Financial Management Secrets Of The Spa Industry.
Leslie Lyon
Thursday, 27th December 2007
Reflecting for a moment on the world of business- in any business- there are always tricks of the trade that can provide quick paths to solving daily business challenges and even turning pitfalls into win falls, and the spa business is no exception.

Just as you have your own trade secrets and methodologies for building your businesses, so do the spa industry experts whose job it is to educate and guide you with the newest trends, as well as proven practices.

No matter whom it is you consult with however, industry leaders will tell you it's all about the numbers and how to take them from paper, to profits. So the focus of this article will be those tricks of the trade, and how to take the information they are providing us and turn it into something tangible that will help sustain our businesses well into the future.

To begin with, we must familiarize ourselves with Spa Financing 101. There are three basic Financial Statements that tell us the shape our business is in, by providing us with an historical analysis of actual financial outcomes; and one Financial Statement that is used to plan for future business needs and goals. These statements provide us with information that is not obtainable through any other means.

They help to identify such things as: areas of over-spending as well as those areas that are under-performing. They can provide comparisons in sales to cost of sales on an ongoing basis, pointing out where changes may need to occur, for example within our staff compensation plan. As well, knowing how we measure up to spa industry benchmarks as they relate to revenue and profitability is invaluable.

Understanding percentages in relation to revenue on our controllable line items within our Operating Costs can tell us if our marketing budget is too low, or if our lease payments are too high, among so many other things. Understanding our business' liquidity will help us to understand what kind of financial flexibility we have in order to effectively act upon future business needs and opportunities.

Neil Ducoff, Founder and CEO of Strategies, Centerbrook, CT, developed a 2-day course for Aveda's Business College called "Financial Fitness", which works to simplify the understanding of what Neil refers to as "The 4 Pillars of Financial Success". Using a more light-hearted approach as an effective learning tool, the course makes interesting comparisons between financial statements and the instrument panel of your car, which you will see demonstrated below.

Having an intimate working knowledge of each of these statements is a sound business approach, but not necessarily a common, or popular one. If as a minimum we were to strive for a basic understanding of each statement; study what they are telling us and take action on the information they have revealed, we will at least have a chance at financial success. All too often however, we are consumed in other areas of the business and don't take enough notice of the numbers. Perhaps we may even mistakenly believe that high revenue means our business is profitable and therefore there is no need for us to monitor it.

The good news is that it is never to late to get a-hold of your financial situation. There are a multitude of tools available that can set you on the right path. Look for books and discs on financial planning for the non-financial professional; courses on finances; and even financial mentors. Begin taking accountability for your financial successes and failures and you will see that the freedom and power that comes from this knowledge can literally be life-changing.

Cash Projections Worksheet - This is a projection statement and is used as a planning tool to help predict the outcome or viability of future business needs and financial goals; it is your "action plan" for both your short and long-term ambitions, and every business should have one.

Considering your "beginning cash", or the anticipated amount left over from the previous period (week or month) and added to your current sales, provides you with your total sales (cash inflows) for the period. Subtracting your cash outflows (expenses) from total sales, gives you either a cash surplus or a cash deficiency, and indicates to you if cash is required to meet your needs and goals for that period.

Having this worksheet in place is the only way we can tell if we should be controlling our spending, or if there is room for spending. It is very useful to compare your projected figures to actual outcomes, as this will provide you with an even greater level of accuracy in predicting future business possibilities.

Ducoff: Cash Flow Projections are the "businesses budget". This is looking through the car window shield, or even better, at your satellite navigational system – "I want to get from here, to there".

Cash Flow Statement - This spreadsheet will show you how much money is needed to operate your business, and when it is needed. As with the Cash Projections Worksheet, it is only concerned with the amount of actual cash coming into the business (revenue or cash inflows) and the actual amount leaving the business (expenses or cash outflows), in a given time frame. Subtracting your expenses from revenue gives you your Gross Profit Margin (or Cash Excess).

Once you have deducted your Operating Costs from the GPM, you will arrive at an Ending Cash Balance (either positive or negative) for the period, which will reveal to you if and when you need to tighten up operations.

Ducoff - Statement of Cash Flows represents "fuel for the business" and must be constantly monitored on your gas gauge. Did the period you are looking at add or deplete cash for the period, and how much cash do you have right now?

Income Statement or Profit & Loss – This statement tracks revenue and expenses in order to analyse your profitability. The components that make up the P&L are: Revenue (Sales); COGS (Cost of Goods Sold) and Gross Profit (Revenue minus COGS = GP); and below the Gross Profit line are your Operating Expenses; and when subtracted from the GP give you a Net Income (before and/or after taxes).

This statement acts as your financial report card at the end of each month to tell you if sales have improved; if you have controlled expenses (if the percentage of expenses to revenue has gone up or down, and where); and therefore if your profit margin has increased or decreased. It will be helpful to note that if you are at anything less than 50% Gross Profit, you may have trouble covering your Operating Costs and making a profit.

Operating Costs traditionally run at 40-45% of revenue in the spa industry, leaving us little room to move if our COGS are too high. COGS include our service staff payroll and product costs for both retail and professional.

Ducoff: The Profit & Loss statement is your "measurement of business performance", measured by the speedometer, tachometer, and odometer. Are you going 90 but still in second gear? Lot's of sales but no profit?

Balance Sheet – This reports the business's Assets, Liabilities and Shareholder's/Owner's equity at a specific date. It explains what the company's investments, obligations, and resources are to help predict the amounts, timings, and certainty or uncertainty of future cash flows. Total Assets must always equal the Total Liabilities + Total Owner's Equity number, hence the term "Balance" sheet.

Ducoff: The Balance Sheet is the "health of your business", represented on the instrument panel by the temperature and oil pressure gauges. People are adding assets, but they may be financing those assets. People get into terrible messes by accumulating debt as opposed to cash. Ask yourself, "Do I want to add value or increase debt?"

Neil states, "Few people use and understand these statements, but particularly the Balance Sheet, Statement of Cash Flows and the Cash Flow Projections. "The Cash Flow Projection", or budget, is the one thing for 14 years we have been pleading with people to take notice of. It's the Owners new boss. If it's not in the budget, you don't spend it".

Spas2b is a full-service Spa Development, Consulting and Training company based in Waterloo, Ontario, Canada. Spas2b draws on the extensive experience of its President, Leslie Lyon. Leslie has evolved with the Health and Beauty Industry for more than 30 years and has participated in many aspects of the Spa trade. An Aesthetician and Electrologist for 25 years, today Leslie enjoys her profession as an International Consultant, Educator, Key Note Speaker, Published Columnist and Freelance Writer.

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