Most of us who own spas do not have formal business training. However, a certain amount of business knowledge is crucial for the success of your spa, and the earlier you obtain that in your career, the better off you will be.
1. Accrual vs. Cash Financials
Every small business owner or manager needs to be aware of several important accounting concepts.
The first important accounting concept is the difference between accrual and cash basis for analyzing your financials. The accrual basis is a much more accurate method that allows you to make well informed decisions for your business.
Hopefully, we do not pull up our checking account online and base our decision as to if we can afford an expensive pair of new shoes on the amount the bank says is in the account. Ideally, we make that decision based upon what we know will be in our account after all outstanding checks or automatic withdrawals clear. That is analogous to a cash versus accrual way of looking at your business’ finances.
For example, if you write your rent check for January on January 1st, and you write your rent check for February on Jan. 31st, in a cash basis, both those checks would go into January’s expenses on your Profit and Loss (P&L) Statement. This will result in large fluctuations in your expenses, as two months of rent will go into January and none into February. If you are entering your numbers on an accrual basis, then January’s rent goes into that month’s expenses while February’s goes into its month, regardless of what day you actually gave the check to your landlord. The same holds true with payroll expenses. Let’s say you pay your employees every two weeks and, in one month, those checks go out on the 15th. These checks represent hours worked in the previous month as well as some in the current month. In a cash system, all of that expense goes into the current month, whereas in an accrual system, the amount spent on hours worked in the previous month goes into that month’s report.
Retail is another area in which accrual numbers give a more accurate idea of your margins than do cash numbers. As a side note, the Internal Revenue Service does allow businesses to file taxes either on a cash or an accrual basis. While managers should base decisions on the accrual numbers, they might want to discuss with their accountants which numbers would be more beneficial when filing taxes.
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Lisa S. Jenks, M.D., began her medical career as an emergency room physician. In 2007, she opened Genesis MedSpa, a medical spa in Colorado Springs, Colorado. Recently, Jenks started Genesis Consulting to help spa owners and other physicians open successful medical spas. Reach her at [email protected] or 719-579-6890.
