This article is sponsored by The Fitness CPA
[Editors’ Note: This article was adapted from an article originally posted on March 19, 2020, on The Fitness CPA blog and updated on May 17, 2020. For more from this author, sign up for the 1 p.m. Eastern, May 20 town hall, "How To Manage Cash Flow, Navigate Government Regulations And Mitigate The Risk Of Bankruptcy During And After COVID-19.]
This is the first in a special COVID-19 series of blogs and videos to help our clients and other fitness business owners through these difficult times.
First and foremost, our heart goes out to all closed fitness facilities and most especially to all who are sick or have loved ones who have been affected by COVID-19. We are thinking of you and are here to help in any way that we can.
With this series, we hope to give you reliable information about COVID-19 that is unique to the fitness industry from a finance and government perspective. There’s certainly a lot of operational overlap for what to do in this downtime – how to talk to your staff, how to retain members and how to manage ongoing costs – but with this series, we will focus on the effects of COVID-19 from an accountant’s perspective, which may be unique to other fitness industry support or consulting concepts out there.
Stay Optimistic, But Realistic
We will take a page from our Motivational Monday posts and say, “We all grow through adversity.” And we are absolutely going to make it through this. Through difficult times there is opportunity to be found, and we’re going to help you find those opportunities.
But we would be remiss if we didn’t recognize that there will be some studios, some fitness instructors and some business owners who have been lifelong fitness advocates who aren’t going to make it through the other side of this without, unfortunately, closing their business.
We hope to prevent that and support you through this time. But we want to be realistic in our recommendations and will continue to be a source of pragmatism throughout these tough times.
Several municipalities have begun allowing fitness business to reopen often under certain restrictions. This may give a false sense of hope that there is a light at the end of the tunnel within 30 days’ time.
Prediction: However, we personally believe that fitness business owners should prepare for the lingering effects of coronavirus through spring 2021, 12 months from now.
Throughout these next tough weeks and months, we’re going to focus on bringing you content from different areas and across multiple topics. As it is a developing story, we want to insert that we reserve the right to change our opinions as facts develop, depending on future and ever-changing developments.
Prediction: Landlords have been and continue to be leery of rent abatement requests. However, as time goes on and as the reality of the epidemic has become clearer (to all but the most stubborn), landlords, lenders and credit card companies are offering more flexibility and understanding. One thing is certain, landlords will see vacancies, businesses will close, and as they do, most landlords will need their tenants more than ever.
Today we’re talking cash flow, and what you need to do to preserve and retain it for yourselves through these difficult times.
Cash Flow or What’s Left of It
The big elephant in the room is what happens if we don’t have enough money?
Cash flow is essentially the money in your bank account and how it flows in from your revenues and out to pay your expenses. If you don’t have enough money in the bank to pay your expenses, you can get in quite the pickle.
To meet demands when expenses are greater than revenues, business owners have to decide to either:
- not pay bills
- wait for more income to come in
- wait to pay bills
We’re going to see revenue numbers drop substantially over the coming weeks, if they haven’t already done so. That’s obvious during a time of closures, quarantines, and member cancellations. The reality in the fitness industry is that revenues never exceed expenses by large margins under normal circumstances, so a 10% or 20% drop in revenue can drastically affect our bottom line.
Strategies to Conserving Cash
When we say cash flow – we don’t mean stuffing dollar bills under your mattress. We just mean keeping enough money in your checking account to be able to pay for your critical expenses, such as rent or payroll (no, not toilet paper – that’ll come later in our post). These are the expenses you can’t put on a credit card if need be.
Action Item: Our recommendation is that you retain as much cash as possible in your business and personal lives.
Even if you don’t need an abatement on any of these items and you have plenty of cash stockpiled, we still recommend that you take the actions below to preserve your cash flow now, so that however long this may last, you will be able to cover your critical expenses should the time come.
So, let’s talk about where we can cut to retain more cash.
The biggest expense on everyone’s minds right now is rent. We’re going to show you what rent abatement looks like and how to go about it. Our full rent abatement guide and downloadable script are available now.
Right now, landlords are not sure how to handle this unprecedented time either.
Prediction: Landlords will almost certainly be wary to initial requests. However, as time has gone on and the reality of the epidemic becomes clearer, most landlords, lenders and credit card companies are offering more flexibility and understanding. Most landlords will need their tenants more than ever, too.
Action Item: We urge you to negotiate a rent abatement, deferral or moratorium, if you haven’t done so already, and turn off any auto pays until you get that rental abatement request. At first, we’re just going to look for an initial one-month abatement or deferral, and then reassess.
Just like rent payments, you are going to request an initial one-month abatement or deferral, and then reassess. This goes for your personal loans too – mortgage, car payments, etc. Call your lender for a deferral period. Many loans have a provision for a 90 day (three month) abatement that we’ve had clients already approved for. And principle and interest on SBA loans are being paid automatically by the government for six months. This is a huge win for fitness owners with an SBA-backed loan. Stay tuned as we have a dedicated blog and video to cover loans and lenders.
Prediction: There will be interest and loan abatements granted by almost every lender.
Action Item: Talk to lenders and request a deferral.
Credit cards are easier to manage as you can push off full payments and only make the minimum payment for now. Credit cards can help individuals and businesses throughout this difficult time though rates may be slightly higher than other sources of capital. For now, use your credit card to charge expenses in order to free up as much cash as you can in your checking account. (This goes for your personal credit card and personal checking account as well).
You may possibly incur interest charges down the road, but interest rates have fallen slightly, and if you can refinance into another debt instrument later, there should be very low interest periods to help people through these difficult times.
Action Item: Preserve your checking account as much as possible. Have your credit card balance grow and continue to only make the minimum payment.
What other expenses can you cut? We need to say: payroll must be paid to staff no matter what. You must pay your employees during this difficult time. As much as we would love for you to retain that cash flow, payroll still needs to be paid to employees and on the normal timely schedule. We’ve even seen some of our clients pay early and that’s very nice of them during these troubled times.
Action Item: Pretty much every expense besides insurance and payroll of critical staff should be cut. There are exceptions, but they are few and far between.
Aside from payroll and insurance, we’re advocating that the bar starts at zero and you add necessary expenses back in incrementally as you go.
If you’re still operating virtually, you are going to continue to have operating expenses, however, much less than before. You may be bringing in some revenue and you may have some payroll costs, but you still want to start at zero and then calculate your new restricted budget.
We will have a video taking you through this process in the upcoming weeks. In the meantime, you can go ahead and get started on your own by reviewing each line in your bank statement or your accountant’s general ledger. (A general ledger is a list of expenses that’s categorized by each of your expense accounts.)
Action Item: Review all of last month’s expenses. Literally go down line by line, cross off all expenses that you don’t absolutely need. This should be most all of them.
If you’re one of our clients, please feel free to meet with us. Drop us an email and we can go through your expense ledger line by line.
Stay tuned for more information
At the end of the day, most fitness businesses will make it through these trying times. If you’ve read this far, chances are that you are the type of business owner that is going to make it through to the other side.
Prediction: With the right optimism and outgoing spirit, along with taking the right action and not viewing from the sidelines, you are going to come out of this and be better for it.
Stay tuned for additions to our COVID-19 series or visit our COVID-19 Resource Hub. We’re going to cover several topics in the coming weeks including:
- Rent Abatement: How to save yourself from bankruptcy
- What about my employees and instructors?
- What government bailout is best for my fitness business?
- Explain the Paycheck Protection Program to me.
- Paycheck Protection Program Q&A #1
- Government Bailouts, PPP & EIDL Q&A #2
- Line by line expense review. What to cut?
- After COVID-19: Preparing for Reopen
- But what about now?
As always, if you have additional concerns or need to speak one on one, please reach out to our team here.
Follow our emails and YouTube channel in the next coming days and please share with any other business owner who might find this helpful.
We’re here for you and will continue to do our best to keep you informed over the next coming weeks.
Eric Killian is a CPA and founder of The Fitness CPA. Fitness is a big part of who he is. Maintaining a healthy lifestyle, eating well (mostly paleo), hiking, backpacking, mountaineering, practicing yoga and Crossfit are all important cornerstones of life. But Kiillian also loves ice cream and cookies too much to say no. He enjoys helping owners make sense of their business and finding ways to grow it. It’s an honor to help you see situations, scenarios and opportunities from all sides so you can make informed decisions.