By: Bryan Durocher, Founder and President of Durocher Enterprises
A detailed business plan is a must-have for a successful, profitable, and sustainable medical spa practice. “Business is a numbers game”. We have all heard that saying before and it is very true. Having a positive bottom line in this industry means really keeping an eye on operating expenses and understanding what the numbers mean and what to do to keep them in proper alignment.
Having a handle on your numbers means understanding what the overall financial picture needs to look like and breaking it down into manageable bite size action steps that need to happen every day. It starts with you and your vision and then educating your team members as to their role in the financial process.
Many med spas or cosmetic practices are not profitable. This is mainly due to the lack of understanding and education on the part of the ownership. With most payroll expenses take a significant amount of the gross service sales revenues. Our profit margins in this industry are very tight and there is little room for error. Keeping an eye on your numbers allows you control over knowing where you are, and planning for where you want to go. An owner who knows their numbers is not waiting for the financial advisor to tell them if they are successful or not. Keeping your finger on your business’ financial pulse allows you to dance, shift and change with your business’ needs quickly and intelligently.
For additional help building your medical spa business plan, see the Business Plan Template in the AmSpa store.
Every business plan must include pro forma financial statements. These are financial statements that are used for you to predict the future profitability of your business. Your projections will be based on realistic research and reasonable assumptions, trying not to overstate your revenues or understate your expenses. If you are going to seek a lender or investor, they will use these financial statements to highly scrutinize your med spa. The bottom line, the lender or investor wants to know when and if your spa will be profitable.
The pro forma statements that are required are listed as follows:
- Pro Forma Income Statement
Pro Forma Cash Flow Statement
Pro Forma Balance Sheet
Yearly Projections (Income Statement, Cash Flow Statement, & Balance Sheet)
These are a tool to review your gross sales vs. the expenses you incur while operating your business. The model we will use allows for totaling gross service and retail sales, then deducting the costs of doing business and allotting them to the appropriate categories to show our net profit before taxes. These statements should be done at the end of each month to identify what is working and where our opportunities for improvement are. The most important result is the timely completion of the statement. You need to understand the process and do not physically have to do it. If you are not a “numbers” person, a bookkeeper, accountant, and tools such as med spa/spa software, Quick-books® or you may use a computer spreadsheet program such as Excel® can support you in getting the job done.
Format and Sources of Information
Information for a three-year projection can be developed from your pro forma cash flow statement and your business and marketing analysis. You can also pull together a first year forecast by combining information on sales from business owners and trade associations. The first year’s figures can be transferred from the totals of income and expense items. The second and third year figures are derived by combining these totals with projected trends in the industry.
Cash Flow Statement
Definition and Use
The cash flow statement (or budget) projects what your business needs in terms of dollars for a specific period of time. A cash flow projection tells (1) whether or not you can pay bills, and (2) when you’ll need cash infusions to keep going. This statement deals only with actual cash transactions and not with depreciation or other non-cash expense items.
For information on financing options for your medical spa practice, listen to the Medical Spa Insider Podcast Episode 10 with Wells Fargo’s healthcare specialists.
Definition and Use
A balance sheet shows what items of value are held by the company (Assets), and what its debts are (Liabilities). Professional lenders look at your balance sheet to analyze the state of your finances at a given point in time. They are looking at things like liquidity (how easily your assets can be converted into cash) and capital structure (what sources of financing have been used, how much was borrowed, and so on). Professional lenders use such factors to evaluate your ability to manage your business.
The following is explanation and instructions of how the ‘Strategic Assumptions’ data will apply to a business plan.
- # of treatment rooms
- How many hours a day and days per week the med/spa will be open
- Estimate of the price points for services offered
- How long each of the spa services will take
The above assumptions will then be used to answer the following questions
- Hours open per day divided by length of treatment = # of treatments per day per room
- # of treatments per day multiplied by price of service = Revenue per room per day
- Revenue per room per day multiplied by # of treatment rooms = Total Service Revenue per day
- Total Service Revenue per day multiplied by days per month = Total Service Revenue per month
- Total Service Revenue multiplied by retail percentage% = Approximation of Retail Sales
- Retail Sales plus Total Service Revenue = Total Spa Revenue operating at 100% capacity
- Total Spa Revenue operating at 100% capacity multiplied by % selected by identifying which of the below works for your model = the Actual Capacity Assumption.
Actual Capacity of your spa when it first opens will depend on many factors. For example, if you are an existing practice expanding into an ancillary spa, your Actual Capacity ratio would be higher than that of a spa being built with no existing clientele.
- If you are building a spa with no existing medical practice attached to it, begin with an Assumed Actual Capacity Rate of 10% in the first month.
- If you are expanding your medical practice to include a spa and you have an existing clientele base that will support, begin with an Assumed Actual Capacity Rate of 20-35%.
- An average you could calculate is 4% growth per month
- Goal to be met by the end of year one is 45% capacity
- Ultimate goal will be to operate at 75% capacity
Keep careful notes on your research and assumptions, so you can explain them later if necessary, and also so you can go back to your sources when it’s time to revise your plan at some later date.
Service Expense Analysis
When it comes to your expenses shopping around will do you well. Remember it is not what you “make” it is what you “keep”. I have highlighted the major expenses that are usually out of line and cause a lack of profit.
Fixed vs. Variable Expenses
Fixed expenses are those costs that remain the same month in and month out. It is easy to incorporate them into your budget as you know the number you are dealing with already. Items such as lease payments, loan payments, accounting fees when on retainer, insurances, cleaning services, and depreciation can all be examples of fixed expenses.
Variable expenses change with volume of business your company does. Meaning the “more” or “less” business you do, these numbers can rise and fall exponentially. Example variable expenses include credit card fees, education & travel, repairs & maintenance, salaries & commissions, telephone, and utilities.
Expenses and Professional Services Used to Run Your Business
- Get at least three references for each individual or company you are going to use in helping you operate and grow your business.
- Look at your natural skill sets – Do you love doing the task? Can you pay someone else to do the task and make more money doing what you do best? Could you have more quality time and a better life by delegating out the task?
“I’d rather have 1% of a 100 people’s efforts than use a 100% of my own”. –John Paul Getty
Advertising & Promotion
This category covers all of the tools you use in marketing and promoting your business. It is a category you have to pay particular attention to as advertising costs can add up very quickly. Items covered under this expense include; magazine, social media, television, and radio advertising, marketing materials such as business cards, menus, brochures, and referral cards, all direct mail pieces, and client entertainment.
With any investment into advertising/marketing/promotion, think about tangible return. Can you track the return on investment? For example, are you advertising with a display ad in the yellow pages? If you are investing heavily in any particular area you must have a tracking system put into place to monitor results. Otherwise, how do you know if it is a wise investment? The strongest form of marketing is “word of mouth” and it can be the least expensive. A referral card program is the best way for techs to build a clientele and it is traceable. Special events are another strong revenue tactic.
When creating your advertising plan, also keep in mind the specific legal requirements that apply to medical practices.
Your costs for salaries, commissions on technician’s revenues, EDD, FICA, and workman’s comp insurance are totaled and listed here.
Hands down this is one of the most challenging areas with your business and has to be monitored closely. If this area is out of alignment refer to the commission structure in for a plan that allows for profitability.
Supplies – Back Bar
This would consist of anything used to perform a service. Professional supplies need to be separated from retail products that are purchased for resale. Request that your distributors or vendors itemize them separately for you if possible.
This is another challenging area. These expenses if not checked can mount up very quickly. The three main culprits are; the actual cost of the product to perform the service is too high, product waste and inventory control.
When choosing professional products to perform service you have to compare the cost of the products needed to perform the service and how much you are charging for the service and does the product cost amount to no more than an average of 18% of the service price charged in a med spa. You may find some services are slightly higher and other come under the seven percent and in the end balance out. A business that too focused on injectables or fillers will run into to challenges with cost of goods. You want a balance of service revenue from machines as well.
Inappropriate Cost – European Facial $100.00
Cleanser/Toner/Mask/Moisturizer/Eye Cream/Cotton Pads $20.00
Product Cost $20.00 divided by $100.00 Service Cost = 20%
The second culprit is technicians using or wasting too much product. When staff is not paying for the product sometimes there is little care in how much they use or how much is rinsed down the drain. Coach your team in the appropriate amounts of product needed for their particular services offerings. Another option is to use products that are formatted for individual services so there cannot be waste.
Create a monitoring system for back bar products where technicians have to turn in completed packaging before they can get new supplies. Appoint an individual to be responsible for inventory control and ordering. This person would do a physical count of inventory each week, note shrinkage (missing product) and create a master order form to track purchases. By all means do not let your sales reps decide what to order for you.
Retail Expense Analysis
This category covers the expenses of buying the products you retail in the med spa or spa. You are looking for the highest profit margin possible. Typically a branded line’s cost will range between 48%-56% of the retail price. Private label or specialty items can have a much lower product cost and higher profit margins that you set based upon market acceptance.
An inventory system is essential for keeping track of ordering. Most software systems allow for inventory control and adjustments. Having a point person handling this is important to monitor cost, orders, and shrinkage. It is easy to overspend in this category especially when there are sales and promotions constantly offered from your vendors.
For more information on systems and best-practices to build your medical spa profitably and legally, attend one of AmSpa’s Medical Spa & Aesthetic Boot Camps.
Bryan Durocher is the author of Wakeup Live the Life You Love in Beauty, and is the founder of Essentials Spa Consulting and Durocher Enterprises. Durocher was named one of the “Top 20 People to Know in the Beauty Industry” by Global Cosmetic Industrymagazine, and provides coaching, consulting, global industry trends, and marketing solutions for medical spa, spa and industry professionals internationally. He has published many articles and has provided business education internationally at a variety of national and international industry events including AmSpa’s Medical Spa & Aesthetic Boot Camps and The Medical Spa Show.