Go With the Flow

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.

Next, use the reports to log payment due dates on the calendar. “A lot of owners can’t keep it in their banks, so if you’re poor at cash flow, spread these payments out. Set up payroll to fall on weeks when you don’t owe rent,” advises Leita Hart-Fanta, a self-employed certified public accountant (CPA) in Austin, Texas. The strategy of paying one or two bills a week focuses attention on the situation daily.

“The problem is you make spending decisions one at a time, in small increments,” Berry explains. “Suddenly you turn around and your fixed costs have gone up by 50–60%, and you’ve forgotten that cash flow on the balance sheet is what really pays those bills.”

Heather Gray has only owned The Spa of Groton in Groton, Massachusetts, since January 2006, but she understands these basics. She files her bills by the week they are due, “so if I don’t have a lot of bills due one week, I can start paying the next week’s and not be caught by surprise,” she says.

For Gary Adams, owner of Georgetown Day Spa in Charlotte, North Carolina, the fact that you never conquer cash flow keeps him vigilant with the numbers. “You can have a day that, based on appointments, looks very slow. Then to your surprise, you have a high volume of product and gift certificate sales and walk-in appointments. On the other hand, you may have a day that looks fantastic on the books, but everyone pays by redeeming their gift certificates, and no one buys products that day,” he says.

Drowning victims

Magos admits some situations call for deliberate cash flow shortages because their benefits far outweigh the temporary pinch. After all, the greatest profit lies in product more than services, so savvy owners take advantage of quantity discounts. But a majority of the time, owners find themselves gasping for cash thanks to these unwelcome situations.

Competition. Too many spas are suckered into pricing to match the guy down the street. You are on more solid ground with cash flow when you charge based on your real cost factors flagged on those daily reports.

Seasonality. January is a very hungry cash month, as clients redeem gift certificates, a situation Adams admits still causes him grief. Tax deadlines make April horrible as well, says Hart. And count on vacations biting into July and August sales. Certainly theme promotions during these dog days help, but don’t count your clients before they slide into your slippers.

Misreading sales pitches. Your equipment sales representative’s job is to explain her product performance numbers in easy-to-understand terms, so you know she is not lying when she says charging $80 per session pays for the table in a month. However, as Hart points out, many owners forget they still have to pay sales staff and their taxes and for advertising to bring in that client, in addition to the space lease, credit card fees and a myriad of other expenses.

Pollyanna thinking. Open a worksheet, type in numbers that reflect a crash in advertising response, a rate increase from vendors, hiring an additional employee to help on the weekends—then make the computer spit out the impact on your available cash. “In some cases, a 5% decrease from your expectations means a new business idea is a cash drain,” says Magos. In that case, pull the stopper before you take a bath.

Swim to shore

Once cash flow problems swell, your options ebb. Ask Berry, whose business cash flow last decade forced him to secure a second mortgage on his home for $120,000 to bail out. He also racked up $65,000 in credit card debt trying to keep things afloat in the earlier days. “When I talk about cash flow, I know why you don’t want to wait until things are bad,” the entrepreneur says today.

Thankfully, the software projection worksheets steer many owners clear of disaster, offering snapshots of when to fight and when to fold. If you believe your situation is worth saving, start on the outflow side. “The first thing people in the real world do when they’re about to bounce checks is not pay their vendors,” Berry notes.

Yet, in Gray’s experience, these partners usually offer a solid branch to grab if you approach them for help. For instance, arranging a 30-day payment window with wholesalers means you can sell the product to raise the cash for that bill. Just don’t wax generous and extend that same credit to your customers, allowing them to pay for treatments after the fact, Hart adds.

“It’s amazing how much money you can save by stocking up on retail and supplies when the vendors are in the mood to be generous,” Gray points out. “If you can only pay part of an invoice, do that and call them before you mail the check so they do not think you are trying to avoid paying them in full. Every industry and every business goes through tough financial times, and if you all make an effort to pay and communicate with each other, you can all work through the tough times together.”

Gift certificates represent a common, one-shot answer to quick cash for this industry, but unless you sell them with the right attitude, they become your worst nightmare, as Adams can attest. That’s because if you use them only to bail you out today, you likely won’t have the income to pay staff to redeem these certificates six months down the road. Instead, control the certificates’ havoc by calling the purchaser to encourage an appointment. This strategy also reaps new customers to boost your cash intake in the future. Adams places one-year expirations on his gift certificates.

Banks offer the most muscle on the outflow side of the river to rescue you, but walk in forewarned.

“They aren’t happy about being emergency relief,” Berry says. “If you rush in the morning you’re about to bounce a check, it won’t work.” However, if you present solid profit numbers from your business plan during the good times, you’ll likely convince your local banker to extend a revolving line of credit to draw on temporarily should things get shaky.

According to Magos, the bank determines your credit amount at 50% of inventory book value and 60–80% of receivables. It’s another case of planning pays, literally. “My commercial lender has restructured my business loans a couple of times this year to help me maintain my credit rating. Half of my credit card companies have been very helpful as well,” Gray reports.

Finally, there’s Adams’ solution that hasn’t failed him in the past eight years. “Punt!” he says. “Decide which bills are most important and pay those first, hoping to have a better cash flow the next day. Sometimes it’s putting off that product order you were about to make or placing a smaller order. You offer discounts to try to fill in your calendar of appointments. And you do what probably all small-business owners do: Pray and hope for a better day tomorrow.”

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