Profit First for Microgyms - John Briggs

So just the formula. And then sales minus profit equals expenses, meaning I'm going to first determine what I should pay myself, what type of profit I should have. And then based on what's left over, I'm going to force myself, I'm going to give myself this arbitrarily lower number that I can now need to run my gym on. It really, it's crazy. I've been done profit first in my own business for three years. You figure out how to make your business work on the smaller scale.

This is your host, Eric Meltone. Episode number 149, I talked to John Briggs. So John is coming out with a new book, uh, Profit First for Micro Gyms. And if you don't know what Profit First is, uh, it's an accounting system originally uh originally originated by Michael McCallowitz in his book, Profit First. And it's it's widely applicable to any type of company. And I think if there's one thing that a lot of small business owners don't know or aren't privy to, it's how to deal with the money. How to put profit first. Get it? That's the title. How to put that first so that you're paying yourselves and you're optimizing the business and keeping it healthy as possible. It really comes down to simple habits of how you deal with your money and rules that you put on the business that you're not overspending in certain areas. And they've come down to a very, very specific formula. My personal experience with profit first has been amazing. I implemented it with my gyms and uh saved me a lot of money, increased my profit margin quite a bit. And uh I use it for a lot of other things. I mean, just the principles in general for personal use uh for my family and I, it's it's it's great. So a lot of great nuggets here. John specifically is moving this uh system into micro gyms, so boutique gyms, CrossFit gyms, things like that. He's part owner of a CrossFit gym, so he walks the lock for sure. And uh you're gonna learn a lot. And you know, a lot of uh of this comes down to the money mindset of gym owners and uh the problems that they face. So it's not just a money thing, right? Money is just a symptom of a problem. So you'll get a lot out of this. I sure did. Um love talking to John, he's a great night, great guy, really nice guy. So before we get into it, this episode is brought to you by Level 5 Mentors. Uh I am happy and excited, thrilled actually to be part of Level 5 Mentors in business coaching and mentoring entrepreneurs. Uh, it's a great pleasure of mine. I love getting people unstuck uh and moving towards their ideal lifestyle and business, uh, because that's what I do on a daily basis. I'm always striving for it. Um, it never ends, and it's it's a lot of fun. So go to level five mentors, and if you do feel stuck, or maybe you just want to get some kind of gauge, some kind of metric of how you're doing as an entrepreneur, we do have an assessment out there. Um you can go click on it, and uh I believe it's about eight questions, and it'll give you really, really good insights. And once you do that, uh go ahead and schedule a call and uh we'll chat with you and see where you're at and see uh what kind of problems you're facing and how we can help you get unstuck. So level5mentors.com, L-E-V-E-L, number five mentors.com. Without further ado, this is episode number 149 with John Briggs. Enjoy the show. And we're live. Mr. John Briggs, welcome.

Thank you. Glad to be here.

Yeah, man. Um, excited to have you. And uh let's see, you and I probably crossed paths like years ago, but we we've now been chatting more frequently due to the uh the Slack community data, Lead Gym Insiders. So there's a plug for that, LeadGymInsiders.com. Yeah. You always offer um a ton of value in the conversations that take place in there. And I think uh, you know, I'm excited to talk about what you're up to and and profit first and all those things. But maybe we just start off, John. Just give us your story, man. Kind of give us your background.

Okay. Um, well, I graduated from BYU with a master's degree in tax and actually decided to take a job in a door-to-door industry outside of right outside of college. And that company, um, man, they made $30 million in the same year they declared bankruptcy. Yeah. Okay. And we'll we could potentially get into that conversation um after I share my background. It's a great story about Parkinson's law.

Okay.

Um, because I was going down, I decided, well, I have this master's degree in tax, I've interned it Deloitte. I should probably get back into that. So I got back into it. And then a whole bunch of other stuff happened. I eventually found myself on my own, having the need to put food on the table as my own tax uh professional and solopreneur. Um, and then it just it kind of grew from there. I during that process, I came across the pumpkin plan written by Mike and Calowitz, which actually was what introduced me to Profit First, which I'm we're gonna talk a lot about that probably on here. But the pumpkin plan was awesome because it teaches you how to identify your top clients and how to duplicate them. But at the time, I didn't even know what my top clients were. So I did his analysis. Mike always provides amazing tools in his books. And I realized, wow, I have a lot of microgym clients that are amazing. I like working with them, they respect what I'm asking them to do when it comes to taxes. They're not like doctors or lawyers where sometimes they know so much that they can't possibly take advice from somebody else.

Right.

Like, man, I won't duplicate these guys. So we started down that road, and the more I got down that rabbit hole, I realized there's a lot of just their experiences that I wasn't familiar with. And so, like most people would do, you buy into a CrossFit gym just to get the experience, and that's what I did. Um, so yeah, last year I bought into the gym that I was going to because I saw the signs uh that I've seen in our hundreds of clients. I'm like, hey, I think you might be going out of business. I don't know anything about your numbers, but just guessing because I don't see you doing any of the things you need to do to stay in business. And instead of him telling, instead of the owner telling me, dude, go screw yourself. Like, who are you, Mr. Member, who doesn't ever get to first place in any of the wads, anyways? Who are you to tell me how to run my gym? So we but instead he said, Why don't we go to lunch? And uh we went to lunch, and at lunch he actually said, I'm you're right, I'm not making money, and I've tried to sell it a couple times. I need I need help. I need someone to help light the fire back inside of me. And uh so we took it from there, and I've been an owner for a year. It's been a very interesting ride. Uh, we've been implementing Profit Firsts, but man, I can tell you the insight that I've been able now to provide to my team members that I'm getting on the gym owner side has really helped our services just we're we're so much better now than we were last year, just because of this experience. So that's I mean, that's probably a roundabout background for me.

Yeah, yeah, it's excellent. I'd be curious because you know, I presume before gym owners you've worked with a lot, you mentioned you've worked with a lot of different professionals, right? Yep. How is the gym business now that you're in it, right? Like you got in it. Now you're in it. You're like knee deep, right?

If not waist over my head, whatever you want to say.

I'm just saying it all a nice way, you know, as far as in the gym business. Uh how does it differ? How are the challenges different than let's say, like a dentist or you know, um an attorney or something like that? How is the gym business different?

Um the biggest difference I have seen is that because fitness can appear simple, everybody, everybody and their brother thinks they know how to run a fitness business. A dentist isn't gonna have one of their patients come to them and say, Hey, I think you need to do this in your practice. A lawyer is not gonna get that. I've never gotten that as a tax professional. Someone just saying, like, hey, I really think uh maybe you should change the schedule your schedule. Yet as a gym owner, and maybe because you're just so involved on a day-to-day basis where these other professionals you only see umce or twice a year. Wow, the opinions that gym members have, it's it's sometimes hard to filter through uh the loud minority. And uh that's that's been the biggest difference. There's a lot more drama involved than I ever thought would be possible. Because before being a gym owner, we're dealing with their financial statements. We're like, we can tell you from the numbers, you need another revenue source. You don't sell nutrition, you need to add nutrition, you don't offer pure personal training, you need to sell personal training. Your margins are terrible, you're paying your coaches too much, your rent expenses, like we can do all that stuff, wouldn't we been able to do that? But you never realized until getting into it that by telling someone, hey, you need to add another revenue stream, you might actually have 50 members that get pissed off that you're trying to add another revenue stream. Or one of ours, which when I first bought in, probably a common mistake. We had an unlimited package, and the previous owners, unlimited meant everything. Yoga classes, Oli, they paid the one fee they could do whatever the hell they wanted. I'm like, you're you're losing a ton of money here on these sessions for this expert coach for this specialty program because you're not charging for it. And so we got away, we got rid of that. We even had members who never attended the other sessions tell us how devalued their membership now was because we took away classes that they never had actually attended in the last year, anyways, and then we were gonna start charging extra for it. You don't get that experience unless you've been in it to so now, like when we give advice to gym owners, we let them know we understand what this means and we understand it's not gonna be a one-week fix, but you shouldn't really consider it because from a financial, financially fit standpoint, the financially fit gyms are able to do this. And if you want to be financially fit, then you need to consider it.

Yeah. It's a really good point you brought up because you know, in the microgym in the CrossFit world, you are equal parts community manager and leader, an equal part business person, right? And it presents a lot of unique challenges. I mean, it's great in so many ways. Like you have if you have a great community, I miss my community in Santa Barbara all the time, right? Do I miss those moments where you get pulled aside by someone and they're like, you know, I noticed that you're running six-week challenges and it just doesn't feel the same anymore. And uh like, well, God, you know, I apologize that you don't feel the same way anymore. Uh my bank account feels much differently than you do. Um, and so does my grocery bill, right? And and like it's it's it's an interesting thing. And and people, I think there's an assumption that you have to martyr yourself as a gym owner within the CrossFit community or the the micro gym community. I'm not gonna blame too much on CrossFit, but it's it's just true. And uh, you know, everyone has access to you, right? Like we were always running events, like there's always an event. Um, I can't imagine my wife was always um not impressed with how many times I'm like, well, I I would love to, but you know, there's a one of our it's someone's birthday from the gym. Like, really? You know, that was supposed to be our night. I'm like, yeah, well, yeah, right. So there's a lot that goes into it, and I think it's an interesting thing is the emotional people aspect of running a community is um, you know, I I I relate it, I'll probably maybe someone will get mad at me for saying this, but I relate it to like being a um like a religious community leader, like a priest or a pastor or something like that, right? Where it's it's very similar, you have like a flock of people that you're responsible for, right? Yeah, everybody has an opinion. So um, yeah, a lot of armchair, a lot of armchair quarterbacking for lack of a better term.

Yeah, that's a great term, I think. Uh the gym owner space that other industries don't deal with. We have the complaint. Um, because of course, if you ask for feedback the wrong way, you also um get the wrong type of feedback and you get the loud minority responding, right? And we did that. We we did a couple experiments, and the way we requested feedback just was stupid. But some of them were like, well, the gym owners just they're not around enough. And I'm thinking literally since the day I bought in, either myself, my business partner, or both of us have been at every single event that the gym has put on. Like, we can't sit, we're not gonna sit in the gym 12 hours a day for every session. We're not gonna work out on every session. But yep, no, we weren't, we just were not present enough.

Yeah, yeah.

Can't win.

Yeah, it's it's the thing that the thing I heard the most that that eventually uh I just tuned out because I heard so much was, well, you know, it just doesn't feel the same. You know, you're not there anymore. It doesn't feel the same. Um, and that that happened when I pulled myself off the schedule completely, you know, about year four or five, and um just did, you know, a couple classes and taught that. And everyone's like, well, it just doesn't feel the same, you know, without you and and Traber, you know, coaching classes as much. And yeah, interesting. Let's get I want to get back to this, what you mentioned in the beginning, um, about working with a $30 million company that went bankrupt. Okay.

Yeah.

Give us some details on how is that possible? When what are, yeah, talk to me.

Well, let me let me paint this scenario. I'm I'm sitting in my office, and the president of the company, at the time I was the controller, which, if you don't know, that's like the head accountant. Um, I'm sitting in my office as the controller, and the president comes running in and he's totally out of breath, and he's like, dude, you won't believe this, but you got to close your doors and don't let anyone know that you're here today. What are you talking about? We're accountants. It was myself and two other accountants. I mean, pretty low-key position. You expecting the mafia? I mean, what kind of trouble do you get yourself into? It's like, well, all those checks that we just handed out. Um, I'm like the checks from this company retreat. So at the end of every year with the door-to-door sales company, we have this big event and they give the back-end checks. So most sales reps will get paid some sort of stipend over the course of the summer, and then they reconcile at the end. And those who did really well get big checks. So we had handed out 30,000, 20,000. I mean, one guy got like $70,000 like in one check because how well they produced during the summer. It's like all those checks we just sent out, they're gonna bounce. And when all those sales reps come back in for you to recut the checks, those are gonna bounce too because the owner didn't get the million-dollar loan that he'd been working on. Like, okay. And it's one of those moments where you hear them talking, or you like you kind of take a step out of your body and you're like watching the scene. Yeah, you're like, I can't even comprehend what you're saying, is the stupidest thing I've ever heard in my life. Because in my mind, I backtracked to six months prior when I sat down with them and I showed them this image of this super sexy spreadsheet, and I laid out for them hey, for every sell that we get with all of our expenses, we're keeping eight dollars. So eight hundred dollars in revenue, we actually get to use eight dollars of that for future growth. Wow, that's a terrible margin. And I don't, I think in every industry. And they're like, dude, you're so paranoid. Like, no, look, there's this new, there's this new thing sweeping the business community, and they're calling it a budget. And I think we need to implement that. And they're like, dude, John, you're so paranoid, we're just gonna sell more. Like, if you just sell, you're only making eight dollars per sell. Why anyway? So it was like one of those least satisfying, I told you so, moments of my life. But I'm like, now do you believe me that we need a budget? But the sad part was is that now I'm out of a job, and so were hundreds of other people because this Nimrod couldn't run a company. And I mean, it's crazy to think on a $30 million business, it it sometimes isn't that hard to acquire another million-dollar loan. But in this case, the company was so leveraged that no one was gonna touch it. And yeah, so the paychecks bounced and sales reps went to competing companies, and uh yeah, they uh the company was forced into bankruptcy.

Yeah. Wow. So there's there's a lot of interesting lessons that I think we can parlay there, right? Um, you know, I think first of all, when when you look at at micro gyms, what's what's the target profit margin that you deem as minimum health?

Minimum health? Uh man, if you're not above 10%, you're screwed.

Okay.

But we've found financially, so as part of writing the book, I spent a lot of time researching financially fit gym, which I classified as I was willing to talk to them if their net income was 20% or higher. And so just to clarify for those who may not, they hear some of these terms and sometimes we assume they know it. Net income is total revenue minus all your expenses. Um, that's your net income. Not the quite the same thing as profit from cash flow. Um, so uh just to make sure we're not combining terms, profit is basically if I look at all the cash that comes in, and then I look at all the cash that goes out, what cash is left over? That's the simple way we look at profit. Um, that's what the profit first method is based on. Net income is slightly different. Um, you can't have cash leading the business. It's not technically an expense based on accounting things. But anyway, so we looked at companies that were 20% or more, and we actually found 30 to 35 percent um is is like the elite level. If the if a micro gym is running out of 30 to 35 percent net income or higher, they're crushing it. They should be very proud of themselves.

Yeah, yeah, that's awesome. I mean, I um, you know, the another thing that was interesting to me is I think a lot of gyms don't, I know I don't think, I know a lot of gyms don't know their numbers as well as they should. Not shocking to you, I'm sure, to hear me say that. Um, but also, you know, I think there's a a a great, you know, percentage of people who are like, well, you know, I think my numbers are around here, but you know, there's not as much left in the bank account every month as I'd like. So I just need more members. Just need more members.

Just need 10 more members or just 10 more members, I'll be set.

Yeah. Yeah. So where where do we start? Right? Let's give let's give that situation. And I can talk about my personal experience with with Profit First, which was amazing. I mean, you know, the first thing I did, um actually my wife came in and she started cleaning up the books and helping me out. She didn't know anything, but we just kind of talked about the plan and she's so good with numbers and spreadsheets. Um sexy spreadsheets, by the way. It's really funny. Uh and we the first thing we did is we went and I think we did hire a Profit First consultant, and we just got rid of all we looked at all of the monthly recurring expenses.

Yep.

That was about sixteen hundred dollars a month that I got back. Right. Yep. That I was like, okay, we could stop there and I'm happy. Right. But then we kept going and we kept going and looking at different things. And um sometimes it resulted in uncomfortable situations or uncomfortable conversations with people and staff, but these are things that just needed to happen for the business to get you know on the right path. And you know, I think by the time I sold, I was at a 23% profit margin, which is great. It was great. Um, you know, everything worked out well, the story ended well. But you know, over nine years of gym ownership, you're gonna go through through highs and lows, right? Seasonalities and learning mistakes and all those things because there is no book written on how to do this whole micro gym thing yet, right? So where where do we start? Like where is where do you start with people?

What's the well I would let me first say I think there's no magic one starting point. My advice is if someone is feeling the the cash like that they're bleeding cash, yeah. Pick the idea that sounds the least intrusive, the easiest for them to do. Um, one thing um I've heard is this idea that success precedes motivation. And I really like that concept. Um, and so let's give ourselves a little bit of success. Two-brain. Um, I'm a big fan of two-brain, and they talk about bright spots, and it's like give yourself a bright spot. So, like where you started, analyzing your expenses could be a great place to start. Um, it I mean, another great place to start is to actually figure out where you are bleeding cash. Uh so for example, we have a free five-day challenge we offer to gym owners, and it's taken this idea of let's analyze the cash flow and financial health of your business. We broke it up into five digestible chunks that should take no more than like 10 minutes a day, break it up into five days, and by the end of the fifth day, you've effectively given yourself an analysis and you can see, oh, I'm overpaying myself or I'm not paying myself enough, which means I'm spending too much over here on my operating expenses. I'm not saving enough for taxes. I've never I thought of this idea of giving myself a profit distribution. So I need like you can start on any one of those aspects. Um, but yeah, if if you want to get into it, I'm happy to share a couple. Tips that everyone can potentially do with cutting expenses, at least. Sure. Um it you're gonna want to schedule out some time because if you're not in love with your like numbers and accounting, this may feel like a hero watch or some hour-long workout, or by the end you want to lay on the ground and cry a little bit. But you'll feel good just like you do after a great workout. So you want to start with your bank statements and credit card statements and really look at the last 12 months. And there's a couple things you can do. You want to go through it and start putting circles around any expenses that are for team members' pay, that are recurring expenses, and um expenses you feel like are critical to staying in business. Uh, when it comes to that analysis, I like to tell people don't worry about these terms you might have heard, such as variable expenses or fixed cost, those kind of weird accounting terms. I want you to think about your expenses in the sense of is it productive for my gym or business or is it not productive? Does it improve my clients' experience? Does it increase my cash flow? Does it lead to immediate profit? Does it save, does it support systems that my members enjoy? Those are productive. If it doesn't fit those criteria, then you need to consider cutting it. And it's likely when you're talking about the 1600 bucks you found per month, you probably went through the same thing, like, oh my gosh, I this is duplicate expense here. I don't need this. Um, this I'm not actually utilizing this full service. Oh, there's a free service for the one part that I'm utilizing. I'm thinking right now with Zen Planner, we have Zen Planner in our gym. I'm so tired of how hard it is to get accurate data from their super convenient, customizable reports. I'm like, really, at this point, Zen Planner is serving as our attendance check-in. That's it.

Yeah.

Because they can't rely on the data, any other data in there.

No.

And it is super expensive to use as a merchant processing like shopping cart thing as well, because they force you to use Pay Simple, which doesn't give you the best rates, you know?

No.

Right. So that type of analysis would lead me to okay, I need my members to be able to check in. I need to check for these reports, but can I do this for less money? Um, and I don't know, maybe you had some ex some of these experiences when you analyzed your expenses.

For sure. I mean, um, I think merchant processing fees is something that no one really pays attention to until you pay attention to it. And then it's gonna A, piss you off. And B, you're gonna want to start looking immediately for ways to save yourself, you know, hundreds, if not much more, every month, right? It's depending on how much you're billing. Um, you know, I'm billing anywhere between 30 and 50 grand a month, and you you start taking percentages of that, oof, man, it's it's a lot of money. And I mean, going back, like if I'm working with someone who's developing an amazing CRM because one of the reasons is a lot of the stuff, almost all the day-to-day redundant activities are automated through his software. It presides a great client experience, but also the billing is so simple. The reporting is so easy, right? It's all done through Stripe, and it has a very, very small percentage that you actually pay. And the things like you're talking about, like how do we get good reporting? Reporting made no sense with any of them. I did Zen Planner, Wattify, um, mind body, uh, front desk. I did all of this and I tried them all because you know, I was like, the only thing I want was good, reliable reporting. And it just made no sense. I'm like, why am I $27,000 this month? And then it shoots up to $46,000 the next month, right? Like, how does that happen? I would call they're like, oh, we don't really know. Okay, great.

We don't know.

Well, can you find out your paying $350 a month, right? And I think the other thing I looked into is how can I um I saved a lot of money on insurance, right? Um, I got I went out and got a couple competitive insurance quotes. So you can shop a lot of this stuff around. You can shop out merchant processing, like here's what I have now. Can you beat it? Right. And those are some of the big areas was insurance, merchant processing, um vendor supplies. Yes. Yep. Um, and then also looking at stuff like how much inventory am I keeping on the shelf when it comes to retail, right? Is that necessary? Like, what are my margins on it? Am I actually tracking my retail? Like, do I know how much I'm actually selling? Uh, these are all things that were big epiphanies for me. But I think, yeah, the insurance, like any any major cost that you have that can be shopped around competitively, do it, right? Because people want your business. Uh, so that that was some of the epiphanies. I mean, I had many, but that was some of the big ones.

Yeah, no, and that and that's what kind of and analyzing your expenses are gonna help you realize because we just most micro gym owners are busy trying to grow their gym community, yes, improve the experience for their members. They're not taking the time and setting aside to do the stuff because honestly, it's not appealing. Uh, okay, should I sit down and look at 12 months of statements or talk to Susie? Sure. Hey, Susie, how's it going? How are things? You know?

Yeah.

But any little excuse that you can come up with, that's gonna take precedent over generally. Um, you know, most gym owners are gonna generally not want to do that.

Well, I think it's how you how you portray it. I looked at it, I was like, okay, I'm gonna sit down for the next hour or two hours and see if I can make myself an extra 500 bucks every month. That was it. I was like, okay, now I'm motivated, right? That's my that's my grocery money, right? That's my car payment. That's a lot of things. That's worth, you know. So um I think that that's uh it's an excellent place to start. So okay, so we've looked at our bank statements, we looked at our credit card statements, we're looking for our all kinds of expenses that may be reoccurring or unnecessary. What next?

Um, well, once you do that, then uh you obviously want to cut the expenses you absolutely don't need. Cut them. And then the other ones, then it's the question of can I get this for free or for less money somewhere else? So maybe switching your CRM. That could, I mean, we What of Fi raised their prices when I just bought it at the gym, so they were switching over to Zen Planner. That was saving us some money because both of them have their problems and you just kind of pick your poison at this point. Um uh yeah, so just all those different things like Spotify, Pandora, how many music subscription softwares are you paying for? Um, but it honestly it's kind of that simple. Now, if someone is super bleeding, we do uh the Prophet First book kind of suggests that uh the extreme is to cancel all your credit cards and get new numbers issued. Because then those vendors who you owe money to, they're gonna call you. You do not need to worry about that. They will let you know that you owe them money, but it let it forces you to slow down and make the decision with every single transaction. Obviously, you're gonna pay these people because you committed to it, but it could ask, it could help you stop and say, Hey, you know what, I'm gonna pay this bill, but I don't actually need your services going forward. Thank you. And cancel that service. So it if someone's super bleeding, that is one of the extreme methods that does work. Um yeah, it but it it's really it's not rocket science, it's just a matter of taking the time. I mean, everyone, every gym owner I've ever met is capable of doing this. Yeah.

You know, it's it's interesting too. Um there's a lot of emotion behind this type of process too. Because I think, you know, you look at, you know, I talk about vanity metrics all the time. What's your top end revenue? How many members do you have? And you know, being in a a gym, I think we at most we had 265 members, right? And then, you know, as right before selling, we were right around 180. And my life at 180 was way better than 265. My profit, my amount of profit was the same, my margin was bigger. Um, my, you know, average client value is much bigger. But it's it took an emotional process for me to go through and be like, okay, yeah, I have these massive numbers that I tell everyone I have 265 members, but am I actually doing well? Right. Do I even want to know? Like, you know, like there's an emotional aspect to it because in in one mind, you're you're so trained to think, like, well, I'm doing great. I've got 265 members and I'm X amount top-end revenue, but I know in your gut, you know something's not right because the numbers aren't adding up. Your bank account seems a little thin at times, right? So getting past that emotional aspect, okay, I actually got to rip the band-aid here and see what's going on.

Yeah. And there's another component as well that we found when you sit down and look at your expenses, you're basically telling yourself you made a bad decision.

Yeah.

If there's an expense you find you're gonna cut, because you committed to that and thought at one point, this is a good idea. And now you're realizing this was not a good idea. And there's that element too, where you're now battling internally to try to, I mean, you have to tell yourself, yep, I did make a mistake. And that's okay. I can move past it. But I don't need to hide from that. I don't need to stick my head in the sand and pretend like I haven't made financial mistakes. I can just accept it, fix it, move on.

Yeah, awesome, man. So once you get, you know, your expenses somewhat under control, maybe you get you know stabilized in your business, you start to understand like what your metrics are, um, what your you know, real metrics are profit, right? What other metrics do you have, people? What are some of the KPIs you recommend?

Um, so key performance indicators, KPIs. Uh, we it kind of depends on the stage of business that they're in. Um, but we do like average revenue per member as a baseline. Um we think looking at rent as a percentage of income is important.

Okay.

I mean, overall, uh, we also look at team member expense. Um, what we've found in studying these elite gyms, if the gym's team member expense, so that and when I say team member, I'm talking about all coaches and if they have additional support, like a front desk attendant or some of these joy girls, joy boys, whatever those are positions are called. Yeah. The full gamut of all team members. If that's 44% of revenue, you're okay, you're doing fine. You don't have to kill yourself. If you're above 44%, you really need to work hard to get it to 44%. But the elite gyms, they're they're down to 35%, 30 to 35% of their revenue, team member expense. So it's possible to get down that low. Um, but those are some revenues that we we like to look at at some times. But here's the beauty of one of the reasons why I'm so in love with Profit First is because sometimes we get caught up in oversophisticating. And I see these people who are adding, well, I have this KPI and I'm tracking it this often. But what does that tell you? Like that that's acting sometimes they're tracking numbers that are actually the result of multiple other things going on, and so it's not really giving them good information. Profit first, the system is effectively designed as you look at the income that comes into your gym twice, and you do this twice a month, which is what we recommend. Sit down every 15 days, income comes in. Now I'm gonna take that income and I'm gonna allocate it to different purposes right now, instead of doing the typical thing of income comes in, I'm gonna spend money. And when I get to paying myself or payroll comes around, oh, I sure hope money's there. So this is like you're much more proactive and purposeful with the income before you even think about spending the money. And so to some degree, though these are KPIs, because if you check and the money in your profit account continues to increase, that's a good metric. If the bank balance in my owner's pay actually is going up, that's a good, I mean, that means I'm I'm winning. And so we recommend splitting up your income in a variety of different buckets. A lot of people have heard of the envelope method. Maybe our grandparents used it, but that's really what Mike McAllowitz did with the system, is he said, let's create envelopes, but let's just do them as bank accounts. So income comes in, I have one income account as the bank account, and then I'm gonna put a percentage into team member expense, a profit account, owner's pay account because I need to make sure I'm getting paid or I'm gonna get burnt out. And that doesn't do my community any good if I'm burnt out. Um, tax, you're gonna have to pay the piper at some point, you might as well save it up over the course of the year. Equipment, and then operating expenses. And we recommend doing that twice a month. And that's um, you know, the the idea of this uh eating uh smaller meals. I mean, I know that there's I guess new data that maybe says that that's not good, but I think if most people broke up their bigger meals into smaller meals, they're gonna be healthier.

Sure.

Uh like a bear versus a horse. I mean, you look at the bear, he hibernates, comes out, eats a gigantic meal, hibernates again. Sure, strong, powerful, but pretty round. Look at a horse who grazes, there a horse is ripped, shredded, like it's really lean. It's the same concept here with our money. We want to sit down and think about these things much more frequently, but in smaller doses, so that we don't burn ourselves out. Um, anyway, so yeah, we recommend putting it into those different envelopes. And in fact, I mentioned that five-day challenge, um, we suggest based on the information that they put in as they do the homework each day, they the analysis will give them the percentages to put into those various accounts.

Right on. So I know you have a you have a book coming out, which is going to explain all of this in fine detail, I have no doubt. But when you look at um the classical accounting systems and what profit first is, you know, let's maybe take a step back. What's the big differentiator in profit first versus like a classical accounting system?

Yeah, so um since the beginning of time, it seems like, um, Adam and Eve came out with this formula: sales minus expenses equals profit. It's been this formula that's literally been around Mesopotamia, ancient Egypt, like thousands and thousands of years. No one's ever challenged it, no one's ever looked at it. Some um, I think he was a friar, Luca Pastioli or something, he created the double entry accounting method. And literally that's what every accounting book has been based on ever since. And it's the same format if someone actually were familiar with what their profit and loss looked like. You have income at the top, subtract the expenses, and you have profit left over. Profit first says the the problem with that is that you're focusing on the wrong thing, right? The idea is that you're focusing on expenses and profit becomes an afterthought. So just flip the formula. Same formula, same numbers, but now it's sales minus profit equals expenses, meaning I'm gonna first determine what I should pay myself, what type of profit I should have. Then, based on what's left over, I'm gonna force myself, gonna give myself this arbitrarily lower number that I now need to run my gym on. And amazingly enough, humans have found out that they are very creative when forced into those situations. You're just proactively forcing yourself in that scenario. And it it really, it's crazy. I've done profit first in my own business for three years. Um, maybe you have some experience with it as well. But yeah, you figure out how to make your business work on the smaller expense number.

Yeah. Yeah. Well, it goes with life in general, too. It's like your your life, your expenses go up and down with whatever your earnings are, right? And as an entrepreneur, like my earnings go up and down all the time. And luckily, I have a wife who's very sane, right? She's like, no, this is our expenses for the month. Because if it was up to me, like, you know, we're always renting new places because we're always moving and nomadic. And if it was up to me, like if I had a good month, we're like, hey, guess what? Next month we're staying in a freaking mansion. She'd be like, no, no, we're gonna stick to the same budget every month, right? And if you do that, it's just life's a lot easier. And you just get used to like, well, no, that's my cap. That's what I get. That's all I get to use. That's it.

Yeah. Well, you just described as Parkinson's law, right? So the supply will always meet the demand. So, like, actually, if you think about the $30 million business that I worked for, what happened was because they were focusing on it, their expenses always expanded to match the cash available to spend.

Yeah.

And that's what happens with most of our behaviors, unless we have a system like this where we're purposefully setting aside the money ahead of time and then not allowing those expenses to expand into the available cash, because we've already said this cash isn't available anymore because it's for our specific purposes.

Nice. Nice. So, okay, so sales, profit. And generally the the target is what, 33% is what you want for ideal for profit?

Yeah, I mean, I think everyone should be working towards 33%. Absolutely.

So that leaves the remaining percentage for expenses. Okay, so we've kind of established, you know, some of those numbers. What's what's like now give us a little more meat? Like, how does the process actually work? I mean, we had talked about you know, starting with the bank account and the statements, but you know, we have different bank accounts, right? Um, for each particular bucket or whatever you want to call it. Um, what are other some of the major details that that go into profit first?

Um, surprisingly enough, it is almost that simple. Uh, you have you make sure that your merchant processing and your checks, like it all goes into one income bank account. You then set up these other five accounts with your bank, five or six accounts. And then once a month, you're going to sit down, you're going to analyze what is the cash that came in in the last 15 days, and you'll have your percentages. And so let's say your owner's pay percentage is 20% of the cash that came in. I'm going to take 20% of what's deposited in my income account, I'm going to put it in my owner's pay account. Maybe my tax percentage is 3%. I'm going to take 3% of that, I'm going to put in tax. And you look, so you're moving these different percentages and actually doing the transfers uh twice a month into these various accounts. The remainder from the income account goes into your operating expense account. And now you, when you need to spend money, you look at the different accounts you have for the different purposes. Um but that I mean that's really where that's the bread and butter of the profit first system. You just have to figure out your percentages and you do it.

Yeah, you just do it, right? Just get discipline. Uh, random question for you. Where do you think is one, what are some of the best states to, from a tax perspective, to own a gym?

The best states?

Yeah, from a tax perspective, if you had to take a wild guess. Not California, right? Not California. Yeah. Okay.

For sure. Uh they actually passed a law that basically said we don't acknowledge independent contractors anymore. And so even if your coach was a legit independent contractor, California's gonna force you to pay them W-2, which is now an additional 15%. That happened late last year.

Oh, that's brutal.

A Supreme Court case, yeah, it's really brutal. Um, Texas is pretty good because most micro gyms are under a million dollars in revenue. And so they'll avoid the franchise tax and they don't have any state income tax. Um, so from a tax standpoint, that's good. Florida doesn't have any state tax either. Um, and and we haven't had any two weird rules. The the weirdest rule in Florida that I found is that they charge sales tax on rental income. So if you're one of those gym owners who are doing really well and you even bought your space, Florida actually will make you charge sales tax if you have them in two separate entities, which is a really smart idea liability-wise. I have my building over here on one hand, and then I have my gym over here. I want to keep those liabilities separate. And so by gym will pay rent, just like it's a landlord. In Florida, even though you're an owner, they're gonna make you charge sales tax on that. It's really stupid. That's the only weird rule. So Florida's the only one where we're like, you need to talk to attorney, make sure you have liability protection, but we want to figure out how you're not actually paying rent, you're just paying off your loan.

Yeah. Um, but yeah, those are some ideas. What about and what about NEs? I mean, I always had traditionally, I've always had an S-corp. Do you have any preference on those?

We do. For gym owners, S Corps is more often than not the best scenario. Um, there are Tennessee and California, sometimes based on the revenue that they're making, it might not make sense based on the franchise taxes that um, which is a franchise tax is really just the state saying, even though So you're also going to pay income tax on this personally. We're also going to charge you an additional business tax because we wrote it into law and we want to. That's really what a franchise tax is. So there's weird scenarios, but I would say for 95% of gym owners, we recommend the S Corp. And the main reason is because of this differentiation between what the tax code calls passive income versus ordinary income. And ordinary income, which is the type of revenue owning a gym and getting gym membership fees would be classified as in the tax code. Ordinary income has the self-employment tax component tied to it, meaning it's a self-employment income. And so you pay your income tax, but then you also pay this 15.3% tax on top of that. The S-Corp is the best entity that allows you to minimize that 15.3% self-employment tax hit. And that's why we like that. That's not to say partnerships can't work.

Awesome. Yeah, I just open a personal S Corp just for all things because I just know how beneficial it is. I mean, I'm not going to talk about my taxes, but it did pretty well for most years, you know, with taxes.

Um we even recommend if your coaches make a certain amount of money and they're independent contractors, they should also have their own S-corp.

Yeah, sure.

Let them take advantage of the same tax rules that all these other big businesses get to take advantage of, especially after tax reform. Um after 2018 tax reform, W-2 employees can't write off, unless they're military, they can't write off expenses they incur for their employment. And guess what? Coaches are probably buying supplements so they can stay fit and not soar from all the work of coaching. Uh, they're probably buying workout attire, they're probably driving to the gym. They probably have a cell phone so they can be in contact with members and the owner, the GM. All of those are potential business expenses. As a W2 employee, they do not get to claim those anywhere anymore.

Yeah. If they write programming, they have a home office. Right?

Yep.

Yeah, that's very crazy. What about international? Um, do you work with a lot of international clients as well?

We don't. Yeah. Uh we're pri we're US based. We we can help people if they have international income. Obviously, we can make sure that's filed the right way on their US-based tax return, but no, we don't we don't do any foreign tax returns.

Interesting, man. Yeah. So tell us about your book.

Okay. It's uh it's called Profit First for Micro Gyms. And in case anyone's asking, yes, Mike Mikalowitz knows that I wrote the book.

He's gonna try to sneak that one by.

I mean, there was a post when I first mentioned it, and one guy responded, you know, sometimes those they're those people who just can't help but be dicks. It's like, uh, does Mike know that you're like taking his concept? Like, actually, he's the one who recommended I write the book.

Yeah.

Yeah, yeah. He's very aware. Um, it is a derivative book of his original Profit First, but it's written specifically for the micro gym owner because there are tweaks that they need to make. The numbers from Mike's analysis, he didn't look at micro gyms for the percentages. And so that's why there was a need for a different book. Um, it the publication day is January 7th. You can actually pre-order it now, but um, the main point of the book obviously is following the profit first system. But one thing that I found working with, we currently have 280 active CrossFit clients. We've added 100 in the last year. I imagine we're gonna continue with that trend. Um, and micro gyms across the board. But uh a lot of times the gym owner, there's this hesitation when we start talking to them. They know they need more money, they know they can't continue on the way it is. But deep down, that margram syndrome you mentioned earlier on, that's a real thing. And there's this aspect of health and fitness, and what we do as micro gym owners in the fitness industry literally changes humanity. People, we can we can fix the medical system, the insurance system if everybody were more fit. Like so many elements of humanity improve and change. And sometimes, because it's such a noble outcome, they have a hard time accepting that they deserve to make money off of it. But the truth is, everyone's members, they're asking you to be profitable, right? They're not asking you necessarily to say, hey, I want you to rake, you know, overcharge me and you know take all my money, but they're saying, I want you to be able to focus on my experience. I want you to be able to improve the gym so that my experience continues to improve as well. You can't do that without profitability. And so the underlying main message of the book is that gym owners deserve to be profitable, even though the outcome of what you do is noble, doesn't take away from the fact that the value you're creating and you need to receive that value back in the form of profitability. Because guess what? All the gym owners who didn't who like suffered through the martyrdom syndrome and never convinced themselves they deserve to be profitable, they're not in business anymore. They're not changing lives anymore. You need profit to be able to continue to change lives, simple enough.

Yeah, that's that's fantastic. We should have led with that, that whole pump up speech right there. That was awesome. And it's so true, man. I can't agree more. I think uh, you know, you mentioned about such a noble outcome. Because, you know, and it's just not Jim Owners. I mean, we can we can branch this out and say a large percentage of the the fitness population or the fitness professional population is um you know considering so with Mart because, you know, within the fitness industry, uh I I've interviewed 500 people within the fitness industry in the last two years. Asking people all the time why they get into it, I just really want to help people. You know, I got out of my corporate job because I hated it and I found fitness because I get to help people, I get to change lives, right? And that's awesome. I mean, it shows a it says a lot about an industry overall that people really want to help, right? But then you dig in a little bit deeper and you're like, yeah, but Eric, I'm freaking broke. Like, I don't think I can do this anymore. Like, oh, okay. Yeah, well, let's talk about the numbers. Like, you deserve to make money. You can make six figures in this and be happy and have greater energy and deal, build a team, and all these things. So, you know, I I think your message hopefully resonates with some people because it's a really powerful one. Yeah, thanks. Awesome, man. Um, well, thank you. Thank you for coming on. Believe it or not, we just blasted through like almost 50 minutes of of chatting about uh really sexy accounting. Sexy accounting.

People don't get it. But once you do, it's like that is sexy.

Sorry, new hashtag. Awesome, man. Well, John, thank you so much for coming on. And uh, where do people find you and your book?

Um, so the book you can go to profitfirst for microgyms.com.

Okay.

Um, you can also find it on, we'll have a link on our website, insighttax.com. Um yeah, if anyone wants to reach out to me with questions of anything we talked about, uh John at insighttax.com is the best email right now. But yeah, I appreciate you having me on. I thank you very much.

Yeah, it's absolutely my pleasure. Ladies and gentlemen, John Briggs. Hey fitness fans, don't leave yet. It's your host, Eric Malzone, and I have a quick favor to ask. Actually, three favors. So, number one, if you're a fan of our show, I asked you to do something that takes under three minutes. Go to iTunes, please, and subscribe to our show. Please, please, please. It means so much to us, it's so important. And then give us a favorable review. We would really, really appreciate it. And uh, I can't tell you how much it means and helps us out. So I know it takes two minutes of your day, and uh it means a lot to us. So please do that. Number two, go to our YouTube channel, our fitness marketing alliance, and uh please subscribe to our YouTube channel there. Number three, if you like this episode or any of the episodes that we've released, share it on social. That's huge, that's a big deal for us, and we put a lot of work into these episodes uh trying to give you great actionable content uh for the fitness industry. So that would mean a lot. And that's it. So we have some big plans coming up for this show. I'll be talking about that in the next couple episodes. But thank you so much for listening. It means so much. And uh if you have any questions, please reach out to me. I love to hear from everybody. Eric, E R I C at Fitness MarketingAlliance.com