The Three Treatments Quietly Losing You Money (And Why Your Busiest Room Is the Problem)

Anji opens with the episode's core warning: the busiest treatment room may be the one costing a practice the most money, and the loss compounds as the schedule fills.

Guest Sean M. Duncan, CPA, is introduced as president and founder of SMD Consulting and Accounting and founder of Chief Proactive Advisors, a firm built around proactive planning instead of year-end paperwork.

Sean ran this same analysis on his own business and walked away from roughly two thirds of his revenue when the numbers told him to.

The episode covers margin per room hour, fully booked losing service lines, and pre-year-end decisions, and is sponsored by Ekwa Marketing.

[View Transcript]

Your busiest treatment room might be the one costing you the most money. And the fuller a schedule gets, the faster that loss compounds. Welcome back to the Business of Aesthetics podcast. I'm your host, Anji.

To help us pull apart the P&L most practices never actually cut by the service line, we're joined by Sean M. Duncan, CPA. Sean is the president and founder of SMD Consulting and Accounting and the founder of Chief Proactive Advisors, an advisory firm built around proactive planning instead of year-end paperwork.

And he has a particularly interesting perspective on this conversation, because he ran this kind of analysis on his own business and ultimately walked away from roughly two thirds of his revenue when the numbers told him to.

Today, we're discussing how to calculate real margin per room hour, what to do when the losing service line is also the fully booked one, and the decisions practice owners can make before year-end that determine their profit long before anyone files anything. This episode is brought to you by Ekwa Marketing. Sean, welcome to the show.

Thank you. That was an awesome introduction. I want to meet that guy you were talking about.

Me too, me too.

Sean explains that financial statements exist for one purpose: making management decisions, not simply handing data to a CPA for a tax return.

He recommends three to ten major revenue categories on the P&L, using QuickBooks subcategories for added detail without overcomplicating the view.

Tracking margins by type of work is how Sean decided to fire two thirds of his firm's revenue: low-margin, high-stress, tax-prep-only clients.

Revenue alone isn't enough; product, time, room, rent, and staffing costs must be matched against each service so the margin is visibly positive.

[View Transcript]

All right. Sean, now most owners in this audience open their P&L and see one blended revenue number for the whole practice. So walk me through exactly how you cut that P&L apart by service line. What specifically has to get allocated down to each individual treatment before an owner is looking at a number they can actually trust?

Right. And honestly, if they even open the P&L at all, that's already ahead of a lot of other practices, because most people just take that financial information and throw it to their CPA to fill out a tax return. And when I teach a lot of this stuff, the purpose of the P&L, the profit and loss, the income statement, and all the other financial statements, their sole purpose is to make management decisions. That's it. It's not for the CPA. It's not for the lawyer. It's not for the banker. The original intent was so that you can make decisions, and that also goes for investing in companies, right? It's this rule set.

So anything that helps you make a decision is valuable. That's the first starting point. Now, a lot of people will say, "All that information is in my practice management software. I don't have to do anything." Not true, because you can get buried in the details.

So what I like to tell clients is, whether you're an aesthetics practice, a plastic surgery practice, or a construction company, the rules are generally the same. What are the major categories of revenue that you're interested in keeping track of? Is it injectables and laser products and skincare rejuvenation? What is it you're interested in? Because obviously you have services. You can overdo it. You can have a hundred different things. "Oh, I need a line for every type of injectable." No, not really.

But if you're trying to understand subcategories, you know, "Here are my injectables, but these are the five main product categories I have, and two thirds of my revenue comes from one of them," you might want to track that at that level. The good news is QuickBooks lets you do subcategories, so you can total and compress. So that's the key: what are the major categories you need to look at? If you're a plastic surgery practice, facial work is different from breast augmentation, which is different from a tummy tuck. We would want to know where that revenue is.

And again, the purpose of this is so you can know if it's doing what it's supposed to do, which is, I know it's going to shock you, generate income. It's a big surprise. But if you don't have that detail, you're looking at this one giant pool of numbers and going, "Well, it's getting bigger."

Bigger is not better. And in fact, I'll jump on that. You mentioned this too, and we're probably going to talk about the emotional responses and what's expected of a practice. I own a CPA firm. What we are specialized in and known for is proactive, fixed-fee advice as the year goes, not hourly, so right away that's already different. But if you were to call me up and say, "Hey, I just need a tax return done," I would decline and refer you to someone else. We do tax prep, but we only do it if we're helping you as the year goes. You alluded to this in the intro, and I didn't think we were going to talk about it, so this is kind of cool, because it really relates to the emotions and the expectations. I was the largest firm in town.

And two thirds of my revenue was coming from tax-prep-only clients. They were super low margin, lots of grunt work. CPAs are top five in suicide and divorce rates every year because of tax season. It is a grueling, horrendous grind. Well, I looked up and said, "This stuff is low margin. It's low appreciation. It creates stress and anxiety for me and my family and my employees. This is dumb. This is not what I signed up for."

So I fired it. I fired two thirds of my revenue. Now, wait, I'm a CPA firm. I'm expected to do that. Now, let's flip this back to you guys. How did I know? Well, I tracked tax work versus consulting work versus bookkeeping work versus special projects. I tracked it and I could find those margins the same way you would. What are my injectables doing? What is my body contouring doing? What are my product sales doing? If you see those numbers, you can then get a feel for, "Man, that's just not doing what I expected."

Now, it's not just revenue. I'm sorry if I'm getting a little nerdy; maybe this is where you're going to go. It's also the costs that match against it. Because obviously, if you do an injectable, there's a cost. You bought the product. But there's also the time, the room, the rent. There's an allocation for the people and the hours. We'll probably get into some of that if we get to that level of detail. But we want to know revenue minus cost equals some number. That number needs to be positive.

That sounds so obvious. But if you don't know if it's a positive number, you're continually losing money. If I told you every time you did an injection you would lose $15, you'd say, "Eh, it's only $15." Now think about it: the entirety of all the people that walk into your spa for an entire year, times negative 15. Unless you're running a nonprofit on purpose, all you're doing is stealing from yourself and hurting everything else that would work.

So that's the premise of it: how do you break down the revenue categories? It's the categories that give you the biggest impact to understand. You can do subcategories, but you can overdo it. I personally recommend three to 10 categories. Ten's a little heavy, but three to 10 is a good range to have as major line items in your P&L's revenue section. More than that, you're probably going overboard. That's where the subcategories come in.

So, probably a bigger answer than you meant to get, but I'm very passionate about it, because the purpose of accounting is to give you information to make decisions. If you're never looking at it, you're guessing. And I can't tell you how many practices we go into that are just losing money hand over fist because they don't have a clue. They say, "Well, revenue's going up." Yeah, but your bank account's getting smaller. That's not what we're shooting for here. So hopefully that gives you the big picture and maybe sets up 85 other questions. I don't know.

And now it's time for our clinical tip.