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Go With the Flow
By: Julie Sturgeon
Posted: July 22, 2008, from the March 2007 issue of Skin Inc. magazine.
Most spa owners credit their great hands and people personalities as the tools to success in the professional spa industry. Business experts take a different tact: You need cash in your register today before you can pay your bills—and unlock your door—tomorrow.
“People think in terms of profits: It costs $X to offer a service, so if they sell for $Y, they’ll survive,” says Tim Berry, president of Palo Alto Software in Eugene, Oregon. Unfortunately, when it comes to the bricks-and-mortar reality, complications such as assets and principal loan repayment don’t appear on that blueprint.
It’s a problem Alice Magos, an analyst with Commerce Clearing House in Chicago, runs into, and her advice cuts to the chase. “A small-business owner has to stop worrying about profit and loss, and start considering cash flow the lifeblood of the business. You can be terribly unprofitable and still survive as long as your cash is flowing,” she assures.
Fortunately for the accounting-impaired, cash flow’s definition couldn’t be simpler: It’s having the cash on hand to pay when your bills are due, as opposed to profits, which look at whether you made more money than you spent when you total up the year. The difference lies in timing, as sales (cash inflow) rarely occur the same day you need to pay the rent, the utilities and payroll (cash outflow). That should scare spa owners, especially those who give in to the temptation to pay their kids’ allowances straight from the cash register.
Keeping your head above water
Berry compares the problem issues of cash flow to the deceptive nature of a calm, clean river. “People catch their foot in something below that surface, the current holds them down and they drown. That’s like cash flow, because both are hidden dangers,” he says. Experts recommend you don a software package as your life jacket, because it forces you to enter all your business numbers. Of course, pushing the button for a cash flow report still falls on your shoulders.