Understanding Your Financial Statement

In any sport, as in business, you cannot be successful if you don’t know the score—and in business, your financial statement information is your scorecard.

When analyzing financial data, it is important to look at four different aspects: trends, comparisons to previous years, budgets and industry averages. Depending on the item analyzed, these details should be looked at monthly, weekly or even daily. So just what should you be examining?

Start with statistics from your business; many of these can be provided via your spa software.

• Average ticket. Total dollars divided by the number of clients is a very simple calculation. Look for comparisons to previous months, previous years and projected amounts. Is it going up or down? Following is a sample average example: $50,000/500 clients = $100 per client
• Discounts. Many spas give away their profits by over-discounting. Look at this monthly.
• Service per client. Identify trends. If service per client is going down, you are missing out on add-on sales.
• New client count. How many new clients did you see last month? This will give you an idea of whether your marketing is working. Also, it will provide information about the effectiveness of your referral program.
• Client retention. This is especially important for new clients. According to industry averages, if you can book a new client twice, you have a 70–80% chance of retaining the client. Client retention also gives you an indication of your customer service.
• Retention by service provider. Do you have a team member who is not retaining clients? If so, consider additional training to remedy the issue.
• Retail per service clients. Most spas would not have a profit if it were not for retail sales, so watching the trends is important. According to Kopsa Otte research, most spas have an average 27–40% client retail with a ticket of $12.50–15.00 per client.
• Hours booked compared to hours available. This is an efficiency ratio; strive for 75% or greater. To calculate, simply take the hours the spa professional is working on clients divided by the hours in the building.
  Financial statements also must be examined; here, calculations may be necessary for some items.
• Retail sales. Compare year-to-date and with the previous year and budget.
• Gross profit percentage. This may be the most important number that you need to examine. Calculate by taking your total sales and subtract total variable costs—costs that vary with sales, including back bar, retail purchases, production labor, payroll burden on production labor and merchant fees—to find your gross profit. From there, divide your gross profit by total sales, and the result is your gross profit percentage. Target 36% or more in order to be profitable.
• Fixed expense as a percent of sales. Consider targeting 30% and calculate by dividing fixed expenses by total sales.
• Merchant fee percentage. What are the merchant fees for credit cards divided by total sales? This may be creeping up; 2.5% is becoming more common. If this percentage is going up, you need to reconsider your provider and the cards issued.
• Pre-book percentage. The more visits from a client results in more money for the bottom line.

These are just a few of the numerous items that you should look at when reviewing your financial data. If you are going to run a business, you have to know the score so that you can make adjustments and, in the end, win the game.

Larry Kopsa, CPA, is a partner of the 25-member certified public accounting firm of Kopsa Otte. His unique insight into spas, distributorships and cosmetology schools allows Kopsa to work with clients from coast-to-coast and speak at events worldwide.

Author’s note: The information provided does not constitute legal, tax, accounting or financial advice and is offered as an information service only. No liability is assumed in connection with the use of this information.