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How to Make Money in an Employee-Based Salon or Spa
May 15, 2017 | By Neil Ducoff | No Comments
Why would anyone open a salon, spa or medspa if it can’t make money? Especially when they’re notorious for operating at low single digit profits, or losing money … and plagued by staff walkouts.
It’s also true that many service provider owners wouldn’t get a paycheck if they weren’t working behind the chair or in the treatment room.
In fact, many owners realize they could make more money as employees in their business, working on the very compensation system they designed.
The true, but sobering, news is that when any business struggles to pay bills and create profit, it’s because their owners design and operate them that way.
The top four culprits are:
- Compensation systems that are financially unsustainable
- Undisciplined spending behaviors
- Excessive borrowing and credit card debt
- Excessive employee turnover
IMPORTANT: Throwing in the towel to go booth rental or suite is a knee-jerk reaction to a bad situation.
Escaping the hassles of managing employees in exchange for collecting rent from them … and keeping “all the money” the owner generates with his or her own hands … is massively oversimplified. It’s going from one bad situation to another.
There is no secret to making money in an employee-based salon/spa business. In fact, making money is a collection of systems that are backed up by discipline. It’s no different than losing weight and getting physically fit.
Here are my six No-Compromise Leadership strategies to making money in an employee-based salon/spa:
- Managing “cash flow” vs. “flowing cash”: Entrepreneurs are like cowboys … they hate operating constraints and love to shoot from the hip. This is especially so with cash and spending. Without a mechanism (system) to monitor and adjust the flow of cash, it’s easy to spend what could have been profit, not to mention create losses on the Profit and Loss Statement. Non-Negotiable: Managing cash flow means creating a Cash-Flow Plan and being seriously disciplined about following it. It means that every expense is justified and planned. It means buying the “gotta have’s” before any “nice-to-have’s.”
- Payroll must be a controlled expense: Commission pay is a fixed percentage of revenue. The higher you drive revenues, the higher your commission payroll. Increases in rent, product costs and operating expenses have no place to go other than to squeeze profit. Non-Negotiable: Because it is a predominately “fixed expense,” Team-Based Pay is a controllable compensation system. Payroll costs only increase through planned and budgeted raises and hiring. While every other commission-based industry adjusted or eliminated commission entirely (Best Buy and Apple Stores), the salon/spa industry did nothing to adapt. Make your payroll a fixed expense to control it. Stop paying for the wrong performance and put it where the right performance is.
- Find balance on your “Balance Sheet”: If you want to see how healthy a salon/spa is … look at its Balance Sheet. It doesn’t matter how busy and popular it is if bills aren’t getting paid and debt is increasing. A Balance Sheet is simple to understand. Assets = Liabilities + Equity. When payables and debt (loans, credit cards, taxes owed, etc.) exceed the value of Assets … Equity goes negative. It’s like owing more on your house than it’s worth. It’s ugly. If you don’t have the cash to buy that [anything you think you need so bad] it will add debt to your already tight financial state … you’re inflicting pain and stress on you and your company. Non-Negotiable: Just like you want to build equity in your home … you want to build equity on your Balance Sheet. If you don’t totally understand what this means … it’s time for a Strategies wake-up coaching call.
- Debt reduction and control: Borrowing more money to throw at a problem created by no, or poor, financial decision-making and control digs your debt load hole even deeper. Using credit cards for cash advances or purchases you can’t afford to pay off each month (with loan shark interest rates) digs your hole deeper. There’s nothing wrong with manageable debt. There’s everything wrong with a debt load that’s sapping the financial life from your business. Non-Negotiable: It is a joy to hear a coaching client say, “We are officially debt free.” That means all those monthly payments remain in your cash flow. If you understand that “Profit is not cash” … paying down debt is the most efficient way to truly turn “profit into cash.” Resist the temptation to add debt of any kind. Discipline yourself to methodically pay down debt.
- Business expenses … Don’t take it “Personal”: I’ve met too many owners that complain, “there is no profit,” when they’re running home mortgage payments, college tuition, vacations, home utility bills, etc., through the business. I have no choice but to write the following: There is “business” and there is “personal.” Personal expenses do not belong on your Profit and Loss Statement and Balance Sheet. The only way to pay personal expenses through your business is to misrepresent the expense. That’s called tax evasion. Non-Negotiable: If you’re running personal expenses through your company checkbook, knock it off. You may need to consider adjusting your lifestyle to what you can afford. Your company is more profitable than you think.
- Cash reserves ROCK: One of the disciplines we coach at Strategies is to build cash reserves. It’s “sleep good at night” money. It’s money to fund new opportunities. It’s a feeling of security that you have cash reserves sitting in a separate bank account. Non-Negotiable: The goal is to transfer cash from your operating checkbook to your cash-reserve account and leave it alone. Cash that stays in your operating checkbook is just too easy to spend. We suggest that owners build a cash reserve that is at least equal to three to four months operating costs. Budget a minimum of five percent of total monthly revenue to go into your cash reserve account. YES, it is possible … if you are disciplined and go No Compromise.
Here’s my challenge to you: If your salon/spa is generating at least ten percent Net Profit, congrats! In most cases, the above six strategies can help you boost that profit a few more points.
If your company’s Net Profit is in the low to mid-single digits, you need to heed the wake-up call your financial reality is telling you. It’s time to understand how to manage cash flow and reduce debt.
If your company is not profitable, how long are you going to wait before acquiring the knowledge and skills to be fiscally responsible? When are you going to take action?