If you own a gym, you probably look at your P&L regularly. You know your revenue, you have a good sense of your profit, and you’re likely tracking it every month. That’s honestly one of the best habits a gym owner can have.
The problem is that your P&L only tells you half the story. There’s a second financial document, your balance sheet, that tells you whether your business is actually financially sound or just productive. After working with hundreds of fitness facilities, I can tell you that’s usually where the real problems are hiding.
Running your business off the P&L alone is a lot like training upper body and never lifting legs. The mirror says you’re in great shape, right up until you try to pick up something heavy.
Your balance sheet has four warning signs that your P&L will never show you, and most owners don’t spot them until they’re already causing problems.
By the end of this article, you’ll be able to pull up your own balance sheet and know exactly what you’re looking at. That includes the one number most gym owners have never calculated, and probably should have.
Prefer to watch? Eric walks through the whole thing in the video below.
Two Documents, Two Different Questions
Your P&L answers one question: did we make money this month, this quarter, or this year? It’s revenue in, expenses out, and whatever is left over, and it matters.
Your balance sheet asks something different. Instead of looking back over the last six months, it shows where you stand financially today. The SEC’s guide to financial statements puts it simply: a balance sheet shows what a company owns and what it owes at a fixed point in time.
It’s built on one formula, assets equal liabilities plus owner’s equity, which is the same definition the IRS uses in Publication 583.
- Assets are what you own, like cash, equipment, and inventory.
- Liabilities are what you owe, like credit cards, loans, and unpaid taxes.
- Owner’s equity is what’s left for you after all of that.
Getting those numbers right matters more than most owners realize. We had a client recently where I could see equipment in their photos that wasn’t anywhere in their books. It turned out it had gone on a separate credit card, and around $23,000 of Pilates machines never made it onto the balance sheet. If it’s not on your balance sheet, you can’t see it, and neither can your banker.
I like to think of your financial statements as the health report for your business. The P&L tells you whether you were profitable, and the balance sheet tells you whether you’re financially sound. Those two answers are often further apart than owners expect. A gym can post a great year on the P&L and still be in a precarious position, because the balance sheet captures cash reserves, debt load, and structural health in a way profit alone can’t.
To their own detriment, most gym owners rely on one and ignore the other, which is exactly how a business ends up skipping leg day.
So when you do pull up your balance sheet, here are the four things I’d flag right away.
The Four Red Flags In a Gym’s Balance Sheet
1. A low cash balance. If your business doesn’t have enough cash to cover short-term bills like payroll, rent, and vendor payments, that’s a problem no matter what the P&L says. At its core, a fitness business is a cash flow business, so cash decides whether payroll happens, not profit. We’ve seen profitable gyms hit serious trouble simply because they ran out of cash, and that’s one of the hardest situations to watch unfold.
2. High liabilities. The healthiest businesses we work with either carry low debt or pay it down consistently. When liabilities are high, you’re locked into fixed obligations like rent and loan payments that don’t go away when revenue dips. That creates a kind of fragility you might not feel until the moment it suddenly matters.
3. Low working capital. This is the one that trips people up the most, so we’ll go deeper on it in the next section.
4. Negative owner’s equity. If you’ve been taking distributions faster than the business generates equity, the owner’s equity line can go negative. When that happens, I’d think twice before any big capital investment, especially an expensive expansion. That isn’t meant to discourage anyone. It’s an honest read of where things stand, and it’s much better to have it early.
Of those four, working capital gives us the clearest read on whether a business can handle its day-to-day obligations.
Working Capital: The Number That Tells You If You Can Pay Your Bills
Working capital is your short-term assets minus your short-term liabilities.
Short-term assets include cash in your bank and savings accounts, deposits in transit, and inventory, which is essentially anything that turns into cash within the next 12 months.
Short-term liabilities include credit card balances, tax liabilities, and any debt with payments due in that same window.
Subtract the second number from the first, and you have your working capital.
What that number really tells you is whether you can pay your bills right now, in any month, not just a good one. That’s why we generally tell clients to keep one to two months of expenses in the bank. It’s not because we expect revenue to drop to zero tomorrow. It’s because that cushion is what healthy working capital looks like in practice.
When working capital is positive, you’re in a strong position to weather whatever comes your way. When it’s thin or negative, the business is stretched, and in an industry with thin margins and seasonal swings, that’s how owners end up struggling to make payroll or rent.
We’ve had clients who were genuinely caught off guard the first time we walked them through their working capital. Revenue was up, so they assumed everything was fine. Once we pulled the balance sheet together, though, they were operating with almost no buffer and were essentially one slow month away from a real problem.
Retained earnings is the other number worth checking. It is the profit the business has built up over time and kept rather than taken out. Positive retained earnings mean the business has been building something, while zero or negative retained earnings mean a strong P&L isn’t telling you the whole story.
Those conversations are hard, because these owners hadn’t done anything wrong. They simply didn’t have visibility into this number, and it’s exactly what you want to know before you sign a new lease, plan a second location, buy a home, or even take on a car payment.
Make It a Monthly Habit
Nobody builds strong legs in one gym session, and the same goes for your balance sheet. The owners we work with catch problems early because we review their balance sheet every month instead of once a year at tax time. The SBA calls the balance sheet the foundation of managing your finances, and a foundation only helps if you check on it regularly.
I often compare it to a doctor’s visit, where the patient is the books. Reviewing monthly lets you catch symptoms while you can still treat them. Looking once a year turns you into the coroner reading a postmortem report.
Each month, scan for the same four things:
- Low cash.
- High liabilities.
- Low working capital.
- Negative owner’s equity.
If you spot one, treat it as a signal to ask questions rather than a reason to panic. It doesn’t automatically mean the business is in trouble, but it does mean something is worth understanding before it turns into a problem you didn’t see coming.
That’s the conversation to have with your accountant. And if your accountant, CPA, or CFO isn’t regularly walking through your balance sheet with you and explaining what they see, that’s worth paying attention to as well.
Where You Actually Stand
Your P&L tells you what happened last month, and your balance sheet tells you where you actually stand today. They answer different questions, and a strong business needs good answers to both.
Profitable is good. Profitable and strong is the goal.
This week, pull up your balance sheet and check for the four red flags: low cash, high liabilities, low working capital, and negative owner’s equity. If you’ve never done it before, you might be surprised by what’s there, and now you’ll know exactly what to ask about it.
If you’d like a second set of eyes on what you find, that’s a conversation we have with gym owners every week.
Until next time.
