that, which I'm going to, I'm going to assume that let's say you're using a class model, if you're running classes that are not full to capacity, then you 100% need to be filling, and I'm focusing on filling those classes, because that means that your revenue can go up, but the costs, the percentage will start to come down. Because you're not paid. There's nothing really for you to pay per person that comes into that those existing classes. If you're running a timetable, or maybe you're doing personal training sessions, or you have got small group personal training sessions, and you think, well, the these, what I'm running at the moment are not full, but I need to just put more on to the timetable, I need to offer different days and times, that's what I need to feel, then if you're hiring somewhere somewhere or you're paying somebody to do deliver those your costs are gonna go up as the revenue comes in. But you won't know this unless you take time to actually look at it, to do the assessment of it, first and foremost, to see where it's at right now. And then to look at what's the capacity, the business has could the operating costs percentage start to come down, once you start to bring the revenue in. And if it does, and it gets close. So if you've got less than 250,000 pounds a year, you ideally want your cost percentage to be around the 30% mark, certainly no more than 40%. If you are between the 250 and 500,000 pounds a year, then you could your cost percentage will be higher. Because generally, when a business is bringing in a higher revenue around that there's usually more costs associated associated it with team. So for you, if that's your range 500,000 to 250,000 a year, then you're probably looking at cost percentage about 40 to 50% 50% maximum. So look at where your business is at now. And then what does it have the capacity to do? Once you start filling the slots that you've got available, whichever format you've got, if the numbers don't stack up, if that cost percentage does not come down, or it starts to go up. As your revenue goes up, you need to look at the module that you have got something needs to change, because whilst I focus heavily here on the cost percentage, what you have to remember is this. Out of the revenue you bring in, you've also got tax to pay. So there's a percentage that goes for tax on top of your costs. Then there is if you're VAT registered obviously you've got your VAT to pay, which can be a complete shock for people when that first happens if you are not already prepared for it. So that eats is All eating into the profit that's left for you, the business owner. So the more the higher your cost percentage plus the tax plus the vat, the less there is in the pot for you. And then for me, it's like what what's the point unless you unless you've got another form of revenue coming in, or you know, you absolutely do not need to pay any bills for whatever reason, and you're just doing this out of sheer love, your business is not going to be sustainable, the ideal scenario will be that you start to build the profit pop up, and that you actually have a reserve of three months worth of operating costs at any one time. That's the that's like the ultimate ideal goal to get to, you may be a million miles away from that right now, you may be just at the point where your business is just about covering the costs, and just about paying you a small salary. If that's where you're at, you've got to look at that model, does the model need to change, if he does need to change, change it now Don't bury your head in the sand like I did. If I knew what I know, now, back when I first set my that that training provider business up, I would have done things so differently, but I didn't. And I ended up falling out of love with it getting really despondent, feeling like a complete failure, shutting it down, and then finding out about this after the fact. So please, if you're at the point listening to this, where you the scenario I've described, and my my experience is similar to you've got to look at this. Now. If you're at the stage where actually you're you're paying yourself a decent salary, you're happy with that you're covering your costs. And your but there's not a lot that's left over in the business, still look at the model, start to build up that reserve. Because here's what happened for a lot of people when COVID hit, they didn't have a reserve. So their income dropped dramatically. To start with, yes, many of people in the fitness industry pivoted and went online. But that first initial part, a lot of people just froze, they didn't see it come in. And the reserves were not there. If you've got a particularly for you know, if you've got a bricks and mortar business, you've still got costs to pay, if you've got a team, they still want to be paid. So by having that reserve, the three months reserve that gives you breathing space, to make better informed decisions, rather than decisions out of fear. Because no great decisions have ever been made, when you're in that mode of panic and fear. So wherever you are at whatever stage of your business you are at right now, the prophet first model, go and read that book, if you want to read that book is a brilliant, but it's quite heavy, it is quite heavy. Once I actually read it several times, to really get my head around with it, round it and then to put it stop putting it into into action. But haven't read of the book, or at least listen to this again, and do the do the sums on your business. Where are you at? Do you have a profitable business model or not? It may not be profitable right now. But does it have the capacity to be one, if it doesn't change it is your business you can do with it whatever you want to you have the power, you have the choice to change it. You can look at the way you run your sessions. You can look at the way you want your operating costs. For me, like often I would do a kind of an audit of my costs, say once every quarter to see whether any of those could be removed? Do I still need them or that affect the quality of the delivery of the service? Or have I you know, have I overspent somewhere unnecessarily so but just look at your numbers. Because as I said, typically when I first start working with a new client, their cost is over 70%, sometimes higher, like the 85 90%. And what we've had done when we looked at it will go okay, right, this business for some not all, this business does not have the capacity to give you what you want financially. So we need to change it now. And then we explore ways to change it are the times when we look at it and go okay, the cost percentage is high right now. But if we focus on filling than getting the numbers in, this is what it can look like. So now we have a very clear map. We've just mapped out the actions we need to take on that business to get it to be more profitable, because a whilst money's not everything you need and deserve to be paid well from a business that you're running. But it's more than that. If Business is not profitable, that means it is not sustainable. And we want your business to be just sustainable. And for me as well, when it comes to it, whilst I appreciate numbers is not very exciting, they do not lie. They give you facts. In business, we can often make decisions based on how we feel about something. So we can be quite emotive, we make decisions, what we say is based on our gut, or whether we feel like this is the right thing to do, when it comes to what I'm talking about here have been a profitable business, you need to look at some facts. Yes, you can, you can go with what you then feel to be the right thing. But once you have the facts, and the numbers do not lie, they may be painful at first to see. But if you don't like what you see, but the great thing is, you now have the choices to do something about it. Do not whatever you do wait till you get to that stage, I would say that that stage was far, far more painful than taking some time to do this now. So I hope this episode has left you keen to look at your numbers. I won't necessarily say excited, although I have to say the more I I've done this over the years, the I love the numbers now. If somebody is hip to me 10 years ago, that you'll love numbers, I would like No, no way. It was not my thing. Now I love it because I I love to see the facts, and then look at the challenge of it. Okay, so what can we what can we do to improve that. So I hope that's left you feeling keen to look at your numbers. Once you know what they are, then you're going to be able to make strategic decisions based on facts, not just emotions, or not just on what other people have suggested that you do. You know, other coaches or mentors or friends that are in the industry, they may say, Oh, you need to do this, your business is your business. your revenue, your costs are your revenue, your costs. So you need to be doing things that are based on factually based on what's right for your business. If you've made it to the end of this session, then well done, because I know that numbers and finances not exciting. And if you are still listening, then would you do me a huge favour would you take a few minutes to just leave a review and share your biggest takeaways from this session. I'd love you to share what you what you got from this and and also if you put any of this into action, come back and share what you've done and how it's helped you. We want to inspire other people to do the same. And while you're there, don't forget to subscribe so you get notified of future episodes. So that's it from me. That's the profit first model. Do your numbers and I'll see you on the next episode. Bye for now.