How's Business?

For many of us, the financial health of our practice comes down to “can I pay my bills?” That is an excellent baseline measurement of business health, I admit. Sometimes, though, it’s helpful to have a deeper picture of the financial health of our practices.

Big corporations use a raft of financial reports to do just that. Most of those reports, however, either don't make sense for the kind of businesses we’re running or they’re answering questions we don’t generally ask. There are three common financial reports that I do think are useful to massage therapists and they answer three fundamental questions:

• How much is my practice worth?
• Is my practice actually profitable (how much money am I really making)?
• Do I have enough cash to pay my bills?

How Much Is My Practice Worth?

Are you wondering if you could sell your practice? Do you need to take out a loan for your business? Are you curious if you’re practice is worth more than it was when you started? Then you need a balance sheet.

A balance sheet shows you how your business is doing on any given day. To create a balance sheet, you list all your assets, list all your liabilities, and see what the difference is. The difference is your “net worth”.

Your assets include things you can convert to cash: cash (obviously), the money in your business bank accounts, any money that is owed to your practice, any inventory that you have waiting to be sold, and expenses you’ve pre-paid (rent, for example), reference books, and (probably our biggest category) office and massage equipment (massage table, CDs, linens, laptops, printers, etc.). If you ever added all this up, you may be surprised how many thousands of dollars you have in assets.

Your liabilities are things like the balance on business loans, taxes you will need to pay for this quarter, outstanding bills, and (one that we don’t always think about) outstanding gift certificates and packages. In short, liabilities represent money or services you still owe.

Balance sheets are particularly valuable for comparison. That is, if you generated a balance sheet for the last day of 2010 and another one for the last day of 2011, you could see if your net worth went up over the course of 2011.

Is my practice actually profitable (how much money am I really making)?

We become massage therapists to help people but we also want to make money at it. It’s good to have some cash in our pocket but is our practice actually supporting itself? Are we making more than we’re spending? How much more?

To learn that, you want to create an income statement (it’s also known as a Profit and Loss statement). The income statement lists all the money you made in a period of time (usually a month, quarter, or year) and then lists all your expenses for that same time period. Hopefully, the income is more than the expenses! That’s called your profit.

If you do your bookkeeping through a program like Quicken or Quikbooks, the software can easily create this report for you. If you do your bookkeeping in something like Excel or on paper, it’s just a matter of adding up the columns.

This may sound suspiciously like the Schedule C you fill out for your annual income tax return. It is very close to your schedule C. In fact, I usually create an income statement to help me fill out my schedule C.

Like the balance sheet, it’s especially helpful when you want to compare one time period to another. Did you make more money in the 1st quarter or the 2nd quarter of 2011? Was 2010 or 2009 more profitable for you?

Will I Have Enough Cash to Pay My Bills?

We usually know how much cash we have right now because our clients pay as they go. Cash flow can be a challenge for us, though, if we sell a lot of gift certificates or packages. What happens if most of our clients in one week pay with gift certificates? We don’t end up making much money that week!

A cash flow report helps us anticipate periods of low income or high expenses. There may be software that helps with this but I find it to be mostly a pencil-n-paper exercise (though I keep mine in Excel). List the months of the year and write down the big expenses you know you’ve got coming up. As much as you can, put them in the month you think they’ll occur. Common examples would be:

• License renewals
• Professional society membership renewal
• Conventions and continuing education (and associated travel expenses)
• Vacations
• Quarterly taxes
• New office equipment (laptop, iPod, cell phone)
• New massage equipment (tables or chairs in particular)
• Gift-giving crunches (like Christmas or, in my family, October!)

This list gives you an idea of your cash outflow.

How do you figure out what your normal monthly inflow is; that is, how much money do you usually make in a month? Take a look at your monthly income for the last year if you haven’t been in practice very long. Notice the highs and lows in your income. That will give you a general idea. If you’ve been in practice a couple of years, it’s worth it to run an income statement for several years, broken down by month. Then you can see what your average monthly income is over several years or you can start to notice whether some months are consistently low or high income months.

Sounds like a lot of work? It’s absolutely worth it if you’re the kind of person who is regularly uncertain / uncomfortable about having enough money to pay your upcoming bills. Putting it down in writing at least gives you a more concrete idea of what you’ll need.

When you need to know how you’re really doing as a business, these three reports can provide you a wealth of valuable information.