I'm constantly asked by business owners, "How can I make more money?" Then they look to me as though I have the magic dust that I can sprinkle over the business and magically transform their check book to a well of plenty. Bad news, no magic dust.
What I can do is help you understand what profitability should look like, and how you can get more of it. Numbers are not evil. However, understanding the basic tools of financial management is a critical skill that every business owner must possess. It is impossible for you to be effective without some relationship with the financial performance of your business.
Managing profitability is like putting together a jigsaw puzzle. The good new is that you really only need six pieces (numbers) to understand your profitability, manage your business and make informed financial decisions. These six inter-related pieces are:
Labor Cost %
Net Profit %
Debt Service %
Labor Cost is the single most important cost for any business owner to manage. Compensation plans for your employees can be structured so that total labor cost does not exceed 42% of product and service sales.
Gross margin is defined as Total Sales minus Direct Costs. Direct costs are those expenses that fluctuate with sales and include direct labor, product purchases and room supplies and professional supplies. Total direct costs should not exceed 70% of sales. Gross Margin (Sales minus Direct Costs) should not exceed 30% of Gross Sales.
Overhead dollars are a fixed amount and include rent, insurance, utilities, advertising, travel and entertainment. The total of these expenses should not exceed 25-30% of Gross Sales.
Net Profit is Gross Margin minus Overhead Expenses. If Gross Margin is 35% and Overhead is 25%, Net Profit is 10%. Ten percent (10%) Net Profit is a reasonable and realistic target for Day Spas. Where is yours?
How much debt can your business service? I Debt service should be no more than 50% of Net Profit.
Breakeven Sales are the amount of sales you need to do every day in order not to lose money. You need to know the five numbers we discussed above, in order to determine Breakeven Sales.
You want and need a plan for moving your business forward but don't have reliable information. Using the best information you have available, assess where you are in these six key pieces. This will allow you to focus your energy on areas that have immediate impact on your profitability and growth. Once you know where you are with these six pieces, you can formulate a strategy and budget. From here, your financial puzzle will begin to take shape.
By Monte Zwang, Wellness Capital Management