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Where the Money REALLY Goes in a Salon or Spa
June 5, 2017 | By Neil Ducoff | 2 Comments
In an industry almost entirely driven by skilled, creative and passionate professionals, it’s easy to understand that there is a significant lack of interest in “the numbers” side of business.
So much so, that it’s not unusual to hear service providers say, “I don’t care about the numbers, I just want to do my work,” when owners and managers try to share financial and critical numbers with staff.
At Strategies, our business is coaching owners of employee-based salons and spas to grow successful and sustainable companies. For a business to be “successful and sustainable,” it must not only be profitable, it must have sufficient cash reserves. Remember, “Profit is not cash.”
FACT #1: Financial literacy — understanding financial reports and financial management — is a non-negotiable for ALL businesses – large and small.
FACT #2: There are many “busy” salons and spas that bring in a lot of money that are barely profitable and are tight for cash.
FACT #3: As much as many service providers balk at knowing and understanding the numbers side of the business, they know and understand their own numbers, and make grossly inaccurate assumptions on what the salon/spa and owners truly make.
A stylist recently posted on our Strategies Salon Spa Business Idea Exchange discussion group on Facebook, in response to our “What’s a good commission rate” post.
“You work your ass off to have clients and a salon wants at least 50% of it still seems crazy. Glad there are suites these days because I’d rather be the captain of my own ship. No need to have to work in a salon with 20 competing stylists. And why should a salon make (20 stylists make $1000 a week … so the salon gets $500 × 20 = $10,000 a week.) They [owners] make the money … don’t worry about it.”
The post illustrates the employee’s conclusions and point of view regarding the age-old 50/50 commission split.
More importantly, and absolutely no disrespect to the poster, but this post illustrates how the lack of financial literacy training makes it easy for employees to make conclusions based on “50%” of the salon/spa’s financial reality story.
Using the numbers in the stylist’s post, here’s the math on both sides of the 50/50 split:
- All expenses are based on conservative industry benchmarks
- The above Profit & Loss Statement DOES NOT include “Owner’s Pay”
- A 5% Net Profit leaves little margin for error
- Debt payments (bank loans, credit card balances, etc.) are paid out of Net Profit
- Reminder … Profit is not cash
So … based on the stylist’s side of the numbers that assumes owners get 50% of service revenue … where’s all that money salon/spa owners are making?
Yes, it’s frustrating for owners that employees believe they’re being taken advantage of.
Without financial literacy training, employees will continue to say, “Owners keep all the money after commissions are paid.”
FACT: Numbers tell the truth … but only when all the numbers are considered.
It took me ten minutes to build the example Profit & Loss Statement in Excel. I’m good with numbers because I’ve been dealing with salon/spa financial reports my entire career.
But back in the early 1970s, I was a young salon owner trying to figure this business out. I worked hard to learn the story that financial reports tell because I wanted to know the truth about my young salon’s financial viability.
I’ve been teaching owners and staff financial literacy ever since.
Here’s my challenge to you: I believe that it’s the responsibility of every business owner to teach financial literacy to its employees.
I believe that it is your responsibility to share certain critical numbers about your business to give employees a sense of ownership in making those numbers better.
Call it “Open-Book Management” or anything else you want, but pulling back the curtain on the financial reality of building a successful and profitable business, is the secret to employee engagement.
This doesn’t mean having a staff meeting and handing out your Balance Sheet and Profit and Loss Statement. It means starting out seriously simple with the concept that there are only “100 pennies in a dollar.” Most of those pennies go to payroll. Some pennies go to product cost. Some pennies go to rent. It’s not very hard to explain … if you are financially literate.
If all your employees only know what percentage they get of their service sales, that’s the number they will lock on to. It makes everything else an extremely bad assumption.
Want some help getting a handle on your numbers?
Here are two ways Strategies can help:
- Let us build your cash-flow plan for you with our Profit Projector Package. In just four calls with a Certified Strategies Coach, we’ll build your plan, and more importantly, show you how to use it, react to it and grow it.
- Attend our flagship training, the four-day Strategies Incubator Seminar. Not only will you learn to build your 12-month cash-flow plan using your actual numbers, we’ll load you up with our proven systems to help you and your team push the numbers forward…and reward everyone for doing so.