Highly skilled touch, functional equipment and a beautiful environment are key elements that make your massage business the talk of the town — and they cost money to implement.
With an understanding of how to manage small business finances, saving and using this money to benefit your business becomes a much less daunting task.
An essential investment in your education, massage table, chair, supplies or facility can make or break the future of your business, but none need break your bank account. Still, a lack of experience in financing large purchases might hold some massage therapists back from progressing as far or as quickly as they might.
Never fear — whether you are starting a massage business, renovating your existing skills or building upon them, the cash you need is available to you. (Read “4 Steps to Financial Power.”)
It is useful to do both a non-financial and financial analysis of the investment you want to purchase.
While it is crucial to acknowledge the financial implications of any investment, the non-financial implications are also necessary to consider. This is especially important if the investment may not be directly related to generating revenue in your business. For a massage business, this might include décor, which is a part of your business but not directly tied into generating revenue.
There are 4 main questions you must answer to make this evaluation:
1. Will the purchase fit, or be in line with, my business’s goal and overall strategy?
2. Am I looking to generate more visits versus increasing the quality of the products or services that I already offer?
3. What are the pros and cons of the investment?
4. Are there other investment opportunities present that my money would be better suited for?
Once you have evaluated the investment through these questions and it still seems like a good investment for your business, it is time to look at the financial aspect of the investment, or what I will call doing a fundamental financial analysis of the purchase.
Gather all your financial data related to your desired investment. The evaluation of this data allows you to make cash flow projections, which tells you if the investment will improve your overall business performance.
You need to:
• Get organized, with your data in one place.
• Enter the data into a software program, such as an excel spreadsheet.
• Analyze the data.
A more in-depth analysis includes a break-even analysis, a payback analysis, and a net-present-value analysis. These analyses are vital steps in the financial evaluation of a potential investment.
Here are definitions of each of those types of analyses:
Net profit or loss analysis: also known as the incremental cash flow analysis. This is calculated by taking the net revenue for the year minus the expenses and loss for the year. The first-year cumulative cash flow would be the net profit or loss from the first year. The cumulative cash flow for year two would be the values from year one and two combined.
Break-even analysis: this gives you an idea of how profitable the investment has been in each time frame. You will usually look at a one-year snapshot. It gives you the volume of procedures (massages or other sessions) that would be needed to equal the costs or expenses on an annual basis associated with your investment.
Procedure numbers that are less than the break-even point would lead to a financial loss while those more than the break-even point would indicate financial profit.
Payback analysis: this gives you an idea as to how long it will take to recover the money that was spent on acquiring the investment. This assumes that your cash flow statements are correct. One takes into consideration the economic life of the investment, or how long before you will need to replace it.
Typically, most office equipment has a life of between three and five years, for example. Equipment such as a massage chair or table might come with a multi-year warranty.
If the payback period is equal to or greater than the payback analysis, the investment is not a good idea.
Net present value analysis: this analysis allows you to determine what the future value of your investment is today. It helps you figure out which investment would provide your business the most value in the future. This helps even more if you are trying to decide between more than one investment.
Implementing the Purchase
Once you decide on your class, purchase or renovation, the question becomes: What is the best way to achieve this?
Here are a few questions you need to ask yourself before you proceed: Should I buy or lease equipment?; Whether I buy or lease, what are the financing considerations, or where will the money come from?; and Once I have the investment, what is the best way to protect and maintain my purchase or renovation?
Leasing Equipment. If the purchase is a major item such as a hydraulic table, leasing may make sense.
Advantages: Leasing may require only a small, manageable monthly payment. These low payments can relieve pressure on your cash flow. Suppliers may also be able to arrange suitable financing terms for your business. Leasing is also ideal for equipment likely to become obsolete soon.
Disadvantages: Leasing will end up costing less money out of your pocket initially, but there is still a financial investment and commitment on your part. Leasing will usually cost you more in the long run. Additionally, you will never own the equipment.
Buying New and Used Equipment. Buying makes sense if the equipment is one that is unlikely to become obsolete soon and the purchase will serve you for an extended period.
Advantage: You become the owner of the equipment.
Disadvantage: Requires a bigger up-front cost, which can be prohibitive in certain cases. Additionally, when the equipment becomes obsolete, you are stuck with it.
If you have worked in the industry for a long period of time, it should not be hard to evaluate how long equipment is likely to last and be useful. If you are just starting out in the industry, it may make sense to speak with someone who has been doing this longer than you, and not necessarily rely on the salesperson who is selling or leasing you the equipment.
You are likely to get a better idea of how the equipment will hold up from someone who is using it daily versus someone who is trying to sell you the desired equipment.
Show Me the Money!
So, you have done your financial and nonfinancial analysis and the equipment or renovation with be a worthy business investment. You have also decided between leasing and purchasing.
Regardless of what you choose, you will have to now come up with the money.
There are many ways to accomplish this:
• Savings. Start setting aside money for your business investments. Depending on what the investment is, it may make sense to not have any debt on it.
• Loans from friends and family. Depending on the size of the contribution, there are limits placed by the IRS on what constitutes a gift. Loans from family members and friends are not subject to this if you have something in writing quantifying the funds as being a loan. Speak with a tax accountant for the exact limits for gifts and the information regarding loans.
• Financing provided by the company from which you are buying. Many equipment companies allow a customer to finance a purchase for anywhere from three to 60 months. Interest will be charged.
• Bank loans or line of credit. Shop around for the lowest interest rates. Receiving a low-interest rate depends on your creditworthiness and credit scores. In many cases when you are starting out you may need to rely on your personal credit to make purchases for your business. Ensure that you pay off all your credit card balances promptly and keep a low credit-to-debt ratio.
• Lending Clubs. These peer-to-peer lending platforms will usually charge a higher interest rate compared to banks; however, they tend to allow for lower credit scores.
• Home equity lines of credit. This source of money also be used to fund major purchases. It is based on the equity that is currently in your home.
• The free/barter option. You might be able to barter a service of yours for something you need in your business: A set number of massage sessions in exchange for a room renovation, for example.
The best way to protect your investment is to keep a close eye on your finances. Measure your goal performance and your cash flow monthly. I hope that with the information in this article you now have the tools you need to make the decision-making process effortless.
About the Author: Lozelle Mathai, CFEI, is an accountant with more than 18 years of experience in the field of financial management and accounting. She is the owner of Closing Your Books LLC, as well as The Body of Accounting, a virtual educational accounting consultancy firm that teaches massage and bodywork business owners how to manage, maintain and understand their business finances. Her articles for MASSAGE Magazine include “When it Comes to Reporting Gratuities, Here’s What Massage Therapists Need to Know.”