Numbers, financial statements and similar business health assessments are objective, fact-filled and to the point.  Interestingly, many spa and salon owners find numbers more frightening than a room filled with spiders that could harbor malicious ghosts.  Numbers just aren’t the thing that creative types are typically drawn to.  Consequently, the facts that will reveal a spa’s business health are hidden, ignored or overlooked.  Oftentimes, the spa is run from a mysterious inertia that is the combination of loan residue, owner income and random cash found in the till.  Sometimes particularly diligent spa owners do try to track certain numbers but do so through an archaic computer program or an off-site accountant and never really comprehend the meaning of the numbers for their business.  While keeping track of numbers is crucial for the IRS, your banker or your investment team, it is also crucial to run numbers that get at the soul of your business.  Customized tracking systems that are tailor made to the spa industry must be utilized to understand the mechanics of the business that you are operating on a day-to-day basis. 

Common Financial Myths: 

Cash is Profit and profit is cash.  Nothing could be further from the truth!  Without cash flow, that is money that is immediately liquid and accessible to pay bills with, your spa could be out of business in a matter of months. Profit, on the other hand, is the money that is left over after everything has been paid for.  For example, your spa collects $34,000 in the month of May in gross receipts.  After you pay out all of your costs, both fixed and variable, depreciation, taxes, wages, costs of goods sold, etc. there is (hopefully) some amount remaining, which can be called net profit.  Obviously your spa must be making some profit to justify its existence as a viable business. In order to make payroll, pay rent and settle immediate bills, a portion of this profit must be immediately available.  Many businesses go out of business during their first three years because there is no cash available with which to pay bills. 

Gift Certificates are Free Money.  Quite to the contrary!  Think of a gift certificate purchase like you would a friend who has asked you to hold some money that they will eventually use to treat you to dinner.  Until the dinner has been purchased the money is just an IOU for dinner.  Consequently gift certificate funds should be held in a separate account or in some way distinguished from general revenues.  Generally, the gift certificate will be recognized as revenue when the certificate is used or when it expires making it no longer usable by the consumer. If your spa is located in a state where gift certificates are not permitted to expire, you may write off a percentage of the revenue after a period of time, like five years, in order to settle your books. 

Other problems with gift certificates:

1. While the gift certificate gravy train is hard to say no to recognize these particular revenues for their actual value.  Running a successful business isn’t just about collecting as much money as possible for a given period of time.  There must be a long term plan in the works that accommodates and plans for client retention, retail sales and ongoing business growth.  Realistically gift certificate clients will not build your business, although they may generate useful revenues to help with the final numbers and paying the bills at the end of the month.
2. The 80/20 Rule is a general principle that says that 80% of your general revenues will come from 20% of your clientele. This 20% will not be gift certificate recipients.  In fact, you should take great strides to be certain that the gift certificate recipients don’t scare off your 20% due to their sheer numbers and neediness.
3. Gift certificate clients will take up the most amount of your spa’s resources for the least amount of long term revenues.  Most gift certificate clients will not purchase retail, not return within the next year, not refer other clients, and not show up for their initial booking.  In fact they will have additional problems like having endless amounts of questions, not liking something about the gift they are receiving and having let down or buyer’s remorse after the experience is over with.  Finally, gift certificate clients may not have wanted the gift at all; they may have really wanted a pair of running shoes or a night on the town.  The simple truth is that gift certificate clients typically did not choose the spa, the experience or the gift.
4. Gift certificates are purchased with money.  The value of money devaluates as time passes.  If you are in a state where you might be forced to accept a 10-year old gift certificate for a facial that was valued at $50 at the time of purchase, you might be honoring that paper agreement with an $85 facial 10 years after the fact.  Try to have your gift certificates ultimately be for a dollar value and not for a service.  Furthermore, things change on the menu over time and the service that the client is expecting may no longer be offered.  That sort of dilemma opens up an entirely new can of worms to be wrestled with.

A Spa is a Cash Business.  Since the beginning of time hairdressers, nail techs and estheticians have been collecting and living off of tips and money from the till.  Whereas in the 1970’s this went unnoticed by the various authorities, those days of carefree business management are long gone.  

1. The IRS is monitoring spas at an ever-increasing rate and they will nail you if you aren’t following the rules.  This means that you must claim credit card tips for employees.  This means that all transactions must be on the books.  All revenues must be claimed and you must pay all required taxes and fees.
2. If you build a successful business but you have no record of the type of revenue it has been producing, how do you sell the business, get a loan for an expansion or take on a partner?  You have no real financial track record for the spa.
3. If you have no income on paper, you have no income for banks, landlords, or mortgages.  Try to buy a house or a car with only your word as collateral. Further, cash doesn’t get a credit history. Even if you can fall back on a domestic partner for credit and financial backing, establishing an earnings history is crucial to your future.

A Loan is a Gift/I’ve just won the lottery.  The rational rephrasing of this myth goes something like…a loan is a giant brick fastened neatly around my neck and the spa needs to make enough net profit so that I can pay myself a salary.  Borrowing money comes at a price known as interest and that interest eats away at your profit.  If you have a business plan that can realistically generate enough net profit to pay back your debt while making a comfortable profit, it only makes sense to take out a loan.  However, remember that a loan is a huge responsibility and requires management.  As for salary, don’t plan on giving yourself a fat check once a month and taking time off as the weather permits.  While a good number to benchmark for owner’s salary is 10% of the gross revenues, remember that there has to be a net profit for this to actually occur and many times the first three years of a new business are lean years.  While an owner’s salary can always be figured into the cost of doing business at the onset of a spa opening, that money is still borrowed and borrowed money comes at a price.  With that said, do plan on compensating yourself for a fair market value given the skills, responsibilities and duties that you will be assuming.  If compensating yourself isn’t immediately feasible, write yourself an IOU for future reconciliation.