It’s The Most Awesome Salon/Spa Financial Report Ever
For starters, it would tell you just how financially healthy your business really is. It would tell you if your business was getting healthier, if its financial health is declining, or if it requires life support.
It would tell you how much total cash you have to operate on and how much cash reserve you have. Simply put, it will tell you if you can sleep well at night.
It would tell you how much you have in assets.
It will tell you what you owe in credit card debt and loans.
Most important of all, this awesome report will tell you how much your business has accumulated in Equity. Just as the equity in your home increases as you pay down your mortgage, the equity in your business increases as you drive up revenue, manage cash, and reduce debt.
What is this awesome financial report? It’s called your “Balance Sheet.”
Most salon/spa owners focus on the Profit & Loss Statement. The problem of just focusing on the Profit & Loss Statement is that it reflects a specific time period … a month, quarter, or year.
Unlike your Profit and Loss Statement, your Balance Sheet begins tabulating from the day your business was created. The Balance Sheet breaks all financial data into three areas: assets, liabilities, and equity — and their values on a specific date.
It’s important to run your Balance Sheet on the same date as your Profit & Loss Statement. Why? Because the Net Profit on your Profit & Loss Statement appears on your Balance Sheet under Equity.
KEY: What happens on the Profit & Loss Statement directly impacts the health of your Balance Sheet.
Here’s how to fully appreciate what your Balance Sheet can tell you about the health of your business:
STEP ONE: Run your Balance Sheet at the beginning of the month and answer these questions:
- How much cash do you have in your company checking and savings accounts?
- How much do you owe in Accounts Payable? (It’s the first line item under “Liabilities.” You’ll only see this amount if you’re entering bills into QuickBooks before you pay them. Entering bills is important because your Balance Sheet can’t see the pile of bills on your desk.
- How much do you owe in credit card debt?
- How much do you owe in loans?
- How much do you have in Retained Earnings? (This is the accumulated net profit from all periods from the day you started your company.)
- How much do you have in Total Equity?
STEP TWO: At the end of the month, run your Profit & Loss Statement … with the “percent of income” column … and answer these questions:
- How much did your company do in Total Revenues?
- How much Net Profit in both dollars and percent? You should have a target Net Profit goal to shoot for.
- What expense line-item percentages exceed what you projected? Key line items to check are service payroll, professional and retail product cost, administrative payroll, and any other line item that appears too high.
STEP THREE: Run your Balance Sheet for the same month-end date as your Profit & Loss Statement and answer these questions:
- Do you have more cash at the end of the period? If not, why not?
- Is your Accounts Payable lower than the beginning of the month? If not, why not?
- Are your loan liabilities lower than the beginning of the month? If not, why not?
- Did your Retained Earnings increase or decrease? If you’ve had negative Retained Earnings for many months or years, it means you’ve had negative Net Profit for extended periods and not enough positive Net Profit.
- Do you have more Equity at the end of the month than the beginning?
Here’s my challenge to you: If you’re one of many owners that doesn’t monitor or understand the story that your Balance Sheet is telling, consider this your financial literacy wake-up call.
Yes, monitoring the financial health of your salon/spa is as important as monitoring your blood pressure, heart rate, diet, and general physical condition.
Your Profit and Loss Statement only tells you half the story. And just because you’re profitable, doesn’t mean your business is healthy.
Remember, profit is not cash. Profit that goes to paying down excessive debt is unsustainable. Yes, you can be busy while you’re going out of business. You’ll never know if you’re not paying attention to your Balance Sheet.
There’s so much more to financial literacy, but even if you only follow the above steps, you’ll be amazed at how you’ll make better decisions for your company.