5 Tips for Profitability from Salon Today 200 Honorees
If you’ve been caught in a slump, and the past fiscal period was not the most profitable, don’t fear. With careful analysis, planning and execution, you can take the opportunity to make any month be the new beginning you need.
We gathered some expert advice from the winners in the Planned Profitability category of the annual Salon Today 200, and came up with some All-Year Resolutions to help you achieve a healthy bottom line. The five salons below share their secrets to profitability.
1. Plan and Systemize with a Consultant
Many salons find it helpful to hire an outside consulting group or financial service to give guidelines and perspective on how to plan out a year of profit. Centre Salon in Denver, Colorado, works with a company called World Class Financial Services (WCFS) to provide financials on a monthly basis with feedback about the financials as well as specific areas for the salon to focus on to help maintain expense benchmarks and overall profit.
“They make sure we’re aware of spending trends that are not meeting our plan in that category as well as celebrate our successes that are in line with our goals,” owner James Pacifico says.
“They also help us decide what areas we can cut spending to help the overall health of the business, especially when sales may fluctuate. They’ve been an integral part of our success and profitability over the years.”
In addition to monthly and year-to-date financial statements, WCFS also provides another report that’s a variation of the profit-and-loss statement called a benchmark report.
“It highlights where we are in each spending category compared to industry average, and we also include our salon budget numbers in the benchmark report,” he says. “We’re able to view each month and see how we did compared to plan and the industry average.”
The report also allows Pacifico to monitor profits compared to plan and adjust spending accordingly if sales are down from plan so profit remains intact in the budget.
2. Forecast, Forecast, Forecast
To forecast sales and expenses, RedBloom Salon owners Troy Winget and Jodi Ohama create a calendar and mark off anything they know is happening such as maternity leaves (in Canada, where their salon is located, it’s a year), renovations or closures, big educational events like Aveda Congress, equipment replacements, increases in rent, utilities, etc.
“I look at what’s trending in our business, what’s happening in the economy and any big changes we may be making like opening a new location and transferring some key staff,” says Ohama.
When making expense percentages, the owners look at historical data like the actuals from the year before, and then enter fixed amounts like rent or salaries.
A budget template using industry benchmarks of percentages of sales and historical data then acts as a guide for the year’s forecast.
“For example, retail costs may have a benchmark of 45 percent of retail sales,” she says. “Each month is then broken out into four columns; one with last year’s numbers, one with budget (forecast based on projected sales), one with benchmark (based on actual sales) and then actuals. It gives me all the information needed to make knowledgeable decisions.”
The salon’s goal is a minimum 10 percent profit, and the owners work backward line by line until they make it work. Once completed, they review it with a financial controller to see if anything has been missed or if there are any other opportunities.
3. Know Your Cash Flow
At Habitude in Seattle, owner Inez Gray made one small change that made a BIG difference in her business. “I look at my numbers every 120 days instead of quarterly, which gives a MUCH clearer picture of how we’re doing because of the speed and seasonality of the business.”
The salon forecasts profitability by utilizing an intricate cash flow spreadsheet that has a daily, weekly and monthly cash budget and actuals prediction as well as a filtering system to show when deposits and payments will clear the account.
“As we move through a month, we are able to see the income and expense trends based on last year and predict a bottom line with excellent accuracy,” she says.
With this attention to detail, Habitude achieved profits that were 52 percent up from the previous year. “It’s not revenue growth that indicates our success, but owner compensation, ability to re-invest in the business, debt-free balance sheets and profitability that truly demonstrates our leadership. The true report card is not how big we are, but how strategic and frugal,” she says.
4. Analyze and Project
At the Nuovo salons in the Sarasota, Florida, area, owners James Amato and Terry McKee have utilized many methods to analyze numbers and project profits over the years. The result? Complete financial literacy of their business.
Once a month, the owners, director of operations and bookkeepers analyze the previous month’s profit and loss, noting their relation to benchmarks for each line item, forecasting future profitability.
“This also allows us to measure and track profit goals throughout the year,” McKee says. “Our P&L is color coded with green, yellow and red, highlighting the line items. If we see green, we know the line item is great, if we see yellow, the line item falls into caution, and if we see red we know it is out of whack (although this may mean a positive underage or overage—here we take action, whether it’s adjusting spending or looking at an adjustment to the benchmark).”
In their analysis, the owners have discovered different strategies for growth that may not always seem obvious. For example, they have found sometimes strategically lowering profits by using them for tax deductible expenses allows them to put money back into the company while saving on income tax expenses.
For 2014, the salon agreed on a profit benchmark of 5 percent. With careful analysis and projection, they came in at 6.3 percent profit.
5. Think About Your Succession Plan
Kendall Ong and Beate Assmuth-Ong, owners of Mane Attraction Salon in Phoenix, Arizona, began working on their succession plan five years ago.
“A large part of it was to reduce the revenue we produce behind the chair by transitioning our clients to other stylists,” says the duo. “In 2009, our portion of salon revenue was 22 percent. In 2014, 14 percent was brought in by us.”
In that period of time, due to careful planning, the salon’s revenue increased by 25 percent even though the owners’ portion of the total decreased by 8 percent.
Another part of succession planning was remodeling the salon. “In 2009, the look of our salon was still fashionable, up-to-date and in good working condition,” they owners say. “We had planned 2023 as our retirement date and knew that though the salon looked good in 2009, in 15 years it would be out-of-date and worn.”
So the Ongs ramped up their budgets with the goal of 2013 for a major remodel to update the salon to last for the next 10 years. When they remodeled they were able to self-finance 75 percent of the cost from salon profits.