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What Story Do Your Salon/Spa’s Financials Tell?
November 24, 2019 | By Neil Ducoff | 1 Comment
I’ve been reviewing salon/spa financial statements for 45 years, starting with my own two salons back in the 70s. Yes, I used to do hair and own salons.
Whenever an owner calls me for help with his or her salon/spa, I ask for the most current Profit and Loss Statement and Balance Sheet. Why? Because I need to know the story of how the company performs and what its state of health is.
The financials also tell me a lot about the owner’s understanding of financials, how much they pay attention to them, and the value they place on them.
In so many ways, a set of financial reports, specifically the Profit and Loss Statement and Balance Sheet, are a numeric readout of the owner’s financial thinking and behavior.
Here are some examples of the story financials tell me:
- I expect to see financial reports that are no more than 30 days old. If the most recent financials are four or five months old, the owner isn’t paying attention to the financials, doesn’t understand them, or sees little value in them. If all I can get is last year’s tax return, there’s a big problem.
- The Profit and Loss Statement must have the percent of income column. The percent of income column is the fastest way to see how the business is performing and where the money is going. If retail sales are less than 10% of total income, there are no systems, focus or accountability for selling retail. The percent of retail and professional product cost tells me if purchasing budgets are being used. The service payroll percent tells me if payroll is within benchmark and if the compensation system needs fixing. An excessively high rent percent tells me the urgency to grow revenue, or if it’s time for a serious conversation with the landlord. Every line item and percent tells a story.
- The Balance Sheet quickly tells me how healthy the company is. If there is little to no cash, the company is in a financial crisis and most likely insolvent. It tells me if there is a cash reserve in separate savings account. It should tell me the total due in Accounts Payable. It tells me how many credit cards have balances and the total in credit card debt. KEY: Excessive credit card debt is a bad sign. It tells me how many loans there are and the principal balance of each. It tells me if the Retained Earnings are positive or negative. Negative Retained Earnings means the company has been operating at a loss for many periods. Lastly, it tells me if the Equity is positive or negative. Negative Equity means the company’s liabilities exceed its assets.
Here are some No-Compromise Leadership insights to ensure that your financials tell a story of success:
- They’re your company’s financial scorecard: Net Profit is a good thing. Negative Net Profit is a bad thing. Cash reserves are a good thing. Little to no cash is a bad stressful thing. Creating positive Equity means you’re creating value to your company. If you keep losing money, it’s time to rethink how you run your company. Almost every salon/spa that’s in a bad financial position can get healthy again — if the owner learns and commits to financial systems and discipline.
- Living your Cash-Flow Plan makes your financials look great: Financials show the score during and after each month, period and year. A cash-flow plan is a monthly projection of revenue and budget for expenses. The cash-flow plan is the owner’s boss. It tells you what you can and cannot spend. If it’s not in the cash-flow plan, don’t do it. The cash-flow plan is useless if you don’t follow it and live it. RELATED: Click here to have us build your cash-flow plan for you!
- Keep your financials accurate: All expenses must be accounted for and recorded. There should never be a line item called “miscellaneous.” Miscellaneous is another term for “I don’t know.” Don’t expect your bookkeeper or accountant to know where every expense item goes. Tell them what the expense was for with a simple note so it goes in the proper account. Review your financials in detail each month, not just to see the score, but to identify a line item that looks incorrect. Question what you don’t understand and keep questioning it until you get it.
- Keep personal expenses personal: I’ve seen home mortgages, college tuition, home appliances, home shopping bills and more buried in Profit and Loss Statements. If I can find it, IRS will definitely find it. Don’t mix personal expenses in your business.
- Pay off your credit cards each month: Credit card interest rates are insanely high — and go off the charts if you’re late with one payment. When I see multiple credit cards on a Balance Sheet with high balances, I know the business is in financial trouble. Stop using credit cards if you can’t pay off the balance each month. Pay down the balance on the credit card with the highest interest rate first. When it’s paid off, cut the card up into tiny pieces and cancel it. Credit card debt is bad.
- There’s no excuse for late financials: QuickBooks is the de facto king of bookkeeping systems. There is no reason why you can’t run a current Profit and Loss Statement and Balance Sheet each week, and definitely at the end of each month. Got it? No excuses.
- The closer to debt free the better: Debt is drag. Too much debt is serious drag. Being debt free is nothing more than a discipline and commitment to live within your means. There is no better feeling in business then being debt free with three to four months cash reserve.
- Someday you’ll want to sell: You didn’t start a business to buy yourself a job. You started a business to create and grow value to an asset. In this case, that asset is your company. When that day to sell finally comes, you want to be able to slide a set of financials across the table to a potential buyer that says, “You are going to pay a premium price for my very success company.”
Here’s my challenge to you: If you can’t check off each item presented above, it’s time to get your financial house in order.
Learning how to read financials, how to set them up properly and how to use financial data to make the best decisions isn’t hard. And, in business, it’s not optional.
Categories: Financial Literacy