Ryan Vaughn explains which financial statements gym and studio owners actually need with Profit First accounting. Skip the cash flow statement, but use the P&L and balance sheet together: the P&L shows profit, while the balance sheet tracks equipment and loan principal reductions that the P&L misses. Use cash-basis reporting in QuickBooks to match your actual cash allocations.
Do I really need to worry about my balance sheet or cash flow statement? I got this question on the group. Tyler, he noticed that Profit First seems very income statement driven, and so he was wondering what he needs to do with his balance sheet or cash flow statement. And also he pointed out, look, if I'm reconciling my accounts every month, is that enough? Do I need to worry about the other 2 statements? So let's talk about this for a little bit. The first thing we need to know is that the cash flow statement is very rarely used. And honestly, I don't think you need to worry about it at all. The profit and loss statement, the balance sheet, and more importantly, Profit First, which plugs on top of those 2 statements, basically It will handle what you need to know to run your business. Cash flow statement is really just an outcome. It's pulling numbers from the different statements. And so if you're running Profit First allocations, that is basically taking care of the things that you need to know. And I just realized I probably said basically 5 times already, so I'm going to try to stop using that word. on this video. The profit and loss statement is formatted in a way where you start with income at top— on the top, then you have your expenses, and then you have the net income, what's left over. A lot of times businesses try to run their profit and loss statement on an accrual basis. Accrual basis means You're booking income when the invoice is generated, not necessarily when you actually receive payment for it. And under accrual, you're also counting the expense when you get the invoice or the bill from your vendor, even if you don't pay it. You're a micro gym, you're a gym owner, you're a boutique studio, you're going to be cash basis. So you don't have to worry about that stuff. And in QuickBooks, if you're like 95% of gym owners, you're using QuickBooks, you'll see, or you may have noticed, you have the option to run your report under the accrual or cash basis. It's like a little button at the top of the report section when you're running the report. So you're just cash basis. And the reason that's important is because now we're just dealing with actual money you received in payments and actual money you sent out as expenses. And for sure, Profit First is going to be based a lot on what happens on the P&L statement. However, the balance sheet is very important. One of the reasons is, is because you buy equipment, and when you buy larger equipment, That doesn't show up on your profit and loss statement, but the cash left your business. The balance sheet is going to show an increase in that asset, whatever it is you bought, whether it was rowers or, you know, bumper plates, those types of things, new rig. So that cash outflow isn't reported on the P&L statement, but it is showing up on the balance sheet. Which is why the balance sheet is important. Another reason is if you have loans in your business, when you make a loan payment, part of that payment goes towards interest, which is a profit and loss statement item. It's an expense. But the other part reduces your liability. It goes towards the debt reduction, right? So if I have a $1,000 payment on a loan, maybe $600 of that is interest expense right now, and the other $400 reduces my balance. That balance reduction doesn't show up on my profit and loss statement. It shows up under the liability section on my balance sheet, which is another reason why the balance sheet is important. And not to mention, even if I'm reconciling my bank accounts in the books every month, it's not necessarily reconciling my loan balance. Which, to be fair, just so you know, most of the time is done quarterly or annually. It isn't often done every single month where you are going in and reconciling the loan balance. You certainly can if you want. But that's why the balance sheet is important. I would say as important as the profit and loss statement. It just only carries a smaller amount of numbers that you're looking at that are related to cash flow, but it still carries that information. Because you could do a scenario where you're looking at your profit and loss and you're thinking, man, things are good. But then you look at your bank account balance, which we know is human behavior, and you realize my balance isn't as high as I thought it would be. I mean, based on what I'm showing in profit on my P&L statement, where's this money? Well, it could have went towards paying equipment. It could have went towards paying down debt, which again is a cash outflow. It's also one of the reasons why the Profit First system is so magical, because when you have the essential 7 accounts and you have those all set up, it is taking into consideration the cash flow needs for all of your business operations, Including the accounts that show up on the balance sheet. So I hope that helps clarify some things. Profit and loss for sure is important when running Profit First. Balance sheet is also important. Cash flow statement, not so much. Okay guys, profit is a choice. Have the wisdom and courage to choose it.
