Level Up for Profitability with Benchmarks
Jared Sanders
Shareholder, Lightheart, Sanders and Associates
Video not loading? Click here to watch.
Chris Linford:
Here we have Jared. You ready to go?
Jared Sanders:
Hey, Chris, how are we doing?
Chris Linford:
Dude, we’re excited. You’re on here we go.
Jared Sanders:
There we go. Let’s let this roll, right?
Chris Linford:
Let’s do it.
Jared Sanders:
Hey, I just want to say thank you first and foremost to letting me come and to spending a little bit of time at the end of the day. I know everybody’s probably thinking why finance is at the end of the day, but hopefully, I can make it a little bit more exciting. Hopefully, I can at least not bore you to death as a normal CPA would.
Understanding Industry Standard Benchmarks
When we got talking about what could I bring, what could we talk about, and stuff like that, one of the things that I really see a lot of questions about, probably over the last 10 years, is benchmarks.
- Where are schools at?
- How are my competitors doing?
- Where are they spending their money?
- Where’s their profitability at?
It’s been a elusive unicorn in my portfolio of work, over the last 20 years, of trying to get good numbers, trying to get where we could say, “Hey, do we have enough to be able to actually say what we think or what we’re seeing?” And there’s a lot of different reasons that go into that, and we’re going to get into that, and then we’re going to talk about how to actually use things.
Imagine making croissants. Croissants is not an easy thing to make, right, it takes a lot of time, effort, and stuff like that. Imagine going through the whole recipe, doing your best but never actually opening up the oven at the end, never actually eating that croissant, cutting it open to see if it’s got the honeycomb inside like it’s supposed to. Just going through all the work but never actually figuring out if you’re doing it. To me that is the greatest example that I can think of of doing accounting but not using benchmarks to see how you measure up.
Benchmarks
When you start to think about benchmarks and what those are … In general terms a benchmark is a standard, it’s a point of reference against which things are compared or assessed. Because sometimes when we talk about benchmarks for profitability, I know a lot of school owners step back and they say, “Look, I want to be profitable, I want to make it worth my time, and stuff like that but profit is not my biggest motivator. It’s not about maximizing profit, especially when we’re talking about maximizing profit over student experience.” I want to make it clear that benchmarks are not only about increasing profit but it’s also about being purposeful in your income and your expenses. It’s about recognizing issues or areas that you can improve from a school standpoint, but it’s also about choosing where you want your money to be spent. It’s about saying, “Look, I know this is where the industry says or it is, but I want to put more of my money into the student experience. I want to put more of my money into what I’m paying instructors, or the instructional expense, and stuff like that.”
As we talk about benchmarks, don’t be turned away by just this … He’s talking about profitability. It’s also about making sure that you pay attention to your pennies so that you can dictate where the dollars go to, okay? When we talk about benchmarks with the beauty industry … Benchmarks only have power when the data that’s being used is consistent. And that’s probably the biggest area that we see in terms of what in the world can we do. How can we know from a school standpoint? Because there is no standard of how financial information is being recorded, how your books are.
Now, I know a lot of us are in Title IV, we’ve got the audit that needs to be done, and stuff like that so you have your gap requirements, your generally accepted accounting principles but there’s a lot of flexibility in there, there’s a lot of differences. The report letter on an audit report, it’s the same. Whether you go from my firm or to any other firm the letters are going to be the same. But how accounts get grouped, how costs get grouped on that financial statement is a much higher level than what you actually need for a management perspective.
What that really means is that the benchmarking within the beauty and wellness industry, it’s been hindered. There’s no way to go from school to school because every school seems to have its own methodology whether it’s breaking down expenses, or how they record income, and stuff like that. There’s a lot of differences. And so when you try and line those up it’s apples and oranges.
One person’s instruction expense only includes salaries for instructors. We have some schools that don’t break out instructor salaries at all. And so you’re really trying to take information and you’re trying to harmonize it.
What we’ve done as a firm … Over the past seven years have been fighting this, but we have looked to work with our client base to establish consistency across the board. And some of that is within the audit process, some of it’s with the questions that we ask within the audit, and stuff like that. But our whole goal is can we get to a point where I can say, across the board, this is what our schools are doing. And I’m excited because this year we’re moving in that direction where we’re going to have … We’ve got good numbers to be able to share with the industry, but also with our clients and stuff like that, to give you an idea of where you’re at compared to your peers. Eliminating that has been a really challenging issue, but I think that it’s one that we finally have figured out and got it.
We do audits for about 120, 125 beauty schools. Within that audit process is gathering that information. I’m like look, I can’t do it across the entire industry because I’m not involved with every school, not every school wants to keep specific detail like we’re trying to get to be able to do a benchmark, but I can do it within my own client base and then we can look at what that actually means. We’ve got enough now volume-wise to really, I feel like, bring some good issues, or good information to the industry.
So let me just talk about some of the specific things. And if you were to have a conversation with me about benchmarks and where you’re at, there’s some specific things that I would ask you in terms of how you’re doing things. If you’re looking at just the financial statements, we’re going to look at just profit statement and loss statements. Some of the things that I’m seeing is … That causes issues when you relate to benchmarks, is combining incomes into one account. So it’s really easy, right, just throw all the income into one account. Income is income, and at least I know that my bottom line is correct. But that plays into our ability to compare relationships, right?
Gross Margins
So when you start talking about what is my gross margin, what’s the relationship between tuition and instruction costs, and stuff like that, if you’re not breaking out your income items in a way that is consistent with the benchmark it’s going to throw those numbers off. Also, there’s some inconsistent methods of when to recognize revenue. Some schools recognize on a … They recognize on a scheduled hour basis, some are on an actual hour basis, some are on a contract basis. Being able to harmonize that as well has been a real struggle. Sometimes, especially non-audited financial statements, we run into issues where non-income items are recorded as revenue. Sometimes if you’re not using a bookkeeper that understands the industry or understands accounting, they may record loan proceeds in the revenue, and stuff like that, and it just gums up and makes the financial statements less reliable.
On the expense side, not breaking out expenses into accounts to be effective benchmarks. Very similar to the revenue side of things where, for example, you’re recording all of your payroll into just a payroll item and so you’re not breaking out instructor pay, you’re not breaking out admin pay, and stuff like that so that then becomes difficult when you’re comparing it to schools that are breaking out that information. Again, items that are included in expenses that shouldn’t be whether it’s buying an asset that really should be depreciated and stuff like that, or payments to … On loans being treated as an expense gums up the expense side of things.
And then the last thing that’s always thrown a wrench in it is owner compensation, right? So some owners are very involved, they’re active, they’re doing things that other schools are hiring individuals for and so how to handle that owner compensation or the other income and expenses can really gum up how your comparatives.
In our philosophy, we’ve taken the approach of moving owner compensation down on the expense and then addressing it if they actually are performing duties that would normally be handled by somebody else in other schools. Again, we’re trying to harmonize the information so that we can compare apples to apples.
How to Use Benchmarks
All right. Now that you’ve got the financial information in a format that’s similar, let’s talk about just the basic way to use benchmarks. So the first is to understand the basis of the benchmark. What that simply means is that you need to understand and be able to recognize how these benchmarks are being calculated. For example, I gave was instruction costs, right? Instruction costs, from our benchmark perspective, we calculate that as a percentage of tuition, not total revenue but just tuition. Making sure that you understand how that number is being calculated and where that information is coming is your first step.
The next step is to make sure that your information is being recorded in the same basis. Making sure that you’ve got the correct information, that you’re calculating in the same way that the benchmark study itself is treating it so that you can make sure that your information now matches or is consistent to the benchmark itself.
The next step is to identify the accounts that are underperforming. Just looking at the benchmark and saying, “Okay, here is the benchmark, here’s where we stand. If it’s less, why is it less? Why are we spending more money in these areas?”
Like I said at the beginning, some of it is intentional. Some of it is schools deciding that is where they want to invest into their schools whether it’s in the student experience or instructor pay or different things. It’s not necessarily wrong that you’re spending more money in an area than the benchmark would suggest as long as it’s done with purpose.
And that’s one of the things that I see a lot of is you have some schools that are very hands-on on their information, they’re very hands-on in terms of where they’re spending their money. It gives them the ability to say, “Look, I want to invest more in my website, I want to invest more in the marketing side of things. I want to do different things because I know that it’s going to eventually generate returns on it.”
I still see a lot of schools that are … Because they don’t have that good financial system that are really just hanging on and saying, “Look, as long as I’m making money or I’m meeting my composite score then I think I’m doing well financially. And there’s a whole range of potential of tightening down that income statement, creating profit that can then be used in a very specific manner to help the school. Identifying the accounts that are underperforming at least tells you the areas that you should look at.
Setting Goals for Improvement
The next step is to determine what steps to improve and to set goals. Now, we always use the smart methodology for goals, right? You’re looking at it and you’re saying, “Okay, what are some specific things that we can do to address that underperforming account?” So let’s first, as an example, say that you’re spending too much money in your office expense. What types of things could you do? Part of it may be just watching it more. Part of it may be saying, “Look, we’re going to reduce the expense because we know that” … “That’s our account that we just drop everything into it so things that maybe we don’t necessarily need to be spending money on end up there.” So you’re going to come up with specific, measurable, attainable, relevant, and time-bound goals to improve that, right? And that shouldn’t just involve owners.
One of the things that I see that’s most powerful is when you engage your team to take ownership with different areas on the financial statements. So when you can engage different people in the company, and engage them to help improve the financials of the company they have that ownership. A lot of times employees don’t even realize or consider the fact that they are costing you money.
And then the last step, obviously is to implement those strategies and to monitor progress.
I want to just take a real-life example and go through it and show you what this would look like. I’m going to do it with words first then I’m going to do it visually, and hopefully between the two I don’t put you to sleep completely. Let’s take a specific account like let’s take instruction expense.
Now, for us, we define instruction expense as all the expenses related to the classroom so that’s your instructor wages, that’s any supplies used in the classroom. Any cost that is associated with teaching your students in the classroom we consider that instruction expense.
Now, our benchmark study suggests that usually runs between 15 to 20% of your tuition. So notice it’s not based on clinic revenue it’s only based on the tuition revenue because we want those numbers to be tied together because they relate to each other. Let’s take a fictitious financials, not pick on anybody or anything like that. But let’s say that when you get down and you start looking at it you’ve got your information, you’ve got it in the right format, and you’re sitting at 23%, okay? What do we do with it? We look at ways that we can reduce that expense. I know we hate math I do too. Even though I’m an accountant I just wasn’t smart enough to actually go to a cool career or anything like that I just … I was told if I want to be in business get an accounting degree, and it’s worked for me.
We’re really talking about just a percentage, right? So a percentage consists of two numbers, you have the top number and you have the bottom number. When you start talking about how can we address this percent as it relates to instruction expense, it’s really about increasing revenue and decreasing expense. Sitting down you can start to map out and you’re going “What are we going to do to increase revenue?” A lot of sessions today have been talking about ways to increase revenue. I mean, at the end of the day, your revenue as a school is based on the hours that your students put in. Really it’s about increasing enrollment, getting more students enrolled, or it’s getting the students that are enrolled to increase their attendance percentage. Okay, from there, what can my team do? What can my teachers do to help? Are my students engaged? Do I need to look at the website? Do I need to look at my onboarding process? All of those things. Lots of things that are not about numbers can drive that revenue number.
Decreasing Expenses
Now, decreasing the expense, right, that’s a hard one because, obviously, in this particular case we’re talking about instructions. Man, I love my teachers I don’t want to let them go, right, but that may be a question that you looked at. If your numbers are down, are you overstaffed in your instruction, right?
Are your teachers putting in the hours that they might not need to? Are they on salary? Are there different ways to balance the relationship between your tuition income and the number? And again, it could come back and you could say, “Look, I’m fine putting in 23% because I’m investing in my teachers, or I’m investing in the classroom experience, and stuff like that” but it’s a purposeful decision at that point.
Instead of just sitting there saying, “I don’t know why I’m not making money, or that not profitable,” you’re now looking at it, you’re taking ownership, and you’re making purposeful decisions. Let’s throw up some numbers and look at what this would look like. Just from the standpoint of the initial things.
And we’re going to skip counts but we’re just going to give those specific ones. Let’s throw in that our tuition total was 750,000, we spent 172,005 on instruction, and that’s a net income eventually of 112,000. There’s other expenses just work with me here. Looking at that that’s 23% and we want our benchmark to be 15%. So let’s say that you went through all of those things, you engaged your team, enrollments went up, student attendance percentage went up. You also dropped some expenses. You had teachers that you know tightened it maybe they went to hourly, or you adjusted the hourly, and stuff like that. But let’s say that we increased our revenue a little bit, we decreased our instruction expense, and now we’re sitting in that 20% range, right? What does that actually mean looking at the net profit? You’ve increased net profit by 45,000.
But I would also point out that you’ve engaged your team to address issues together. I see a lot of school owners that are carrying the burden of their financial situation solely on their shoulders. This is a way to engage your team to help you. Engaging your team to see it. You don’t ever want to come across as look guys, we got to make more money, we got to make more money but we do want them to be engaged on the way that the school runs, the way that people are interacting, and stuff like that. It’ll also bring you purpose, focus, and confidence.
Where are you at now, right? Questions that you should ask. Do you have a system in place to know where you are? Do you know where you want to be or where you should be? And do you know how to get there? All right. The basic questions of taking that benchmark and using it. With that I’m just going to say, if you’re ready to level up your profitability for the attendings here, I’m offering a free financial statement of benchmark analysis consultation. So if you want to talk to me about your financials and how you’re recording stuff, how it relates to our benchmark study, getting those numbers, and stuff like that, just feel free to email me. It does look like a little funky email address because it’s an LSA.CPA. That’s an L, not an I which is what some people mess up. And then they sometimes think that we messed up with CPA versus com but that is … It is my email address. I’d love to hear from anybody.
Or if you have additional information … If you want to participate in a study … If you want to say, “Hey, look, I’m not a client but I want to participate and get that information,” absolutely contact me we’ll talk about what we need to get from you to increase that. My goal is, with what we’re doing here, is to bring good data to the industry. Bring information, and allow people to actually understand where they’re at and where the industry is at because we do have issues and questions that we need to address. There’s a lot of people that think that we’re super profitable. There’s a lot of schools that are doing well, and there’s the schools that are not. Data is the key to being able to answer a lot of these questions.