GET YOUR MONEY'S WORTH
Making Sense of Spa Financials
by Jamison Stoike and Amy Martin Duarte
"Cash is king."
It’s not the most generous sounding statement, but it’s true. We got into the spa industry because caring for and nurturing the health of others brings us joy. But when your books aren’t in order, your prices aren’t right and your inventory isn’t under control, you won’t be able to keep your doors open for very long.
If P&Ls, taxes, pricing models and ratio analyses make your eyes cross, you’re not alone: many in the industry are continually challenged by the financial aspects of managing a spa. fortunately, ISPA has a wealth of resources available on financial management, written by proven spa industry financial experts, that you can use to sharpen your skills, expand your knowledge and, ultimately, improve your spa’s bottom line.
To help make heads and tails of it all, Pulse tapped the knowledge of industry experts to answer our members’ most frequently asked financial questions.
“HOW MUCH SHOULD I INVEST IN PAYROLL?”
In today’s hypercompetitive labor market, one of the questions ISPA members ask most frequently is how to pay their employees enough to ensure retention without affecting profitability. Generally speaking, few spas can remain profitable if payroll exceeds 60 percent of revenue, and few can retain employees if payroll is less than 45 percent of revenue. The ‘sweet spot’ is 50 to 60 percent of revenue. If your spa is struggling to retain employees at that point, it’s a good idea to first look at increasing revenue before increasing salaries, otherwise your payroll may cross that 60 percent threshold.
You can also look at other ways to compensate employees. This includes offering traditional benefits—health insurance, paid time off—as well as non-traditional benefits such as flexible working hours. While these benefits have very real costs on your financial statement, they can bring more value to your compensation package than their cash value alone.
“HOW SHOULD I SET MY PRICES?”
With so many factors to consider— profit maximization, perceived quality, perceived value, costs, competitor’s prices—it’s unsurprising that spas often ask about the best methods for pricing services, according to Amy Martin Duarte.
The most common approaches, especially at small, single-proprietorship spas, are informal. This includes setting prices based on what other spas nearby charge (competitive method), what the spa operator feels guests are willing to pay (intuitive method) or what the spa operator believes guests expect to pay (psychological method).
However, none of these models consider the most important factor in pricing: your cost. A markup-based approach or a bottom-up approach are
better ways to price out your services, according to Financial Management for Spas, because they consider cost.
In a markup approach, you first determine the direct cost of the service, then add the desired markup percentage. The bottom-up approach starts by considering desired bottomline profit first. Then, you work backwards by calculating necessary pre-tax profit, the revenue necessary to generate that profit and cover expenses, and finally dividing that revenue figure by the number of services expected to be performed. The result is revenue per treatment, otherwise known as price.
It goes without saying, though, that a scientifically calculated price is only viable if customers are willing to pay that price, which itself is dependent on what competitors charge, what your spa previously charged and the perceived value of the service. Still, it’s recommended that a spa’s pricing model be fundamentally cost-based.
EXPERT ADVICE FROM AMY MARTIN DUARTE
A CPA and partner at Calvin Martin & Company, PLLC, Amy Martin Duarte is an expert on financial management in the wellness and hospitality industries. Pulse asked Amy for her insight on common problems faced by spas, how recent legislation might affect a spa’s taxes and where to go when you need help making heads and tails of your business’s financials.
Pulse: What are the three most common financial mistakes made by spa operators? how might they avoid making them?
Amy Martin Duarte: First, not adjusting menu prices to cover increases in product and labor costs. Second, not analyzing your sales mix to determine the most popular services and treatments and if they are priced at a greater profit margin to cover lower-volume or higher-cost services. The third is not conducting regular inventories to be able to see shrinkage and spoilage.
P: How has the 2017 Tax Cuts and Jobs act affected small spas?
D: Small spas that are taxed as C-Corporations may have seen their tax rate increase to a flat 21 percent versus a staggered tax rate starting at 15 percent. S-Corporations, Partnerships, and Sole Proprietors will benefit from a 20 percent “QBI” deduction. This Qualified Business Deduction will basically take a 20 percent deduction off the top of the net income that flows through to the owner’s Individual Income Tax Return.
P: What should a spa operator look for in an accountant or financial consultant?
D: A spa operator should find a firm that understands the wellness and hospitality industry. There are many different moving parts to these industries that are not present in other industries. The uniqueness of how spa team members are compensated, the number of back bar products and retail inventory items needed to provide services and treatments, and, most importantly, gift cards and the financial and tax liability that goes hand-in-hand with selling them. An operator should find an advisor that is like “mission control,” who knows where to go and for whom to refer to in any given scenario, be it banking, legal, insurance or human resource needs.
P: What do spas need to know about how to handle retail inventory in their accounting practices?
D: Spas need to minimally have a monthly inventory count. Retail prices should be reviewed when product orders are made to account for vendor price increases. Spas should practice FIFO—First In, First Out—to ensure that product turnover is in-line with any expiration dates. Par levels should also be
established and adhered to so that there is not any more product in-house than what is needed to get through to the next order.
P: What should a spa operator do if they’re completely overwhelmed by managing a spa’s finances?
D: There comes a time in any business when the operator must understand what made them and their operation successful, and it may not be managing the finances. visionaries and entrepreneurs tend to think differently than someone in accounting or finance; they usually don’t do well when they’re placed in a box or have to follow a certain financial order. It’s important for entrepreneurs and visionaries to have a savvy accountant and a manager who has a hospitality degree. This ensures that they can keep growing the business “their way” without getting themselves into financial trouble.
P: Imagine you can only give one piece of advice to spa owners. What would that advice be?
D: When you are doing well, work with your financial institution to establish a line of credit when your financials are at their best. No one ever needs money in the good times, but when you need it in the lean times, banks tend to say no.
P: What’s the biggest threat to a small spa’s financials?
D: Cost control is the biggest challenge of all small organizations. The cost of product is consistently on the rise and not all spas take time to re-cost their services periodically to ensure that the menu price is still in-line with profit expectations. In addition, a monthly or even bi-monthly inventory will keep product shrinkage to a controllable minimum. Labor cost control is also a determining factor in profitability; as your spa team earns an increase in wage and/or commission, the establishment of a wage plan with set wage and commission ranges will ensure consistency as the earning potentials of your team members change.