Ms. Minton

Spas, Health & Fitness

Spa Financials: Amenity, Add-on feature, Cash Cow, Profit Center?

By Melinda Minton, Founder, The Spa Association / Spa Secure

Math...yuck...who likes to do financial equations? However, you only have to plug a few numbers into some formulas to figure out what is going on with your business. Is it viable? What do you need to add, subtract or change to make your hotel spa flourish? Read these basic guidelines to get a better feel for your potential plan of attack. Formulas like the following will allow your spa management team to assess the health of your spa as well as make financial plans for your spa's future.

Break Even Point

Your Break-Even Point is the level of monthly sales required to achieve a profit of zero. Understanding your break-even point is critical to planning and operating a successful business. It is calculated as follows:

Break-Even Point = Operating Expenses / Gross Margin %

For example, if your Operating Expenses are $20,000 per month and your Gross Margin % is 45%, then your Break-Even Point would be $20,000 per month / 45% = $44,444 per month.

This graph illustrates the concept of break-even and the importance of increasing Gross Margin. Each line shows monthly profit for various levels of sales, and the break-even point is where the line crosses through a profit of $0. Each line shows a different scenario:

Scenario A: Operating expenses are $20,000/month and Gross Margin is 45%.

Scenario B: Operating expenses are $20,000/month and Gross Margin is 55%.

While the importance of minimizing Operating Expenses is obvious, many business owners are surprised by the strong impact Gross Margin has on their success.

Cash Flow

While it is not surprising that a business that fails to make a profit will eventually fail, it is less obvious that a business can still fail even if it does make a profit. The reason is a shortage of cash, which is the lifeblood of a business. You need it to pay your bills, pay employees, buy inventory and to reinvest back into the business. If you run out, you'll have to either borrow more money to stay afloat or close your doors.

A profitable business can still have cash problems for three major reasons. First, cash must be available to make monthly payments for any loans used to finance the business. Accountants usually don't deduct these payments from your profit, so if you're only breaking even, you won't have the cash to make these payments. Second, a cash reserve is needed to weather seasonal slow periods and unexpected short-term downturns. Finally, cash is needed to reinvest in the business for things like replacing equipment, expansion and so on. To be safe, every business should maintain a detailed, month-by-month cash flow forecast including seasonal variations and planned reinvestments.

One useful concept is the short-term zero cash flow point. Analogous to the break-even point, this is the level of monthly sales required to maintain an even cash balance in the short term (it does not provide for reinvestments):

Short-Term Zero Cash Flow Point = Operating Expenses - Depreciation + Loan Payments) / Gross Margin %

For example, suppose your operating expenses are $20,000 per month including depreciation of $2,500, your Gross Margin % is 45%, and your loan payment is $4,500 per month. Your short-term zero cash flow point would be ($20,000 - $2,500 + $4,500) / 45% = $48,889 per month. By comparison, your break-even point would be only $44,444 per month.

Productivity per Square Foot

Ever wonder how profitable your salon is per treatment room? Utilizing space to the maximum extent possible is really essential. Yes, the relaxation room is spacious. It's soothing and pleasant to lounge in. The tea served in the lounge is to die for. And exactly how much money is that room making for your spa? Zero!! Not a dime. Rethink your space and get rich.

A glycolic peel costs $55-120 per treatment. The peel itself takes 5-8 minutes. The complete service may take 30 minutes. Lucrative? You bet! What's more, a glycolic peel treatment is typically sold in a series of 6 and requires a great deal of home-care which adds another k'aaacching in retail sales. Now take a natural manicure as an example. This service can take from 45 minutes to an hour. The amount of time spent on the nails is primarily based on how bad of shape the hands are in. Will the client be back any time soon? Probably not, maybe in a month for another manicure; maybe in a week for a $8-12 polish change. What might this client purchase in retail? Perhaps the color of polish used on her nails. Maybe one or two nail care items. Nonetheless, this type of service with retail will top out at a figure well under $75. A glycolic peel series with retail is way over the top at an average of $890. Big difference. So, do you want more manicure stations or more facial rooms?

In simple math, the equation looks something like:

1. Make a list of the most common services performed in a service room. Let's use the facial room where facials are $90, peels are $120, microdermabrasion is $95. We'll just use three examples to keep our formula simple.

2. Take the total of $90, $120 and $95. The total adds up to $305. Divide $305 by the three service examples. That total is $101.60. We can round up to $102, which gives us the average dollar per hour that a facial room in this spa generates.

3. Work retail into the mix by taking the average sales per service amount for the services done in that room, or square footage area. So, for example, a facial room generates an average $180 sale for every one hour of services provided. That might compare to a $25 retail sale on every massage given per hour. Obviously, your facial room is coming out ahead.

4. That is until you start to depreciate the equipment used in each room. This calculation is very specific to the type of spa you are running and the scope of equipment housed within your spa. If you have microdermabrasion units, facial units, skin scopes or scanners and oxegynation units...then you have a hefty amount of skin care to depreciate. In your body therapy rooms, you may have a simple massage table or you may have a wet room with a massage table built in. Each room must hold its own in profitability based on these figures, no matter how glamorous. As far as depreciation goes, the less equipment, the better if you can still bring home the same profitability figures per hour.

5. Insurance. Is that wet room, tanning bed or vichy shower costing you dearly in insurance? That amount that is extra on your statement needs to be allocated to that room. Decide if its profitability per hour justifies the extra expense in liability.

6. One last significant consideration is what is the average ticket for services typically offered in the room you are analyzing. Traditionally a massage service will not produce the same retail sale that a facial service. When doing this math, take well into account the retail margins that each service will generate. If your massage therapists can't sell retail, then calculate your body therapy rooms accordingly. It is all a part of the equation.

Client Retention

Client retention is the most important factor in the growth of a new business. In practice this figure must be calculated by your computer software, and no two programs use the same rules. In essence, retention is the chance that a customer will return to your business within a reasonable period of time (typically 3-4 months) after experiencing a service.

This graph shows sales forecasts for a new spa for three different levels of client retention. It is assumed that the spa will receive 100 new clients per month and the average time between visits for a satisfied client is two months.

Selecting Retail Lines

The industry is crowded with retail lines from which to choose. This is a tool for making the best decisions. Why do you have to limit the number of lines? When you carry an inventory for a line, the value of the inventory is capital not available for carrying other lines or perhaps for other investments, like new equipment, refreshing d'ecor or launching an advertising campaign. You need to ensure that investing in a line is the best use of your limited capital.

Return on Assets (ROA) is one way to measure the value of carrying a line. It is calculated as follows:

Return on Assets = (Annual Sales * Gross Margin %) / Inventory

For example, last year you sold $12,000 of Sally's Skin Secrets with an average Gross Margin % of 50%, and the inventory you maintained was $2,000. Your Return on Assets for carrying this line would be ($12,000 per year * 50% / $2,000) = 300% per year.

In addition, many businesses have limited space for retail display. To address this, it is also possible to calculate Return on Shelf Space as follows:

Return on Shelf Space = (Annual Sales * Gross Margin %) / Shelf Space

For example, displaying Sally's Skin Secrets required 10 feet of shelf space. Your Return on Shelf Space would be ($12,000 per year * 50%) / 10 feet = $600 per year per foot.

To put this concept to work, make a table like this with the calculations for each of your lines. You'll probably find some that aren't pulling their weight. When considering new lines to add, estimate the figures as best you can to make sure they will measure up.

Of course, you can't take this concept to an extreme and just carry a single line with the best numbers. Consumers demand variety, and if they can't find the product that they want at your spa, they'll probably never come back. You have to balance optimizing your numbers with the need to provide variety.

Try to minimize inventory levels using the features of your computer software for tracking inventory and re-ordering frequently. Most programs are capable of generating complete purchase orders ready to FAX into your vendors every week. When this isn't practical, consider using backroom storage rather than displaying excess inventory. This will increase both your Return on Assets and Return on Shelf Space.

Employee Productivity

Are you salaried technicians working at a reasonable pace when they are "on the clock"? Even if your technicians are paid on commission, could you expand the capacity of your spa if they worked more efficiently? To find out, you must measure your employee productivity.

To do this you must first develop a time budget for each service performed by your technicians: 1.25 hours for a European facial, 0.25 hours for a brow wax, and so on. Include reasonable time for room turnarounds, getting the client situated and retail selling efforts.

To calculate productivity, divide the total budgeted time for all services performed by the employee's scheduled hours and express as a percentage. For example, Peggy was scheduled for 40 hours this week, during which she performed 25 facials and 5 brow waxes. The budgeted time to perform these services is (251.25 + 50.25) = 32.5 hours. So, Peggy's productivity for the week was 32.5 / 40 = 81%. You can calculate productivity for individual employees, departments or the entire spa.

Calculating productivity isn't too useful for a new business with a lot of open time in the appointment book, but it is essential for a business operating near its capacity.

Doing calculations like these is a necessary evil of running a sound business. If you can't muster up the calculations necessary to analyze the viability of your spa, it would be wise to find an accountant or a consultant who can look at your numbers and make sense of your data. Your spa can be your hotel's major draw, cash cow and client loyalty denominator. Do the math and then count the rewards.

Melinda Minton is a spa consultant and health and beauty expert with offices in Scottsdale, New York City, and Denver. Ms. Minton is a certified massage therapist, esthetician and cosmetologist with an MBA in marketing. Ms. Minton is also a member of the National Association for Female Executives (NAFE) and of Cosmetic Executive Women (CEW). Ms. Minton is the founder of The Spa Association (SPAA), a world-class organization dedicated to enriching the professional beauty industry through self-regulation, education and sound business practices. SPAA is the largest spa association in North America. Ms. Minton can be contacted at 970-218-5414 or melinda@spaminton.com Extended Bio...

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