I'm assuming you are playing the demo build (1.2.1-alpha1). The message 'not horny to masturbate' appears if your character is not aroused enough. You can resolve this by fast-forwarding a few days. Characters can't get aroused if you have removed their testicles. In that case, add 'Poppers' to Consumables (Schedule->Consumables).
Regarding body modification, here's how it works: you can't modify anything without paying for it. If you don't have enough money, you simply can't apply the changes. Money shortages are not a big deal in that game mode because you can always find a sponsor to pay for your purchases or body modifications.
You own alpha2, so just play that instead. It has several ways to make money and many other features.