PROFITS ARE THE KEY TO ANY BUSINESS. MAKING more money is what everyone wants, yet in the spa industry, it's becoming more and more difficult to show a profit. Owners and managers need to learn to grow their businesses with true measurements and to protect their bottom lines, but many never address their numbers and profitability until it's too late. It can be stressful trying to speculate what the future holds for your own spa if all you have is wishful thinking. All too often, spa owners perform facials just to make ends meet.

But understanding the financial aspects of running a business can be a challenge if you've never taken an accounting or economics course; certainly, no one spent time during their esthetics training on spa finance. With little financial back ground, it's no surprise that spa owners are wavering. The good news is that growing and protecting the profitability of your business isn't an impossible undertaking—It just takes the proper know-how.

You must focus on two major areas for growth and profitability: one, establishing a true form of measurement to project, track and monitor the growth (or lack thereof) in your business; and two, gaining a complete understanding of how to protect the cash you already have coming in.

Keys to Success

Let's begin by tracking five key areas; good numbers in the following components have proven to be successful indicators of increasing sales revenue.

New clients. Knowing how many new clients visit your spa each month allows you to project your sales, know when to hire new employees and gauge the success of your marketing dollar investments.

Client retention. Too few businesses pay enough attention to client retention. The ability to keep clients fuels your spa's growth and should be the focus of your energy. For tracking purposes, a retained client is any new client returning for a second, and visit within 90 days. Setting a retention goal of 50% is an excellent place to start; if you aren't able to meet this goal, you must consider why—there may be a customer service or technical training problem. The key to retention is education. I can't express enough the importance of keeping retention high—by retaining 50% of your new clients each year, you can expect a 15% growth just from this area of your business. If you're serious about growing your business you need to find a way to reward your staff for retention.

Client frequency. Examining the frequency of your clients' yearly visits on a month-by-month basis will help you better project future sales and understand the flow of your retained client base. When the economy is bad in your area it isn't uncommon to watch the yearly frequency rate drop. However, you can use this opportunity to rework your marketing strategy to prepare for slower months. When you can be flexible with a changing economy, low frequency numbers will have less of an impact on your spa's overall profitability.

Average ticket sale. The average ticket sale is the combined sale total of products and services a client has paid, taken on an average. Most owners believe that raising the average ticket sale means raising prices. But the easiest way to increase the average sale is to add services or retail products to a client's ticket. Every spa should have in place a unique approach to adding on services or retail products during a scheduled service.

Retail sales. If you haven't heard it often enough in the spa industry by now, retail sales must be the center of your attention because retail sales and retention go hand and hand. Here are some statistics gathered by Festoon Salon (www.festoonsalon.com) in Berkeley, California, that prove the point:

• If a client purchases two retail products, there's a 60% chance of her return.
• If a client purchases one retail product, there's a 30% chance of her return.
• If a client purchases no retail products, there's a 10% chance of her return.

Another important fact in retail sales is that you'll net approximately a 10% profit from services, but retail sales can yield up to a 40% net profit.

When I think of profitability in the spa industry, one name comes to mind: Douglas J Salon and Spa, anchored in Okemos, Michigan. Brothers Scott and TJ Weaver own several locations throughout the state, including two Aveda Concept Schools, two Exchange Salons for Advanced Education and two new schools scheduled to open in fall 2006 and spring 2007. The Weaver brothers have a mindful approach to profitability: "If you're experiencing low retention, then you'll probably find that you have low retail sales as well," says TJ. "Knowing and understanding the average ticket sale is the key to getting them to spend more," adds Scott. "You know your marketing dollars are working because they're in your spa; the next step is discovering how to drive the sale forward."

If you're experiencing low retention, then you'll probably find that you have low retail sales as well.

Gross and Net

Once you have a system in place for increasing sales, how do you protect your cash flow? To understand the process, you must know some accounting basics.

When looking at your spa's profit-and-loss statement, the two most important factors are your gross profit and your net profit. To find your spa's gross profit, take your total retail and service sales and subtract variable costs, or cost of goods sold (e.g., payroll, payroll taxes, backbar items and products for resale). These costs are considered variable because they vary with the amount of business you do. What's left is your gross profit. Your gross profit margin (the percentage of your gross profit to total sales) is a very important financial indicator. If your spa isn't delivering a 45% to 50% gross profit margin, you'll have a hard time managing any bottom-line profitability.

The biggest key to an outstanding gross profit margin is a sensible compensation plan.

The biggest key to an outstanding gross profit margin is a sensible compensation plan. "Salon owners and managers need to be sure they're fair with their employees, yet be careful not to overcompensate. A spa's compensation plan is usually its largest expense," says Scott. If your spa's gross profits are below 45%, you should consider reworking your compensation plan.

The second figure to calculate is your net profit, or bottom-line profit. To do this, take your gross profit and subtract any fixed expenses such as rent, utilities, advertising and any other costs not associated with service payroll and products. These expenses are considered fixed because, for the most part, they stay the same each month. After you've subtracted your fixed expenses, the amount that's left is your net profit—what you'll take home after all of the bills are paid. A good net profit can mean the differ¬ence between a successful future and just getting by.

There are many forces at work to endanger your thin slice of the profitability pie. I've found that most salons and spas are lucky if they yield a 3% net profit. When I work with my clients, however, I budget them for 15%. The key word here is "budget"—to achieve a healthy profit, creative budgeting must be in place and a limit must be put on spending.

Now that you have an under-standing of how to increase sales and how your gross and net profits are derived, you can begin using this knowledge to your advantage. Success doesn't happen by acci¬dent; it's a result of careful plan¬ning. When you put the correct chain of events into motion, you'll find that purposeful action always yields successful results.

Ana Loiselle, President of the Secret Salon and Spa by Design in Royal Oak, Michigan. A former salon and spa owner, Ms. Loiselle can be reached at 248/546-4312 or at www.thesecretconsultant.com.

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