This post was originally published in the AmSpa QP and on the AmSpa Now blog.
“A smooth sea never made a skilled sailor.”
– Franklin Delano Roosevelt
Franklin Delano Roosevelt’s quote was not intended to describe the financial turmoil many medical spas are facing in light of the current pandemic. Yet, it fits perfectly. The difference between weathering the storm and drowning in it can be seen in a few fundamental financial strategies that can be recommended in any business environment.
Those who survive the storm likely have a deep awareness and understanding of their business’s financial situation and are committed to continuing to develop financial strategy on an ongoing basis. Having a strategy and a clear plan allows for easier navigation through troubled waters and provides a better chance to maximize opportunities when times are good.
Assess your financial situation. Financial priorities during turbulent times include maximizing and conserving cash flow and being able to truly understand the impact of all the options available. Some decisions people have been making over the past few months involve staffing and payroll, what expenses to cut, and how best to strategize around available government funds. All these decisions are easier to make when you have a clear financial strategy—a financial roadmap, a financial plan or a budget—developed.
These financial strategies for med spas can help you get started.
Review Past Revenues and Cost of Goods Sold (COGS)
To begin the process of developing a financial roadmap, you first must review the past. This means understanding your revenues and where they come from. What procedures make up your revenues?
From there, determine your COGS, or the cost to perform a procedure. For example, your injectables and fillers COGS may be 40% of those sales. That means that for every $1.00 earned, $0.40 is going out the door, leaving a gross margin of $0.60. For laser services, the COGS is likely much lower, leaving a higher gross margin. Understanding your revenues and their related variable costs is a good starting point to developing your financial roadmap.
Review Fixed Costs
Reviewing your fixed costs is the next logical step. As your gross margin (the profit after performing your procedure and paying the COGS) increases, your profitability increases—if you are able to keep your fixed costs steady. Rent is one example of a fixed cost. If rent is $50,000 per year, that amount will remain fixed whether you bring in $1 million or $2 million in revenue.
Increase Cash Flow
As you review your historical revenue, COGS and fixed expenses, identify opportunities to do a few things that will impact your profitability and increase cash flow. The first opportunity is your revenue. Reviewing your historical revenue figures may lead to some surprises. Maybe you thought your retail sales were higher than they actually are. Maybe you didn’t realize so much of your revenue was from one procedure. Is the mix of services you’re providing the best use of your provider time? What about your costs? As you review your historical costs, you’ll likely see some expenses you didn’t realize you had, or maybe even some that you are able to completely cut.
Calculate Your Break-Even Number
Calculating and understanding your break-even number is another helpful exercise. Break-even represents the minimum, in an average month, you will need to bring in to keep the lights on and pay all your bills. Knowing your break-even number in turbulent times is critical so you can determine how to stop hemorrhaging cash.
Compare Your Numbers to Industry Standard
Comparing your numbers to industry standards gives you a good idea of how you are trending compared to the industry. Doing so will highlight where you are performing well and where you have opportunities to increase profitability. It also will help you set goals. For example, if you see that you’re overspending in advertising compared to the industry, consider why that might be. Are you trying to grow too aggressively? What should your budget be?
Identify Costs You Can Reduce
Additional actions you can take to maximize cash flow during the pandemic include identifying what can temporarily be reduced, deferred or eliminated. Some credit lenders and mortgage companies are allowing for deferment of loan payments during this time, so consult yours to find out if you can do this to ease your financial burden. Many suppliers understand the situation a lot of business owners are in and are working with their clients. Some landlords are willing to defer rent payments until the future.
Create a Plan for the Future
A thoughtful and honest review of your practice financials helps you uncover where you’ve been so you can then take a stab at making your financial plan. Where do you want to go? What should change? Should your providers be generating more revenue? What goals should they have? Take some time and realistically plan out your revenue, month by month, followed by your costs. Make a plan to capitalize on any opportunities you uncovered during your review. Consider your break-even and rework the numbers until you are profitable, or at least until you are breaking even.
Typically, it is advisable to have a month-by-month financial plan. In these times of uncertainty, however, many are shifting to a week-by-week financial plan. This forecast allows them to see, in more detail, the cash flow ins and outs that can be expected and planned for.
Financial Strategies for Med Spas that Prepare You For Any Scenario
Imagine a scenario where your business has to close for a period of time. It’s outside of your control, leaving you with no revenue. While nobody could have expected this just a short time ago, this situation is reality right now for many. With a clear roadmap and cash-flow forecast, a practice owner can quickly determine the effects of greatly reduced—or completely eliminated—revenue. They know where their money is going. Because they understand their cost structure, they will quickly understand which expenses they won’t have when there’s no income. For example, they will know that injectable COGS won’t continue if there’s no injectable revenue. Then, they will be able to review their expenses and identify the costs that can be put on hold. They can make calls to their suppliers, landlord and banker.
Having a clear understanding of the practice’s financial condition is the difference between implementing an actionable plan and simply worrying. With a proactive approach, many business owners are going to be able to break even during the pandemic. They were able to make reasonable decisions about those issues involving staffing and payroll and what expenses to cut. They are able to implement a strategic plan to best utilize available government funds. As their offices reopen, they don’t have to dig their way out of a financial hole.
Your new financial plan, while critical during turbulent times, will also guide you through the best of times. The financial clarity that results from the careful analysis of your numbers will allow you to make good decisions and capitalize on opportunities in any economic cycle. Once you start measuring and reviewing, you will see your business improve Remember: What gets measured gets improved.
If you are able to use this time in rough seas to improve your business—if you are able to put together a financial plan that gives you clear direction to where you are going—then you will no doubt come out of this storm a much stronger sailor. Your practice will be well positioned to take on any future waters that might come its way.