Wellness industry financial expert, Monte Zwang of Wellness Capital Management, is here with insight on this important topic:
Are you wondering why your profitability has changed post-pandemic? You are not alone. Our world has been and continues to be rocked. The pandemic changed everything and continues to do so. Are rules and regulations changing what services we can even provide? Your guests’ lives, economics, and lifestyles are changing. Capacity, staffing, purchasing, profit margin is changed. How can we plan our profit?
Afraid to read the news? Welcome to our new reality. interest rates, labor shortage, supply chain, increasing prices, unemployment. All of this affects us. We’ve never been here before.
- Now is the first time in my career that my clients are planning for the short term. Once we see how that goes, we can look longer term.
- The landscape is changing. Our relationship with staff and vendors is changing.
- Each news issue requires a new path from here.
- One issue compounds another and another.
It’s rough out here. Our businesses are affected daily by the labor shortage, supply chain issues, product price Increases, lower customer service frequencies, inflation, gas, and housing prices. Sounds like our headlines, doesn’t it?
Numbers Tell A Story. We just need to know how to read. Numbers are an indicator, a result, a target, a measurement. They are not the reason we are in business, nor should they distract us from the main focus – the experience of the client, and the growth of the business. Operators do need some level of financial literacy . They need to know profitability and where the business should be, and where they are relative to goal. You need to know how to tell what is working and profitable, and what isn’t without the concern of becoming an accountant.
Can we plan our way out of this? NOT without Good Numbers. Having Good Numbers does not mean that you to have to learn QuickBooks. It does not mean that you will be spending hours analyzing pages of data. You do not have to go to business school for a degree in accounting. Good Numbers are not terrifying. Having Good Numbers will allow you to know your profitability and be confident in your financial decisions.
The Goal of “Good Numbers”.
- Clear & Understandable.
- Business condition at a glance.
- Accurate. timely.
- Simple. Less is better.
- Profitable? Yes or no.
- Allows you to calculate breakeven.
- Makes sense financially and intuitively.
- Nothing funky or questionable.
Which “Good Numbers” do you need to know, and how often do you need to know them?
- Daily: Cash, Cash Flow, Sales & Sales Mix, Direct Costs and Breakeven Sales
- Monthly; Direct Labor, Gross Margin, Overhead Expenses and Net Income
- Quarterly; Debt Service, Job Cost, and a Plan 2 Some definitions to understand profitability.
- Sales
- Services (by category o Products (10-25% of Service Sales)
- When performed or sold
- Direct Costs
- Products for resale
- Professional Product, Consumables, Back Bar
- Direct Labor: Wages, Sub-Contractors, Front Desk, Retail Commission Payroll Taxes, Benefits 15-20% Med Spas, 38-42% Day Spas
- Guest & Spa Supplies, PPE. Laundry & Linen, Merchant Fees
- Overhead o Administrative Salaries & Taxes
- Advertising, Marketing & Promotion
- Bank Fees o Continuing Education
- Dues, Memberships, Licenses
- Insurance o Meals, Travel & Entertainment
- Office Supplies & Postage
- Professional Fees
- Rent
- Repairs, Maintenance & Janitorial o Utilities & Telephone
- Debt Service. Payables, Loan Payments Interest, Amortization, Leases should not exceed ½ Net Income
Capacity and productivity affect everything. BUT Capacity and productivity has changed post-pandemic.
- How many services are you performing, and could you be performing?
- Monetize these by applying selling prices of services.
- Are you providing “Touchless” services? Evaluate Capacity / Productivity by category or service, by treatment room, by service provider and by device.
- When a room or station is 65-70% productive, look at hiring additional providers.
Know Your Direct (Job) Cost and Gross Profit Margin of your most popular services. If they are not profitable, it doesn’t matter how many you do. You can’t make this up by volume. Total the Direct Costs that go into providing your services and retail products. Know the cost percentage of your most popular services & products. Your POS or EMR system provides great information for labor, pricing, and inventory control.
Know your breakeven! Breakeven is the sales volume and number of services you need to do in order not to lose money. Nobody is in business to breakeven. If you know your breakeven, you will …
- Know if you are making money (or not).
- Know how many services you need to do each day to be profitable.
- Have tools to define KPI’s, incentivize and train your staff.
- Have the information to define realistic sales goals.
- Plan your promotion of specific services.
Facility Development in a challenging economy. We find ourselves in a period of “Business Darwinism”. The stronger, profitable businesses will survive. There might be several perfect facilities that might become available as they were not profitable and closed. If you are looking to develop a new business first look at your projected productivity based on the number of treatment rooms.
- 3,500 Square feet or less at today’s rental rates.
- Design for change, flexibility.
- Limit amount of non-revenue space.
- Allow space for touchless therapies.
- The Taj Mahal was completed in 1653. It does not need to be built again.
No Budget, No Plan = Panic.
Moving forward without a budget is called floundering. You will not have the direction, tools, targets, and accountability you need to operate. Create your budget. You need a roadmap of where you plan to be. For now, plan month to month, then quarter to quarter.
Some Do’s & Don’ts
- If possible, align with medical professionals to make your business “essential”.
- Don’t get involved in pricing, deep discounting wars with your competitors.
- Review and manage the job cost of your most popular services.
- Try to negotiate your Overhead Expenses and your Debt Service payments to the same percentage of income as they were in 2019.
- Hoard your cash. Spend only what you need to.
- If your supply chain is timely, buy only enough Back Bar & Retail product that you expect to use or sell within 30-45 days.
- Don’t build your back stock to large levels even though vendors promise deep discounts.
- Be critical of how much staff you need and how you schedule them. Manage your productivity. Don’t allow non-productive time. You cannot afford it.
- Don’t purchase new equipment or devices on impulse. Define your expected return on investment and plan their productivity.
- Evaluate touchless technologies and programs to utilize underused treatment rooms.
- Create a month-to-month plan. We are in a “sustain and build” mode.
- Manage your profitability voraciously.
Do yourself a favor and please don’t try to do this by yourself. Stay in your lane, do what you know and are passionate about. You are very capable in some areas of your business. More than likely, it is in the production of your services and taking care of your guests. Hire a professional and get some help. They can provide you with the tools and guidance necessary to navigate this weird and uncertain economy, and get you to profitability as soon as possible, As always, we’re here to help, and the first call is always free.
Monte Zwang will be presenting at the upcoming IECSC Florida event taking place Oct. 15-16, 2023, in West Palm Beach, FL. For more information on his classes and other education opportunities available at the show, visit www.iecscflorida.com.