A new business venture is always exciting and invigorating, however, statistics show that approximately 20 percent of small businesses fail within the first year. By the end of the second year, 30 percent of businesses will have failed. Nevertheless, a business venture can be successful if its profitability is carefully considered prior to launching. This blog presents factors to consider when calculating if your next fitness idea will be profitable. 

Profitability will be analyzed using break-even analysis. Break-even analysis is a financial calculation that weighs the costs of a new business, service or product against the unit selling price to determine the break even point. In simpler terms, the break-even point is when the business has sold enough of its product to cover all costs.

• Break-even point = Fixed costs / (Sales price per unit – Variable cost per unit)

In the context of running a new fitness studio, there are prominent costs to consider: 

Firstly, businesses should consider how quickly the startup costs can be recovered as it is usually the heaviest investment. Significant start up costs include rental down payments and gym equipment costs. Commercial rental costs vary according to factors like location, size and length of lease. Often rental down payments go up to 2 months of the rental cost. Here is an example of two vastly different gym spaces and the difference in rental:

Equipment cost is also a significant capital cost when opening a gym. The list below gives an estimate of the cost of basic equipments in a small gym with a capacity of five people:

A fitness studio’s main revenue stream comes from selling membership or class packages, Hence, the business should consider how many packages or membership is needed to generate sufficient revenue to cover cost. For example, the startup cost amounts to $30K, the business can breakeven by selling 300 x $100 packages. After accounting for the number of units required to breakeven, the business should project how long it will take to sell sufficient packages to breakeven. There should be sufficient cash to tie over this budding stage.   

Secondly, evaluate the profitability of your business. Unlike a typical product-selling business, the business model of a gym differs as its revenue depends on the quantity of members and the number of packages they buy. To exemplify the revenue model of a gym, the concept of Unit Contribution Margin per class can better quantify profitability. 

• Unit Contribution Margin per class = Unit Revenue per class – Unit Variable Cost per class

The contribution margin is the difference (more than zero) between the product’s selling price and its total variable cost. In the context of a gym, 

• Unit revenue per class  =  Average revenue per student x average fill rate (e.g. 70% of class is filled)
• Unit variable cost per class is generally contributed by instructor salary 

Finally, the business should reconcile its costs and revenues to derive the Operational break even point.  A positive contribution margin indicates that the business is earning a profit per unit of product sold. However, contribution margin does not account for fixed costs. In the context of a fitness studio, fixed costs are overhead costs that are not dependent on the business performance. For example, rental expenses, salaries of receptionists and utility expenses.

Hence, the break-even point is:

• Unit Contribution Margin x No. of Classes > Fixed costs 

Example: Business A

Tips to ensure your business breaks-even: 

1. Recover cash flow fast 

New businesses should aim to recover their cash flow as soon as possible. This can be done through obtaining government loans and grants to aid in the cash flow of small businesses.  

Alternatively, a secondary income stream can be created by renting out the gym space for events or for private instructors. Platforms like Getspaces allow for gyms to list their space for ad-hoc rental, more information on renting out your studio can be found in our previous article. 

2. Achieve operational break even point fast 

Operational break-even can be reached quickly when businesses increase the fill rate of each class. New businesses can consider joining Classpass, the largest health club aggregator. This increases your brand visibility and is a good platform for new fitness studios. Additionally, businesses should aim to minimize variable costs. One way can be to cut down on administrative staff employed. The average salary of an admin staff amounts to $2575 per month, new gyms can opt for an efficient booking solution instead. Booking solutions like vibefam can automate payment and class scheduling such that administrative tasks can be settled by the owner himself.  

In conclusion, starting a new business venture requires one to take the leap of faith. Nevertheless, financial calculations can be a useful tool when considering if the business venture will be profitable.