By now you know we are huge fans of Profit First. Yet, we still meet people who haven’t read it. If that’s you, STOP right now and go read that first!
K…now that’s out of the way.
We’ve spent the last three years working with Mike (yes, I’m on a first name basis with the author of Profit First), customizing Profit First implementations for fitness businesses, mostly microgyms and yoga studios.
One question we get asked a LOT is…what are materials and subcontractors in this industry?
For those of you who didn’t stop as told above, or as a reminder for those of you who read the book years ago, in the book, Mike (I still have monthly coaching calls with him) defines materials as the stuff required to manufacture your product or those purchased strictly for resale in your retail store.
Subcontractors are people who work for you on a project basis and have the ability to work autonomously and for others. They are not on payroll; they are paid a project fee, commission or hourly rate and they handle their taxes, benefits, etc. themselves.
Mike also says the only time these expenses matter in your Profit First implementation is when they are greater than 25% of your top line revenue. (Don’t know what that is? Seriously – go read the book!)
So, what does all this mean for you? Usually, nothing! We reverse the order we look at these definitions. Use your cost of retail purchases and commissions, if it’s less than 25% of your Top Line Revenue, leave those costs in Operating Expenses and move on.
Now, here’s the part that may hurt a little, if the cost of the retails goods you purchase for resale in the retail area of your studio is greater than 25% of your Top Line Revenue, you have a retail store with a side yoga studio or gym, not the other way around.
In some bigger facilities operating in very specific business models, commissions may be greater than 25% of Top Line Revenue. In that case, you should have an advanced Profit First account called Commissions and allocation to that account first and determine your Real Revenue before calculating any other allocations.
This isn’t to say you shouldn’t have a retail account too. It’s just that it should be a sub account of Operating Expenses. This requires you to be more critical of your retail purchases and vendors to ensure resale before purchasing.
If you have any questions calculating your Real Revenue or commission percentage, reach out – we’d love to help you get this right!