What are RED FLAGS to Look for in your Books?

All right, today's quick video: what are some red flags to look for in your books? By books, we're referring to your bookkeeping. Most of our clients are on QuickBooks, whether that's desktop or online. Um, as a side note, we have had some clients in Xero. I can tell you I do not love Xero at all. The reporting function is terrible, and honestly, I believe the main purpose of doing our bookkeeping, despite contrary or despite popular belief, isn't to be able to do our tax returns. That's a benefit of it. But I think we should be doing our bookkeeping so that we can get good reporting, because reporting lets us see trends, it helps us make decisions. So with that being said, here are just a few things to consider. Negative accounts, in most cases, are not good to have. So in your bookkeeping, you have what they call the chart of accounts. So it's a page. It's all your accounts kind of listed out in their category name, usually organized by your assets first, then your liabilities and equity, then income, then expenses. If you look at your chart of accounts, There's typically a balance there for, for sure, your balance sheet items, which are assets, liabilities, equity. If any of those numbers are negative, there's a high chance something's wrong. The most common account that could be negative, or likely would be, is your owner's draw or shareholder distribution. It's an equity account. It's when you take money out of the business, that's likely negative because you're pulling money out. But other negative numbers, you might want to have an accountant look at it because it could be wrong. Common ones that we see, which we know means something's wrong— sometimes business owners or accountants who don't know how to actually be accountants, they just know how to use software, set up payroll wrong, whether that's actually paying employees Or paying independent contractors, they just set it up wrong and they end up booking all those expenses to a category called payroll liabilities. If payroll liabilities is negative, you have something wrong with that account, and if you don't fix it, you likely are going to overpay in taxes because it's not properly calculating your expense for paying your team. If a credit card balance is negative, what that would mean if it were true is that you have decided to prepay all of your payments on the credit card. So if I sent my credit card company $10,000, I would have a negative $10,000 account before I even start charging expenses. Most cases, the solution or the reason the credit card statement— the credit card balance is negative on your chart of accounts is because only payments are being inputted and the expenses are not being inputted. And if the expenses are being inputted and it's still negative, the expenses aren't getting inputted the right way. So look for that. And then in general, any other debt that you have, if the balance is negative, chances are you're missing out on interest expense. But so those are some easy things to think about. If you pull up a profit and loss report, and any of your expense items are negative, chances are you have income that's been put into that category, and that just needs to be fixed. The beauty about QuickBooks— I mean, look, I don't love that Intuit kind of rules the world when it comes to small business accounting. Um, I— if I told you how much I pay a year to Intuit, um, you would throw up. I know I almost do every time I think about it. But, um, one of the benefits and the reasons they dominate is because it is user-friendly. I mean, that's obviously a pro and a con because it's super easy for someone to think they know what they're doing or doing it the right way and they screw it up. But In this case, if an expense category has an income item mis— like incorrectly put there, it's really easy to go in and fix that. And then a couple other things to consider for our gym owners. We want to look at our team member expense category. We want to try to stay under 44%. Anything under 44% is very healthy. It's very financially fit. Above that, we definitely want to at least make sure we're being profitable, and maybe you have a strategy and a business methodology in which that makes sense for you. Just in the studies that we've done, financially fit gyms, the team member expense is less than 44%. On that regard, rent expense, we'd like to see that under 25%. It's really important. And what that means is if you are looking to open a gym or you're looking to move locations or renew your lease, don't take on a lease obligation or a rent payment that is more than 25%. When I ran a gym, our rent expense was 50%, and I can tell you that is one of the biggest factors as to why we just didn't end up making it. is why we ended up selling it. The other reason was we just couldn't figure out the whole marketing and sales thing. But man, we had to— we ran a tight ship and we had a great— we had a great workout experience. But my business partner and I just couldn't subsidize the gym forever. And then the last thing that I like to look at as far as red flags in the book, for a couple reasons, and I'll tell you 2 of the reasons that come to mind. I like to look at a profit and loss statement by month for the last 12 months. And anytime I see a drastic swing in net income, I want to look at that month because it could mean— one easiest solution is our accounting's wrong and we have either missed some transactions or we've double-entered transactions. Sometimes a drastic swing showing in the books from month to month just indicates bad accounting, which is an easy fix. Uh, the other scenario, not as great of a reason, is, uh, something actually really bad happened. Your accounting is correct, but something negative happened in your business that caused a negative drastic swing. Obviously, if my net income is $1,000 one month and it jumps up the next month drastically, that's great. And looking at the books, I could see that, and then I can go back and recall, what did I do that caused that jump? I'm going to do more of that. But if it goes on the other end, if we go to $1,000 to negative $5,000, what happened? Um, did we lose a bunch of members? Did a coach do something? What, what is the reason? Um, and then we figure that out. So anyways, those are some quick red flags that came to mind when I was asked this question. What are the red flags to look at? Negative accounts, team member rent expense— look at those and then analyze from a month-to-month basis and look for drastic swings. Remember, profit is a choice. Have the courage and wisdom to choose it.