If you think this is business as usual, you are sadly mistaken. In this market, I am not sure what “business as usual” even looks like. Normally when I work with my clients on cash flow budgeting, we are planning one year out . With the current pandemic and open then close yo-yo, we are now planning week to week, then month to month. How do we do this?
Focus on productivity. You need to pay close attention to your bookings. Your schedule will become your first ability to plan next week. Look at it daily; look at how far in advance it is filing. Monitor the number of appointments scheduled and performed accurately. Clearly calculate the capacity of your business. You may not be able to schedule as many appointments as you have in the past because of additional time required to turn the room/station or to accomplish necessary social distancing. When you have these numbers, you can calculate productivity. Next week, you may have more (or less) appointments on your books. You may be planning on opening additional treatment rooms. Calculate your expected productivity. Remember, for the most part, the current social distancing guidelines recommend that you do not take walk-in appointments.
Project your income. Monetize next week’s schedule now. How much money do you plan on collecting based on next week’s schedule? Beyond the earned revenue (products and services delivered), how much cash to you expect to collect? Many client’s businesses have been jump started by their membership. Although this gets the wheels of business turning, it may not create cash for services provided.
Determine your new cost of service. What does all the additional Personal Protective Equipment cost? My clients are telling me that it is ranging between $2 and $8 dollars per service. What impact will this have to profitability?
Watch your Overhead Expenses. Negotiate your Debt. Manage your Profit. As uncomfortable as it may be, if you do not renegotiate your Overhead and Debt, it is going to eat you alive. In a normal market Overhead Expenses (Advertising/Promotion, Admin Salaries, Office Expenses, Insurance, Rent, Repairs/Maintenance, Travel/Entertainment, and Telephone/Utilities) are between 25 and 35%. These are pretty much the same amount every month. If these stay the same, and your sales decrease, they will be higher as a percentage of sales. This is unless you re-negotiate them. Try to keep them about the same percentage of sales they were pre-closing, or you are going to wonder how to pay them. Debt Service should be ½ of your Net Income. Treat these the same as your Overhead Expenses and re-negotiate your monthly payments.
Let’s face it. This pandemic and our ability to operate after reopening will affect our profitability. We will be doing less sales and we might have to consider price increases. Direct Costs will increase. We can anticipate higher cost of services caused by PPE and increasing payroll taxes (especially Workman’s Comp and Disability). Overhead Expenses may increase as we can expect liability insurance rates to increase. Evaluate your advertising and marketing program.
Look for ways to reduce costs and hang on to your cash. You are going to need all of it. This is how I expect businesses to perform before closing and after re-opening.
Profit & loss Before & After Re-Opening
BEFORE AFTER
Sales 100% 100%
Direct Cost 55-65% 58-69%
Gross Profit 45-35% 42-31%
Overhead Expenses 25-30% 30-35%
Net Income (Loss) 20- 5% 12- (4%)
Debt Service 10- 2½ 10- 2½
Working Capital 10- 2½ 2- (6½)
Please bear in mind, anything is possible. Some clients may be able to get busy and get to pre-closing levels quickly. Many of my clients are experiencing initial business that is off the charts after re-opening. They are busy, but this is tempered. Because of social distancing, many have less treatment stations available. That said, “Maintenance” services such as hair, nails, therapeutic massage, and Botox are bouncing back quickly. More expensive laser treatments or weight loss programs enjoyed an initial uptick but have slowed down since. Some states, although their spa businesses can re-open, are unable to do services that require touching the face, so facials are not allowed. Each state seems to have its own rules and procedures as to what is permitted and what is not.
I keep saying this, and I absolutely believe it . These are uncharted waters. None of us have ever experienced anything like this before. We will get through this. It will take time, and, in the meantime, we better take all the steps we can to hang on to our cash and control our profitability.
I wish you all well. Stay healthy and safe. As always, we’re here to help.
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