Are PPP/EIDL Loans Masking Pre-Pandemic Salon/Spa Problems?
Without question, COVID-19 wreaked havoc on salon/spa revenues during the shutdown, and after with reduced capacity.
When revenues take a hit and expenses keep adding up, things get ugly fast — especially for salons/spas in weak financial condition.
As unimaginable as the pandemic has been, so too has the massive federal aid funding — in not one, but two rounds of PPPs. And then there’s the EIDL loans and grants. Federal funding saved many salons and spas from closing.
Because of federal funding, many salons and spas are in a better cash position today than ever before.
WARNING: If your salon/spa has more cash today than pre-pandemic, it’s no guarantee that the future is all blue skies and popcorn clouds — especially if your company has a history of struggling to be profitable.
FACT #1: Profitability and positive cash flow is a discipline that requires some fairly straight forward financial skills.
FACT #2: A salon/spa can have positive cash flow and still be losing money. Persistent negative profit means the business is unsustainable.
If your salon/spa was struggling to be profitable pre-pandemic, PPP and EIDL funds, if not exhausted already, simply masked your financial challenges. Simply put, when the PPP and EIDL funds are gone, your company will be struggling again.
If PPP and EIDL funds have you sitting on more cash than usual, here are three strategies you should lock onto immediately:
- If you were lucky enough to be open when you received PPP round one funding: Use the revenues that would otherwise go to payroll, rent, mortgage interest and utilities to pay down debt. This will free up future cash flow (less debt payments) when the PPP funds are exhausted. KEY: Debt reduction is the most effective way to improve cash flow. You’ll still have all the expense records to support PPP forgiveness.
- Build your cash reserve: Use the revenues that would otherwise go to payroll, rent, and mortgage interest, to build up an emergency cash reserve fund. Even better, open a savings account at another financial institution, other than your operating account, and transfer that money into that savings account. The goal is to make that cash hard to access. KEY: Because we teach/coach cash-flow management and building cash reserves, many Strategies coaching clients entered the pandemic in excellent financial shape.
- Manage cash flow as if you didn’t have the PPP funds: Cut and/or reduce non-essential expenses. Work your cash-flow plan. Eliminate as many overhead expenses as you can. Review your Profit & Loss Statement weekly and monitor your key benchmarks (payroll % of total sales, inventory purchases, guest care payroll %, etc..). This will prevent you from burning cash that you really don’t have. KEY: Having a cash-flow plan (monthly revenue and expense budget) is non-negotiable. Repeat — non-negotiable. Profitability, cash reserves and becoming debt free doesn’t happen by accident or wishful thinking. It takes a plan and the discipline to follow it.
Here’s my challenge to you: This week’s blog post is a warning shot across the bow to every salon/spa owner that hates numbers, doesn’t pay attention to their Profit & Loss Statement and Balance Sheet, and avoids building and living a cash-flow plan.
If the pandemic teaches you anything about business, it’s that cash-flow management is an essential business tool.
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