Turnover vs Profitability

| October 26, 2011 | Comments (0)

By Chris Parker – esp

If you hear of a company that does a billion Rand in turnover you are likely to be very impressed and even intimidated by this figure. You would think that the shareholders of this company would be the happiest people on earth. However, if the expenses of the company were more than a billion Rand then the company would post a loss. Thus if your own business only generated one million Rand but your expenses were only R750 000 then you would have made R250 000 profit and in fact would have made a higher profit than the company that generated one billion Rand.

Therefore, just because your spa is bringing in the money does not mean that you are profitable and if you are not profitable you will only last as long as your cash reserves.

When focussing on profitability there is the obvious final net profit before tax that we are interested in, however, there are also areas of your business (sub sections) that make up the final net profit and each of these areas should be profitable in and of themselves.

Profit on stock

The first and most obvious is your stock. The profit generated from the sale of stock is called Gross Profit. It can be seen as a business in itself. For example if you are turning over a billion rand in stock sales it would appear great but if your stock cost you more than a billion rand then you will not generate a gross profit but rather a loss.

The cost of the stock that you sell is known as the cost of sales. When it comes to cost of sales the margins (mark up) is very important as this is what generates your gross profit. If there is no mark up or the mark up is too low then the amount of gross profit generated by stock sales will not be sufficient to cover your operating costs in order to post a final net profit.

The beauty of selling stock is that it is not as limited by human resources, space and time as treatments are and therefore the sky is the limit. The higher your volumes the lower you can make your margins (if you need to compete on price and/or offer discounts etc).

Profit on treatments

Another area to monitor your cost of sales is on treatments. The primary aspect of treatment cost of sales is the stock used within a treatment. This is similar to the ingredients that go into the recipe of a meal. If the ingredients that make up the recipe are too expensive (based on either quantity or quality) then the price will either need to go up (making the treatment less competitive) or the margin will be eaten into leaving less gross profit and the same threat to the overall net profit of the business.

The challenge of managing treatment cost of sales lies not only in balancing the theoretical costs of what should go into a treatment but also in determining what was actually used because therapists do not always stick to the prescribed recipes (for various reasons).

You therefore will need to do a comparison of what should have been used in the month to what was actually used in order to determine your variance. Simply doing this sort of monitoring will at least alert therapists that you are tracking what they use and will also give you an indication of your true cost of treatment cost of sales.

At a practical level it is unrealistic for therapists to manually track every millilitre of stock used in treatments so you will need some sort of system to link stock recipes to your treatments and have these stock levels automatically deducted each time you sell a treatment with a recipe. The system should also work out the cost of stock per millilitre so that the cost of sales can be accurately determined. This will give you the theoretical value of stock and treatment cost of sales that you should have left and the variance will indicate what therapists have actually used.

Profitability of your staff

Another very import cost factor when generating income is the cost of your therapist salaries and is a question that I get asked very often “What do other salon and spa owners pay their therapists?”

At the end of the day it’s not the way that you structure their salaries that matters, its what they end up getting paid. And its this salary figure that can be thought of as a cost of sales element although it usually gets included in the Wage expense and not the Cost of Sales expense.

If a therapist generates R50 000 treatment revenue and R10000 Retail revenue and their salary is R18000 before tax then they are earning 30% of what they bring in for your business. Therefore if they earned a basic salary of R7000, 20% on Treatments (R10000) and 10% on Retail (R1000) and end up with R18000 then it is 30% of R60 000.

If you know the % of turnover that they should ultimately end up with (including their basic salary) then work backwards from their turnover to end up at this figure.

In terms of being creative you could play with other ideas like lower basic salaries and higher commission rates or sliding scales etc but ultimately each therapist needs to be profitable and its up to you determine the rate of profit per therapist.

All of the above factors need to be taken into account before you start looking at overhead expenses like rent, electricity, telephone etc.

If any of these areas of not profitable (or not profitable enough) then be ready to take action to rectify the situation.

By Chris Parker – esp

Chris Parker is a highly knowledgeable and passionate individual.  Chris joined esp in 1997 and has worked in the areas of Technical Support, Sales, Finance, Consulting, Training and Business Development in the Health & Skincare Industry.  As a respected businessman, Chris has presented various business talks at the Les Nouvelles Esthetiques Spa Conferences, focused towards the growth and development of the spa industry.

 

 

esp Spa Management Software

Computerised Salon & Spa Management including Easy Point Of Sale; Sophisticated Stock Control; Powerful Customer Relationship Management with SMS & Email; Dynamic Appointment Scheduling with Rooms, Staff and Equipment; Financial Control with VAT Returns and Profit & Loss; Easy Data Exchange with Hotel Reception. ESP consulting: Based on Business Intelligence produced by ESP Salon & Spa Software.

For more information contact: ESP Salon & Spa Software on Tel: 021 425 3661 or e-mail: chris@esponline.co.za

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