5 steps to save your business from disaster
If an injury or accident rendered you incapable of training clients, how would your PT business survive? By taking a little time to plan, and following five simple steps, you can protect yourself from the unknown, writes Donna Hutchinson.
Picture the scenario: you are an independent contractor and have been successfully running your own show for a few years. You don’t have a studio yet, but you have enough clients to keep you as busy as you want to be and you’re earning enough money to meet your financial commitments. Two months ago you started putting money into a savings account and you’re thinking about opening a studio of your own soon because business is going so well. You feel you are in a perfect position to take the next step in growing your business.
But then, disaster strikes. You are involved in a car accident, you become ill or you injure your back while spotting a client. The cause of the disaster is irrelevant; it’s the result that’s going to bring your world crashing to a halt. Suddenly you can’t train your clients anymore. You start dipping into your savings, but since you only just began putting money aside you only have two months of funds put aside. After that money is gone, you have no idea where your income will come from.
You don’t have any insurance because you never thought about paying into a plan. You’re single so you don’t have the safety net of a partner to help you out. Your once-viable business starts to crumble as clients look for another trainer to keep them going.
You ask yourself; ‘What happened? How did things get so bad so fast?’ That’s a good question to be asking – it’s just too bad you’re asking it after the disaster has occurred. Now you’re scrambling to figure out what you are going to do next.
OK – back to the here and now. Hopefully you have not found yourself in the position outlined above, which means there’s still time to prevent this disaster from occurring in the first place. And hopefully you won’t get into a car accident, suffer a major illness or get injured on the job – but ‘hope’ is not enough. Let 2012 be the year in which you back things up with some strategic planning to cover yourself and your business in case of emergency.
As a personal trainer, you only make money when you are training clients. As soon as something prevents you from doing so, you may quickly find yourself in financial distress. As a business coach I see this all the time, with both new and veteran trainers. It’s like gambling with house insurance. Sure, your house may never burn down, but what if it does? Paying insurance premiums will allow you to start over without the same financial hardship. It’s the same with personal training – you need to create your own safety net. Even if you have a partner to lean on, it’s unfair to ask them to bear your financial burden just because you didn’t do a better job of planning for a rainy day.
As soon as you decide you are going to run your own personal training business you need to consider how you will protect yourself against hard times. Most trainers operate as sole traders and work alone. They haven’t hired other trainers to help them out, so they have essentially created jobs for themselves instead of starting a business. If these trainers had been working for someone else as an employee prior to starting their own businesses, they most likely received benefits and didn’t have to worry about insurance – paid sick days and automatic deductions took care of everything. This could be one reason why, when trainers strike out on their own, they don’t think about this aspect of their business. Or perhaps they don’t realise that self-employed people can obtain similar benefits packages for themselves at a reasonable cost.
So, how can you protect yourself? Here are five things you should do the minute you decide to be your own boss.
- Save a percentage of your revenue from day one
- Pay into an insurance and pension plan
- Do not overspend
- Pay off any credit card debt
- Ensure you have cash flow no matter what.
Let me start by saying that if your personal finances are a mess, your business finances will be too. If this is the case, get some help right away. Hire an accountant to set up your books and create business and personal budgets. Stick to your budget like your life depends on it, because it just might. I’m not exaggerating – this is very important. I learnt this lesson the hard way. It took me three tries to get it right and cost me a lot of money because I didn’t follow these five steps. But once I did, my business was solid and I stopped worrying about slow months or what to do if something should happen to me.
1. Save a percentage of your revenue from day one
Whenever a client pays you, put ten per cent into a high interest savings account immediately and don’t touch it. When the account reaches $2,000, ask an investment advisor for some short-term, high-interest investment suggestions. You might be tempted to dip into this savings account when a nice pair of shoes catches your eye or a much-needed vacation opportunity pops up. Don’t do it. Save and forget about it. This is your future and your safety net. Think long-term; otherwise, you will turn into the eighty-year-old personal trainer who has to train instead of one who wants to train.
According to Robert Luft, senior investment advisor and director of the Private Client Group, DWM Securities Inc., ‘I would recommend keeping three to six months’ living expenses in cash in your bank account. If you don’t trust yourself not to spend it, put it in an account at ING or something similar. After you build up a cash reserve, then start to allocate to longer term investments.’
2. Pay into an insurance plan
Many plans that provide medical and dental insurance, and insurance against loss of work due to illness or accident, are available for entrepreneurs. Look into purchasing a plan right away. The premiums you pay will be worth it if anything happens, and they may be tax deductible. According to Luft; ‘A pension plan member will contribute close to seven per cent of their earnings, with the employer matching: this is fourteen per cent of earnings. For people without a pension plan, I would advise at least this amount be set aside for long term goals. Allocate another ten per cent for short term goals and live on seventy-five per cent of your after-tax income.’ Trainers who are sole traders would also be well advised to allocate a percentage (around 15 to 20 per cent) of every dollar earned to the ATO. By doing so, you will avoid being faced with a large tax bill at the end of the financial year.
3. Do not overspend
It’s easy to overspend. If you have a budget you will know where every dime you earn should go. If you aren’t skilled at creating budgets, hire some help to get you started. If you aren’t skilled at following a budget, it’s time to grow up. You’re running a business and you need to get serious about ensuring you have enough cash flow to keep your business afloat. Luft suggests; ‘Build up an emergency reserve fund: keep detailed records of your expenses (not a shoebox). Once you have a cash cushion you are comfortable with, determine your short and long term goals and allocate to them monthly. This way you can ‘plan to save and spend what is left’. If you don’t do this, nothing will be left month to month, and you will accumulate no assets.’
4. Pay off any credit card debt
How many credit cards do you have? How many of those cards are at or near their limit? How much interest are you paying on those cards every month? Why did you get into debt with your credit cards in the first place?
I do not have a great relationship with credit cards. I love to shop and spend money. At one point I had over $15,000 in credit card debt and paid that off using my home equity. Then I ran up the card and once again had to dip into my home equity. I guess I was a slow learner, because after the third time I got a serious talking-to by my husband. I had to face the fact that I had a spending problem. So once we paid off the cards for the third time I cancelled all but two of them. One card was for business and had a $1,000 limit. The other card had a $7,000 limit. I called the credit card company and asked to have the limit reduced to $2,500. While they didn’t seem happy about it, they lowered it.
This keeps my card use under control. I also pay my card off as soon as I use it. If I don’t have the money then I don’t buy. It’s that simple. Well, now it’s that simple, but it took me a while to learn this lesson. So now I’m passing this lesson on to you. Pay off your credit card debt. If you can’t be responsible with your credit cards then I suggest you cut them up, lower your limit and only have one.
5. Make cash flow king
I recently attended a conference at which the speaker, Kevin O’Leary, stated ‘Cash flow is king’. It hit me like a ton of bricks. ‘Without cash flow your business is dead’ he said. He is right – if your business does not have adequate and consistent cash flow, you are dead in the water.
The best way to ensure the cash flows like an endless river is to attract, retain and provide exceptional customer service and to treat your clients as if they were royalty. Your clients are your lifeblood: without them you have no business, so do whatever you can to show your appreciation. When they reward you with their money, save it, hoard it and protect it, because it’s the future of your business.
Luft suggests, ‘Start building a relationship with the loans officer at a bank. Apply for a line of credit. As your income grows, consistently ask for more credit. Do not use this credit for personal consumption: the goal should be to use this as your future working capital account.’
It’s a difficult subject to contemplate, but it’s time to take your head out of the sand and start thinking about what you would do if you were rendered incapable of working. How would you survive financially, and for how long? What are you doing right now to put a plan into action to protect yourself?
As trainers we want to help people, but we also want to run profitable businesses. It’s not a bad thing to make money – it’s only bad when you squander it without thinking about the consequences, so be wise and put some aside. Hey, if nothing bad happens and you don’t need to support yourself in hard times, that’s great. Your prudence will have set you up to invest in that studio you’ve always wanted.
Donna is a fitness business coach and author of the How To Guide To Starting Your Own Personal Training Business and The How To Guide To Growing Your Own Personal Training Business. She has over eighteen years’ industry experience and travels the world speaking to audiences about how to grow and develop their businesses. You can contact Donna at www.edgefit.ca