4 Reasons Why Your Spa Should Have A ‘Profit First’ Approach

What is the ‘Profit First’ approach? 

It’s an approach used by hundreds of thousands of companies worldwide to drive profit, and it was created by prolific author Mike Michalowicz. 

(He is also the creator of Clockwork, a powerful method for making any business run automatically. His latest, arguably most impactful discovery is Fix This Next.)

But this article is all about Profit First and how this book has helped us at Addo Wellness Insitute adapt the approach to running a spa business. 

We’ve been fortunate to host Mike on our sister company’s podcast, Spa Marketing Made Easy. Listen to Episode 225: Becoming a Profitable Shareholder of Your Business with Mike Michalowicz and Episode 248: Get Different with Stand Out Marketing with Mike Michalowicz.

Profit First is a cash flow management system that helps you build profit in your business. It has you bucket your revenue into the business into four buckets: Profit, Taxes, Operating Expenses, and Payroll. 

The target percentages we recommend you target in the spa industry are 15% Profit, 15% Tax, 30% Operating Expenses, and 40% Payroll. 

That means for every $1,000 your business receives, $150 goes to Profit, $150 goes to Tax, $300 goes to Operating Expenses, and $400 goes to Payroll. 

Every business owner needs a cash flow management system that helps you project and manage cash flow. 

Bookkeeping alone is not enough to adequately manage the finances of your business. 

With bookkeeping, the best-case scenario is you get an email on the 10th of the month with a set of financial statements to review. But when you receive the statements, you are already looking at data that is ten days old. 

While reviewing those statements and understanding your trends for the previous month is critical, it doesn’t help you answer go-forward questions like, “Do I have enough cash to hire?” or “Am I going to make payroll next week?”

Those questions are answered by implementing a cash flow management system in your business, like Profit First.

While the benefits of a cash flow management system are endless, there are four main reasons that your spa needs a Profit First approach:

1. Profit First takes the guesswork out of tax planning

Most business owners experience this at some point: their tax bill is different from what they expected it to be. Maybe they had a growth year and didn’t adjust their tax reserves accordingly, or maybe their CPA didn’t account correctly for all the changing variables in the tax situation. 

Whatever it is, tax bills can be a moving target. And it is not fun to have to come up with money to pay the bill—money you had planned to use elsewhere or had painstakingly saved. 

By reserving a specific percentage from every piece of revenue that comes into your business, you will ensure a fully funded tax reserve with a buffer. 

Don’t need all that money for taxes at the end of the year? Great! You can take the extra as an Owner Draw.

Did you get a bigger-than-expected tax bill? With Profit First, you have designated funds to draw from without impacting other accounts or areas of the business.

 

2. Expenses expand to what is available

Profit first turns traditional accounting on its head. Traditional accounting uses the order of operations: 

Revenue-Expenses = Profit

Profit First flips this to: 

Revenue – Profit = Expenses

The idea is that we all like to spend money, and expenses have a mind of their own. It’s easy to spend more money and invest in your business—a little too easy. Expenses tend to expand to the container we allow them to. 

If forced to work with a smaller operating expense budget, we will get creative and make it happen. If we are forced to review our subscriptions once a year and understand the ROI on our marketing investments, we will. 

Expenses unchecked will continue to expand and take money from other essential buckets, like profit. 

Profit First helps you keep your operations expense budget at the appropriate level.

 

3. keeps a close eye on payroll

For most spas, payroll is the most significant expense in the business. But how do you ensure that payroll is optimal for the size of your business? 

Having a designated percentage of revenue dedicated to payroll allows you to monitor your payroll expenses. If you need to hire, but your payroll percentage is at its maximum, then you also know that if you hire, it will be at the expense of another bucket decreasing, like profit. 

Profit First doesn’t make these decisions for you but gives you precise data to make informed decisions. Payroll is not a fixed expense; it can be restructured or ramped up or down depending on business needs. 

Similarly to operating expenses, having a specific budget for payroll expenses allows you to ensure that the expense is not ballooning out of control, and gives you specific metrics to measure decisions against.

 

4. Profit draw for the CEO

Ultimately, a Profit First system aims to build profit into your business. 

What is the point of all this extra profit? 

Profit allows you to build a business reserve account for a rainy day. Make intentional reinvestments back into the business to grow. It also allows the owner to take profit “draws” from the business. 

Within the Profit First system, half of the profit is earmarked for Owner Profit Draw. As the owner and CEO, you take on the risk of owning and managing the business and should be rewarded for that. So, when the business makes a profit, half of that can be reserved for the owner, which can be a motivating aspect of implementing the Profit First system in your business! 

Remember, your bookkeeper and accountant are not responsible for your cash flow. The CEO (and perhaps a key member of the team) is in charge of these forward-looking systems that need to be actively managed in the business.