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Turning Salon/Spa Net Profit into Cash
February 11, 2019 | By Neil Ducoff | No Comments
That final line on a Profit and Loss Statement is often regarded as the Holy Grail of business.
And why shouldn’t it be? After all the income is tallied and all the expenses are paid, what remains is Net Profit. If it’s positive, you won. If it’s negative, you lost.
You work hard to get those few percentage points to appear on that bottom line. The problem is that many owners don’t fully understand the dynamics of Net Profit.
Don’t stop reading! You need to make it through the next few paragraphs and it will all make sense.
The one statement that Strategies hammers away at, in coaching and seminars, is that “Profit isn’t cash.”
FACT: Net Profit is a measurement for a period of time — a month, a quarter or a year.
Why isn’t Net Profit cash? The answer is pretty simple. There are transactions that don’t show up on the Profit and Loss Statement, such as principle payments on loans, the purchase of furniture and equipment, and the sale and redemption of gift cards.
Gift card transactions make the understanding of Net Profit more interesting. When a gift card is redeemed, the transaction is recorded as income on your Profit and Loss Statement for that period with the resulting Net Profit.
FACT: The Profit and Loss Statement doesn’t know, and really doesn’t care, how much cash your company has in checking and savings accounts. All it does is record income and expenses for a period and what’s left over in the form of Net Profit (positive or negative).
KEY: Transactions not included on the Profit and Loss Statement occur on the Balance Sheet.
The Balance Sheet is a running tally of what you own (Assets in the form of cash, inventory, equipment, etc.), what you owe (Liabilities in the form of bills, credit card debt, loans, unredeemed gift cards, taxes, etc.), and what you’re worth (Equity in the form of retained earnings, net income, etc.).
So, here are my four No-Compromise Leadership strategies on how you turn Net Profit into Cash:
- Plan it: If you’re one of those salon/spa owners that trust that the “universe” will create profit and cash reserves — snap out of it. Net Profit and cash reserves are planned outcomes. That means creating a Cash-Flow Plan that details expected revenues and expenses for each month for an entire year. This involves some numbers crunching, reviewing historical data, and yes, some guesswork. You may guess right. You may guess wrong. But you have to guess. The more you do it, the better your guesses will become. There is a reason that absolutely every Strategies coaching client has to build a Cash-Flow Plan. You can’t create financial sustainability without a plan. That plan must include building a cash reserve equal to three to four months of operating expenses.
- Measure it: What good is a Cash-Flow Plan if you don’t measure it against reality? Reality is recorded on your monthly Profit and Loss Statements and Balance Sheet. Thanks to accounting systems like QuickBooks, salon/spa owners can run monthly, even weekly, Profit and Loss Statements and Balance Sheets to see exactly how their companies are financially performing. At Strategies, we’ve been running weekly financial reports for over 25 years. We pay attention to where we’re at in key areas compared to our Cash-Flow Plan. We know how well we’re winning and we easily identify potential challenges before they become problems. A weekly scan takes a few minutes and some discussion. We do exactly what we teach and coach our clients to do.
- Live your plan: One of the most challenging tasks in coaching salon/spa owners is getting them to live their Cash-Flow Plan. The most frustrating thing to see is an owner struggling and stressing financially because they’re not living and executing their Cash-Flow Plan. Likewise, one of the most fulfilling parts of coaching is when an owner proudly reports that their cash reserve has doubled and they’re on their way to being debt free. Cash-Flow Plans are like diets. They only work when followed. Living your Cash-Flow Plan is not rocket science. It’s a non-negotiable business success discipline.
- Protect it: You planned it. You routinely measure it. You disciplined yourself and your team to live your plan. Now, protect it. The key to turning Net Profit into cash is getting cash out of your operating checking account and into a separate savings or money market account. If you don’t, that cash is going to get spent. This is especially critical for gift card purchases. The key to a successful gift card program is to transfer gift card cash to a savings account so it’s there to cover operating costs at the time of redemption. The worst thing any salon/spa owner can do is spend gift card cash. Doing so will only create cash-flow challenges when redemptions occur. Being busy has hell with clients redeeming gift cards means very little cash is going into your checking account. KEY: Regard cash in your savings account as sacred. Don’t touch it unless absolutely necessary. There is a reason Strategies calls it your “sleep well at night money.”
Here’s my challenge to you: I just gave you four strategies to turn Net Profit into cash. Lock into these four strategies and you will discover, as many have before you, how to take the financial stress out of business ownership.
It’s going to require personal discipline and mastering some new behaviors. Both are a small price to pay to sleep well at night.
Categories: Financial Literacy