What You Need to Know About Your Medical Spa Profit Margin

In this interview, Monte Zwang of Wellness Capital Management discusses medical spa profit margins. Monte’s business provides business planning and financial strategies to businesses in the health and wellness industry. Monte spent most of his professional career turning around distressed businesses. He worked with many companies in the hospitality industry, but one day started working with a top cardiologist on the West Coast.

This doctor’s medical practice was so financially unstable that Monte had concerns the doctor could become distracted when operating on a patient’s heart. Monte decided to focus his work on medical practitioners and healers. He wanted to give them the financial tools they needed to become organized and stable. That way they could focus on what they needed to do to help people heal.

This episode will cover:

• Important financial goals for your medical spa
• Realistic profit margins for medical spas
• Good debt versus bad debt 
• The cons of in-house bookkeeping
• Three tips for troubleshooting your finances

The Importance of Treating Your Medical Spa Like a Business

Many medical spa owners don’t take their profit margins into consideration when they open their doors. That’s because they are good at what they do and have great holistic health training. But they go through their medical training without learning what it takes to manage a profitable business. They don’t always have reasonable expectations for their profit margins. Some might not even be sure what a profit margin is.

But they need to learn to treat their medical spa like a business. They need those profits to keep their business running in the long term. There are six numbers that every business owner needs to know:

• Sales
• Direct costs
• Overhead
• Net profit
• Debt service
• Break Even

Once you know these numbers and understand where they come from, you can make more informed decisions about your business. They can provide you with a roadmap that helps move your business forward and know where you need to go. After all, if you don’t have a target, you don’t know what you are shooting at. 

Understanding the Financials of Your Medical Spa

A lot of medical spa owners come to a financial advisor because they aren’t sure how their business should operate. Owners put in long hours but feel like they aren’t seeing a return on their time and investment. They know they need to be making more money but don’t know how. So how do they get from where they are to where they want to be? 

They need the right metrics and tools to understand how they are performing. They also need to manage their expectations about revenue. And finally, they need to understand how to create a viable, realistic business plan to help move them forward.

Key Financial Formulas for Your Med Spa

• Your net profit should be somewhere between 15% and 25%. That is after your overhead and direct costs but before your debt service. 
• Your loan amount should equal half of your net profits before other debt. If you don’t have any net profit, then you shouldn’t be paying out on any debt.  
• Your overhead should be no more than 30% of your total revenue. 

A good general guideline is aiming to keep your labor and direct costs around the 50% mark. That will leave you 30% for overhead costs, resulting in a 20% profit result. If you aim for these financials, your medical spa should be a healthy, viable business long term.    

Make Sure You Manage Your Labor Costs

If you are a physician and you are performing services within the medical spa, you should be compensating yourself as if you are an employee. Keep an eye on your direct labor expenses, though. This is an area that can quickly grow out of control. Aim for a labor factor of somewhere between 15-20% of the services you are providing. 

Understand the Difference Between Good Debt and Bad Debt

You have to pay out money to build your business, so debt is inevitable. But there is a difference between good debt and bad debt. 

Good debt is money you pay over time that will eventually generate revenue for you. For instance, if you buy a piece of equipment, you are going to pay it off in five to seven years. The debt will generate revenue for you during those years, though.

Bad debt comes from paying money on something that isn’t generating any income. For instance, if you are making payments on a piece of equipment that’s just sitting in a closet, that’s bad debt. That room isn’t being productive and it isn’t making you any money. Make sure you are maxing out the equipment that you currently have before you invest in anything new. Even if you have to put marketing campaigns into using specific equipment, don’t let it sit there. It’s costing your business money.

If you end up loaning your medical spa money, make sure you treat yourself as a lender. That loan should go on your balance sheet as a shareholder loan because you should expect a return on that investment. Otherwise, why would you go into the business?

The Cons of In-House Bookkeeping

Many medical spa owners try to cut costs by doing their bookkeeping internally. You’ll end up losing a lot of money in the long run if you do this. Someone internal may be less expensive hourly, but they are likely going to be putting in more hours to do the work. The problems aren’t solely cost-related, though.

Doing your bookkeeping internally can result in getting inaccurate, inconsistent information. A bookkeeper who is only looking at the books at the end of the month won’t be able to help you with profitability on a day-to-day basis. You need a financial team who specializes in the medical spa industry who can objectively look at your financials and help you control your cash flow. Your financial team can help you improve your profitability. 

An experienced financial consultant can see areas of expenses that you need to change to move your margins in certain areas. They can tell you if your labor costs are out of line, if your retail-to-service ratio is too low, or if you paid two rents last month by mistake. It’s about more than cutting checks. They can address cash flow issues, create a budget, and help you do your taxes at the end of the year. It’s a planning process that’s substantially different than just processing the data that comes from bookkeeping.

3 Ways To Troubleshoot Your Finances

Want to do a quick check up on your finances? Take a look at these three areas: 

• Look at your gross profit margin. It should be no less than 55-60%. If it is, then you are doing something wrong. 
• Track your growth annually. Compare your sales last year to this year. Are you growing? If you aren’t, you need to create a plan for growth.
• Assess your net profit. Are you taking on too much debt? Look at the equipment you are using and ensure it’s generating the profit that it should.

Know Where You Want To Take Your Medical Spa In the Future

It’s important to have a picture of where you want to go with your medical spa practice. Ask yourself what your financial expectations are for your business. If you are already making them, great. If you are falling short, then it’s time to make a plan and know what you need to change within your business. Knowing where you are going allows you to course correct early, without panicking.