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I have found that more and more young managers in our industry do not know the basics of accounting. Everyone should know the accounting process, should know how to dig down deep to get to the real numbers (which tell the story), and should know how and what to track so that they can operate their business in an effective and efficient manner.
Numbers are important, but many people get lost in the numbers or they waste time looking at numbers on top of numbers that do not help them in running their businesses any better. Numbers do tell the story, but don’t get too caught up in the numbers and forget that this is the hospitality business where the people (members) are the real story.
Your accounting department is there to be a part of your team, just like all the other departments. Their main focus should be to watch and to protect the assets of the club, to process and to certify the numbers, and to report them in accordance with GAAP (Generally Accepted Accounting Principles). They are there to manage the accounting process and to give club managers the necessary information from all of this to run the business. They are there to help; not hinder.
So, what is “Functional Accounting?” Just as “Functional Training” prepares us physically to function and thrive in our day-to-day lives, Functional Accounting will prepare you to function and thrive in your everyday business. Over the next 3 months, I will explain the accounting process, the basic definitions, formulas, and reports/statements you should know, and how to dig down through this process to get to the answers.
First of all, there are two different methods of accounting used: The Cash Basis and the Accrual Basis.
Most clubs, especially large ones, operate on the Accrual Basis, where you recognize revenues when earned and expenses when incurred. For example, under the Accrual Basis, if you buy $500 in shirts in October to sell in December, the expense for the shirts is recognized in December, as they are sold along with the revenues.
Under the Cash Basis, expenses and revenues are recognized when cash comes in and goes out. Under this same scenario, the expense would be in October (when you paid for them — cash went out) and the revenue would be in December (when cash came in). Revenues and the expenses that are related to them do not always happen in the same period under the Cash Basis. This makes it harder to manage that process properly and is the least favorable one to use, especially in our industry. Therefore, we will focus on the Accrual Basis.
Now, let’s cover some definitions (these are ones you will run into regularly):
A/R — Accounts Receivable. Monies to be received from customers.
A/P — Accounts Payable. Monies to be paid to vendors.
Gross Margins – Revenues minus direct expenses related to retail-type sales (such as Pro Shops).
Net Profit — Revenues minus all expenses.
GL# — General Ledger Number — a unique # assigned to every item (revenues, expenses, assets, liabilities, etc).
GL — General Ledger — report that contains every entry from the entire process listed under their respective GL#.
COGS — Cost of Goods Sold.
EBITDA(R) — Earning before Income Taxes Depreciation Amortization (Rent).
Depreciation — the expensing of a tangible asset (large dollar value) over time (treadmills, computers, etc.).
Amortization — the expensing of an intangible asset (large dollar value) over time (patents, trademarks, start-up costs, etc.).
Debits and Credits — all entries are either debits or credits
Journal Entries — entries made to the GL by accounting department to finalize reports according to GAAP.
Now, to understand the business side of our industry, you must first understand the accounting process.
In the process, all transactions are entered from four different areas:
Once this is all done, reports are run to make sure all is correct such as the GL, the General Journal (list all GL entries in order), and the Trial Balance (lists all GL#’s and the debits and credits to each). Once verified, the financial statements are produced, which will then show the results of the operations.
The most important thing to understand in this process is that there is great detail to all numbers on the financial statements. You will see only one number to each revenue, expense, asset, liability, etc. on the statements, but you can dig deeper to see the detail of these numbers. The process is done in the order listed above for each accounting period, but keep in mind, you can reverse this order to dig deeper when needed.
Why do this? You would do this to understand what makes up a number on the financial statements. For example, fitness payroll for the month of March may be different than what you thought. So, dig deeper. Ask accounting for the GL report for fitness payroll for March. This will show you each transaction that makes up that number on the statements with an explanation. Then, if you still need more, dig deeper into those numbers including going all the way back to the payroll software’s reports. You can always get to the individual transactions, so don’t stop digging until it makes sense.
This takes care of the accounting process. Remember, keep digging until you get the answers. Next post, we will go through the statements and reports and what the detail in the GL might look like, which supports all of these documents.
Larry Conner is the President/GM of Stone Creek Club & Spa. For more information he can be reached at firstname.lastname@example.org.