Where the Money Really Goes in a Salon/Spa
In an industry almost entirely driven by skilled, creative and passionate professionals, it’s easy to
understand there is a significant lack of interest in the numbers side of business. So much so, that it’s not unusual when owners and managers try to share financial and critical numbers with staff to hear service providers say, “I don’t care about the numbers, I just want to do my work.”
Since my business is coaching owners of employee-based salons and spas to grow successful and sustainable companies we let them know that it must not only be profitable — it must have sufficient cash reserves. And remember, — profit is not cash.
Here are the facts:
Financial literacy — understanding financial reports and financial management is a non-negotiable necessity for ALL businesses –large and small.
There are many busy salons and spas bringing in a lot of money that are barely profitable and tight for cash.
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. We have a Strategies Salon Spa Business Idea Exchange discussion group on Facebook and in response to our question, “What’s a good commission rate?” a stylist recently posted this post: “You work hard to have clients and a salon wants at least 50 percent, 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 person who posted this, the post illustrates how the lack of financial literacy training makes it easy for employees to make conclusions based on “50 percent” of the salon/spa’s financial reality story. Using the numbers in the stylist’s post and looking at a typical salons annual profit & loss statement, 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 percent 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.”The fact is the 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.