Industry • Best Practice
Mar.21,2022By Boulevard Staff
Do you know your medical spa profit margin? Calculating this figure is an important way to keep tabs on your business’ financial health, increase profitability, and achieve greater success over time. If you’re running a tight ship and managing your medical spa’s finances, chances are you’ve already calculated your profit margin. If not, you probably have everything you need to do so. Here’s what medical spa owners need to know about why profit margins are important.
In the business world, profit margin is the measure of how profitable a company, product, or service is. To calculate your medical spa profit margin, you’ll need to take into account all your revenue and expenses and do some basic math — we’ll come back to the step by step process. In short, your profit margin is the amount of money your business keeps at the end of the day after paying for all your outgoing expenses.
Conceptually, profit margin represents the amount of each dollar sold that your medical spa keeps as profit. The higher your profit margin, the more profitable your business is. If your medical spa makes a 70% profit margin, that means you take home 70 cents of profit from every dollar you earn in sales. To determine whether or not your medical spa is operating efficiently and making enough money to succeed in the long term, you’ll probably need to calculate your profit margin.
There are a few main ways to calculate profit margin:
Net profit margin: This is your company’s bottom line, and is what most people are referring to when they talk about “profit margin.” Net profit margin is the money left over after you account for all your income and expenses.
Gross profit margin: To check how profitable a specific product or service is, you’ll want to calculate gross profit margin. This measures the money remaining after you take into account your cost of goods sold (COGS), which is the price of making those goods.
Operating profit margin: This measures the profit margin for your day-to-day business, as opposed to your company’s big picture financial health. It leaves out line items like taxes, debts, and other expenses that aren’t related to daily business operations.
According to the American Med Spa Association’s 2019 State of the Industry report, the average medical spa profit margin is 29%. With that in mind, it’s important to understand that medical spas come in many different shapes and sizes. Independently run day spas are sure to face very different financial realities than those connected to inpatient medical centers, for example.
While some sources suggest that large companies or medical spas connected to dermatology centers should maintain net profit margins of at least 40%, it makes more sense for outpatient medical spas to target a profit margin in the 10-15% range. Although there’s a big gap between 10% and 40%, that range makes good sense in light of the 29% average for medical spa profit margins overall.
Instead of comparing your profit margin to published benchmarks — or perhaps in addition — you can also use profit margin to better understand your medical spa’s financial health over time. Track your net profit margin year over year to make sure you’re growing your medical spa into a strong, sustainable business.
As long as you have a good handle on your medical spa’s accounting details, calculating net profit margin is actually quite simple. Here are the basic steps:
1. Calculate your company’s net income (revenue minus expenses)
2. Divide your net income by your net sales (also called total revenue)
3. Multiply that number by 100 to represent your net profit margin as a percentage
If you aren’t sure about your medical spa’s net income, you’ll need to calculate that as a preliminary step. Add up all your expenses (including COGS, payroll, operating expenses, taxes, and interest), and subtract that number from your total revenue.
Calculating medical spa gross profit margin follows the same idea; just subtract the COGS from total revenue, divide that number by total revenue, and multiply by 100. To calculate your medical spa operating profit margin, divide your operating income by total revenue and multiply by 100.
Math may not be your favorite pastime as a medical spa manager or owner, but calculating profit margin will make a big difference to the overall health of your business. These are just some of the ways calculating your medical spa profit margin can benefit your business:
Cost and pricing strategies: A healthy profit margin indicates that your business is pricing goods and services effectively and keeping expenses as low as possible. Adjusting your cost and pricing strategies can lead to an even higher profit margin.
Competitive analysis: It can be hard — and dangerous — to compare companies of different sizes. Because profit margin is expressed as a percentage, it’s a relative figure that translates easily no matter the size of your competition.
Risk assessment: By signifying financial health and positive cash flow, having a high profit margin can make it easier to get a loan or find financial backing from entities that want assurances their loans will be repaid.
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