Practical Finance—Part I

Editor’s note: Part II of this column will appear in the January 2014 issue of Skin Inc. magazine, and will address using tools and systems for cash control, utilizing financial professionals, and the value of constantly evaluating and updating aspects of your business’s finances.

Is your business financially fit? If you are like most, your relationship with your skin care business’ financial aspects may raise more questions than answers.

Financial fitness

Being financially fit is knowing where you stand in regard to your business’s financial matters and involves the following.

1. You know how sales are trending compared to previous years.
2. The direct percentage of what it costs to produce and sell products and services is known and managed.
3. Monthly overhead expenses are clearly defined and constantly re-negotiated.
4. Profit/loss is known, and there is a plan to improve it.
5. The volume of sales required to break even is defined in terms of the number of services and products that need to be sold monthly and weekly.
6. Procedures are in place to assist in decision-making and to help determine the financial impact relative to taking on debt or investing in new equipment.
7. You have clear financial targets with plans, tools and systems in place to meet them

Keep it simple

The information you record should be clear and make sense. Your balance sheet, and profit/loss statement should each fit on one page, and your financial statements should be available to you and be reviewed within two weeks following the end of the preceding month. Here’s the big picture, which should be clearly presented on your profit/loss statement.

1. Begin with sales—This includes services and retail.
2. Subtract direct costsThis includes labor, treatment supplies, inventory purchases for resale and credit card discounts; and should take up approximately 60% of your total sales.
3. This leaves you with your gross margin—approximately 40% of your total sales.
4. Subtract overhead expenses—This includes rent; repairs and maintenance; advertising; marketing and promotion; utilities; office supplies; insurance; management and bookkeeping salaries; payroll taxes; and other professional fees; and should take up approximately 25% of your total sales.
5. This leaves you with your net profit (loss)—approximately 15% of your total sales.
6. Subtract debt service—This includes accounts payable, notes, loans, credit cards, leases, lines of credit, and money you have loaned your business, and should not exceed more than half of your net income; may take up approximately 7.5% of your total sales.
7. This equals your working capital—7.5–0% of your total sales.

Note: Don’t include rental income, gift certificates, memberships, interest, tips or collections.

Organize your chart of accounts so it shows your sales, costs and profitability in this fashion. At a glance, you should be able to see what is working and what isn’t.

Break-even point

Apply these numbers to determine the break-even point, which is the point at which your businesses expenses and revenue are the same. The equation is as follows: Break-even point = overhead expenses + debt service ÷ gross profit margin.

The lower the break-even, the more sustainable your business is. You also need to manage equity. The equation is as follows: assets - liabilities. If you owe more than you own, you have negative equity, which decreases the ability for you to receive financing. Clearly define and communicate your target numbers—if you don’t have targets, you can’t hit them. If you manage these numbers, you can manage your business profitably.