Note: This blog is Part 2 of a 2-part series: The 3 simple secrets of making more money from your salon/beauty business
In Part A: Increasing your revenue, we talked about what are the three core ways to make more money in your salon, business metrics that are used to measure this, and how to boost these numbers.
Further in this blog:
Part B: Taking care of your expenses talks about two simple business metrics, how they can help track your business growth, and how to deduce them.
Part C: Making sure you don’t run out of money talks about cash flow in the salon business, what it means, why maintaining a steady cash flow is important, and how to pump up your cash flow.
Part B: Managing your expenses
This part involves looking at the your monthly expenses and finding out whether they match up the industry standard to make your business profitable or not.
This is important because numerous times salon owners are unaware of little-yet-crucial facts like what is the optimum price setting, or how much an employee is supposed to work in order to stay productive for the business.
Below are the three metrics to monitor your expenses and make sure your business is, and stays profitable.
1. Net Profits or Profitability
Net Profits are calculated by deducting the total expenses from total sales. Net profits can be calculated as:
Net Profits = Net sales – Net expenses
Net profit margin is the percent revenue left after deducting total expenses from total sales. This reveals the amount of profit that you can extract from your total sales. It is calculated as:
Net profit margin = [Net profits/Net sales]*100%
If the net sales generated at the end of the month in your salon is $8000, and your expenses are somewhere around $7000 (rent, salary, taxes, etc.).
That means, your net profit is $1000 per month.
And, you net profit margin is 12.5% per month.
Or, 12.5% of your sales is converted to profit.
When we need to compare salons of any size or scale for profitability, percentage net profit margin gives an accurate number. Even if the actual figures for total sales and expenses differ, you can easily compare net profit margin percentage and understand which business is more profitable.
As far as the industry standard is considered, there’s no magic number for salon profitability. Profits in the industry range from 4%-18%. But for a medium-tier salon, anything close to 8%-9% is considered a decent number.
Tips to increase Profitability
- One obvious way to increase profitability is by increasing the revenue. There are three core ways to make money with your current setup. These are further elaborated in the previous part of this post, Part A: Making more money.
- Increase your prices: This is pretty straightforward. Every time a client comes in, and pay a little more for your services, it means more net profits.
- Put up a live deal offer for walk-ins during no shows: No shows suck. In order to engage the idle staff, put out a live deal offer board to attract walk-ins.
- By reducing your costs: Another way to increase your net profits is by cutting some of your expenses. You can do this by:
- Investing in a scheduling software instead of paying for a receptionist. The software provides numerous additional features that are beyond the work of a receptionist, in a fraction of the salary cost.
- Being energy efficient: Turn off high energy consuming equipments when not in use. Involve your team in this too. Encourage and educate them about the importance of energy saving and seek their support.
2. Revenue Per Employee
Revenue per employee is the total revenue generated divided by total number of hours.
This is a very crucial metrics to understand how efficiently you’re utilising your employees to make your salon profitable. A high revenue per employee suggests that you’re operating efficiently. While a low revenue per employee suggests that you can find ways to squeeze more sales from your employees.
For most businesses to be profitable, an employee should be generating a revenue worth 2-3x his salary.
But that again depends on various factors like overheads, location of the salon, and the type of establishment that your salon is.
For ex: Consider a salon in a very expensive area of the town. For this salon, the rent and other overheads will be higher compared to its competitor in a relatively cheaper neighbourhood. Hence, in order for the salon to be profitable, its stylists might have to generate a revenue worth 3-3.5x their salary.
While the other salon might be able to break even at just 1.5-2x its stylists’ salaries.
Tips on increasing revenue per employee
- Cash incentives to staff for achieving targets: This might sound counter-productive at first, but think about it;
Imagine an offer to reward an employee with $250 per month for completion of an additional 20 services throughout the month.
If the average service cost at your salon is $35, then the additional revenue generated will be $700.
Your net benefit will be $450. That’s a whopping 180% return on investment.
- Increase your prices: Increasing prices not only helps in boosting your profits, but also increases the revenue per employee. Increased prices mean increased sales, and with the same number of employees, it means an increased revenue per employee.
- Fill up lean times by sending out deals and discounts. During cancelled appointments, and no-shows, don’t let your staff sit idle. Send out deals in targeted texts/emails with you salon scheduling software, and fill up empty time slots in advance.
- Avoid no shows by sending timely notifications to your customers in order to improve productivity. This is another feature that you can find in your booking software.
Part C: Making sure you have enough money
And more than half of them fail because of not having enough cash reserves.
The key to this problem is Cash flow. Your end of the year Profit and Loss sheet has nothing to do with this. The point is having enough cash to sustain you expenses on a month by month basis.
Let’s dig in some more.
Cash flow is the movement of money in and out of your salon every month.
The inflow of cash is via channels such as payments for services, retail sales, or gift certificates. (Ah! the good times).
While, cash flows out when spent in salaries, inventory, rent, taxes, employee training, marketing efforts, etc. (Meh!)
Two important points to note in reference of cash flow:
- Don’t confuse the term ‘cash’ here with the routine use of the term. The ‘cash’ in cash flow can mean both physical money in hand, and the money in your bank account.
- Credits and loans don’t add up in the inflow of cash. Only money in the pocket counts. For example, the payment amount that clients owe you (if any), doesn’t add up in the cash in flow for that month. It only adds up when you actually receive the payments.
Why monitoring cash flow is important?
- Because expenses are to be paid in lumps but earnings occur distributed over time.
At the beginning of the month, you know you’ll earn enough through the next 30 days to pay all your dues and sustain your business. But that’s the point. The earnings will come in over 30 days. On the other hand, most expenses (rent, salaries, etc.) are required to be paid in lumps.
Hence, it’s crucial that you have a cash reserve to sustain your next month’s worth of expenses. It can only happen via regularly monitoring your cash flow.
- It helps you plan your expenses.
What if you need to buy a new manicure chair? Or invest in an attendance system for the salon? How do you know in if you have enough money to spend a little extra while sustaining your business?
Cash flow sheet shows how much money you have left, and your expenses for the past month. This information helps you understand whether you can afford a new expense that month or not.
How to pump up your cash flow?
Cash flow management is a simple concept. You need to take as long as possible to pay your bills and collect earnings as soon as possible.
In other words, the debtor days, or how quickly cash is collected by you need to be less. And, the creditor days, or how late you’re paying your dues need to be more.
A few ways to do this are:
- Gift certificates: Gift certificates are great. They’re basically money paid in advance for a particular service.
- Try to push dates for paying rent, or your staff’s salaries. This increases your creditor days and gives a window for cash to pile up before you need to spend it.
- Don’t stock up on inventory. Since it has to be pre-paid for, it decreases your creditor days. Instead, replenish every month. You may also try buying from the same vendors to get the products at negotiated prices.
- Accept full/partial pre-payments for your service, if you allow customers to book online. This helps in getting a partial/full payment in advance, and also reduces no shows.
Running your own business requires you to take care of different things, to be at multiple places, and to learn something new everyday.
Back in the day, it was never meant to be a one-person task. But today, with the Internet, and cloud-based services expanding everyday, anyone who aspires to run their own business can.
There are business solutions for marketing, staff management, online scheduling, pre-payments, and what not. A few minutes worth of Google search will tell you the enormous number of salon software out there. But you need to choose one that fits both your needs, and your budget.
Appointy is an online scheduling software that is trusted by 5000+ salon owners across the world. It provides a complete solution for all your business needs. Equipped to serve salons of every scope and size, Appointy comes with a free plan too!