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How to Create Salon & Spa Cash Reserves
March 26, 2018 | By Neil Ducoff | 1 Comment
I know what it’s like to look at bills and payroll that need to get paid knowing that the balance in the checking account isn’t even close to what’s needed.
That was many decades ago. I never allowed myself, or my company, to be in that situation again.
A business without enough cash to sustain itself is beyond stressful. It’s gut wrenching.
Borrowing money, especially on credit cards, to pay bills and meet payroll without a plan to fix the bleeding just digs a deeper financial hole.
When the owner has to stop taking paychecks, the stress level elevates to demoralization.
What you just read is every reason to create the systems and disciplines to build your salon/spa cash reserve.
There’s a reason that I always refer to cash reserves as “sleep well at night money.”
There’s a reason that Strategies training and coaching makes cash-flow management a non-negotiable.
Being “busy” does not define a successful salon/spa business. Why? Because a salon/spa can be both busy and financially broke. Its Balance Sheet shows that Liabilities exceed Assets resulting in negative Equity.
A successful salon/spa business not only has positive cash flow, it has a cash reserve equal to three to four months operating expenses. Its Balance Sheet shows that Assets exceed Liabilities with positive Equity.
FACT: A salon/spa’s Balance Sheet tells the truth about the financial health of the business.
Here are some No-Compromise Leadership strategies to create and grow a cash reserve for your salon/spa — and sleep well at night:
- Get your financial house in order: There’s only one way to say this. When it comes to the financial health of a business, its leader cannot live in denial. Cash-flow challenges and persistent negative profit never fix themselves on their own. Only the owner/leader can make the necessary tough decisions to cut all the unnecessary spending and excessive costs that perpetuate negative cash flow. The one and only tool to do this is a Cash-Flow Plan (a budget). This is part of the discipline of building positive cash flow and creating a cash reserve. NOTE: If you’re running personal expenses through your business, it’s time to stop. Give yourself a raise if you need more money. If you can’t afford to give yourself a raise — make the necessary cuts in your personal spending and lifestyle. Got it?
- Its own place to live and grow: The absolute worst strategy is to attempt to grow a bigger balance in your company’s operating checking account. Cash in the checking account is for paying expenses and payroll — not for saving money. Give your cash reserve a place to live and grow by opening a business Money Market Account.
- The five percent discipline: This is where the discipline of living your Cash-Flow Plan can give you control over your financial reality. The Cash-Flow Plan gives you your revenue targets and expense budget line item by item. The revenue targets belong on your monthly Scoreboards that are updated during daily Huddles. Living the expense budgets requires one no-compromise discipline — if it’s not a planned expense in the cash flow, don’t spend it. The last line item in your Cash-Flow Plan is for your Cash Reserve. We recommend that you budget five percent of total revenue that you will transfer weekly into your Money Market account. If there’s not enough cash one week, transfer five percent of the next week’s revenue. The more you do this, the more you grow your Cash Reserve.
- Treat it as “sacred money”: You’ll never build a Cash Reserve if you view cash in your Money Market account as a slush fund or money that’s available to spend. Here’s how we’ve done it at Strategies for years. Cash in the Money Market account is sacred money. That means cash goes in but rarely comes out. We only tap into our Cash Reserve for major capital expenses or to take advantage of special opportunities. There is no better feeling of security than reviewing our Balance Sheet and seeing that “sacred money” in our Money Market account.
- Better spend or borrow decisions: Because of their insanely high interest rates, credit cards are financially lethal if you can’t pay the balance off each month. Cash advances on credit cards are even more lethal. Lastly, borrowing money on future credit card receipts means your business is a financial disaster and most likely financially insolvent. Bank loans and lease financing are fine as long as they fit comfortably into your Cash-Flow Plan. This is the question that owners must always ask BEFORE making a purchase decision. Do we need [what ever it is] so bad that we want to incur more debt? The same question must be asked before tapping into your Cash Reserve. Got it?
Here’s my challenge to you: Debt is fine as long as it remains manageable in your Cash-Flow Plan.
When your Liabilities exceed your Assets on your Balance Sheet, you’re in trouble.
If you can’t understand what your Balance Sheet is telling you about the health of your salon/spa, it’s time to learn and be enlightened.
One of the best things about being in the coaching business is when an owner says, “We have $xx,xxx in our Cash Reserve.” The next best thing is when an owner tells us “We are officially debt free.”
I’m proud of the fact that Strategies has been debt free for years. We maintain a credit line with our bank should we ever need it. We maintain a Cash Reserve that everyone in the company protects.
Categories: Financial Literacy