346 The 5 Numbers Every Salon Owner Needs to Know

[MUSIC] Last week I painted a picture that I know resonated with a lot of Salon owners out there. A busy Salon, the columns are full, the team are working hard and clients are through the door every day. And yet somehow the money just never quite seems to add up. Something doesn't feel quite right, but you can't really put your finger on exactly what it is. Now if that episode resonated with you, this one is the follow-up you need because today I want to get more specific. If you haven't already listened to last week's episode, perhaps you should as this episode follows on directly from that. I'm Anthony Whitaker and this is the Grow My Salon Business Podcast. The reason that most Salon owners feel that financial fog, that sense that the numbers are happening to them rather than managed by them, usually comes down to five numbers, not 50, not a spreadsheet full of formulas, just five simple numbers. But the real problem is that most Salon owners either don't know them, can't find them without calling their accountant, or have never been showing why the numbers even matter. And I don't say that as a criticism. You were trained to be a hairdresser. Nobody handed you a manual for the money side of running the business. So you do what I initially did and what most people do. You sort of trust you've got your work hard and your hope that it all works out. But hope, as I've said many times before, is not a particularly effective strategy. So today, I want to walk you through the five numbers that in my experience make the biggest difference to whether a Salon owner feels in control of their business or controlled by it. So let's get into it. The first number is your break even point. Now I want to start with this one because in many ways it's arguably the single most important number in your business. And it's also the one that most Salon owners can't answer without hesitation. And I do understand it because although it's not that difficult to work out, the problem is that there are a lot of variables that means that it can and will fluctuate based on other changes going on in the business. So although you may not get it exactly right, being in the ballpark is essential. Otherwise, you can be slowly but surely losing money every week and literally not know it. Your break even point is the minimum your Salon needs to take in any given week before you start making a profit. It's not the amount that you hope to take. It's not last week's takings but the number below which every single penny your business generates is going towards cover and cost and you're not making a single penny of profit. The reason that matters so much is that without knowing your break even you have no way of knowing whether a busy week was actually a profitable one. You see you can be fully booked and still be running at a loss. The appointment book can be full. The team is flat out but if you haven't covered your costs, the rent, the wages, the product costs, utilities, everything, then being busy isn't the same as being profitable. A lot of Salon owners are actually in this position. Not because they're bad at business but because nobody ever showed them how to calculate this number or why it should be sitting in their head every single week. Think about it like flying a plane. A pilot doesn't guess whether they have enough fuel to reach the destination. They check the instruments, they know the numbers. So the Salon owner, the break even point is one of the most important instruments on your Salon's dashboard. The second number is your net profit margin and I want to be very clear about what I mean because profit gets confused a lot. Profit is not your total revenue, your sales. It's not what came in. It's not your wages or your drawings. Net profit is what is left over. After every cost in the business has been paid including a proper salary for you as the owner. And the net profit margin is that figure expressed as a percentage of your total revenue. So if your Salon generated say $10,000 in a month and your profit is $1,000 then your profit margin is 10%. Now here's a question that I want you to sit with for a moment. What was your profit margin last month or last year? Now if your answer is that you need to check with your accountant or that you only get this number once a year at the end of year financial review then you are by definition always reacting to history. You're looking in the rare view mirror and by the time you find out there's a problem it's already happened. I had a Salon owner I was working with and I was Clarissa who runs a Salon in Sydney and when she started tracking this number properly she discovered that her profit margin was 2.5%. Not 25%, 2.5 and that's for a well regarded Salon with a good reputation. A year later having made changes her profit margin was 8.4%. That's not a small shift. She more than tripled her profit margin. So imagine her profit was at $10,000. Well she tripled it, now it's at more than 30,000. And if it was at $30,000, now it's at more than 90,000. That's the difference between the business that's barely surviving and one that's genuinely building towards something. She went on to open a new Salon and in her words I don't think I would have had the courage to make that leap if I hadn't understood the numbers first. That's what knowing your profit margin does, it gives you the facts and facts lead to making better decisions with confidence. Now the third number is your staff costs as a percentage of total revenue. This is the one that surprises people the most because most Salon owners think that they know their staff costs. They know what they're paying each person but knowing the absolute number and knowing it as a percentage of your total revenue are two completely different things. The reason why the percentage number matters more than the dollar or pound or euro number is that if your revenue goes up but your staff costs go up at the same rate, then your profit margin doesn't improve. The business is bigger but it's not more profitable. And if your staff costs creep above a certain percentage of your total revenue, then they start quietly eroding whatever profit margin you had. The industry benchmark for income producing staff, the stylists and colourists behind the chair is round about the 40% of total Salon revenue. Now that's a guide, not a rule. There is some flexibility around that number depending on your rent, your business model, your location, but if you don't know your number, you can't have that conversation. You can't make intelligent decisions about hiring and pay structures or productivity targets. Another Salon owner I work with, Ian, who runs a barbershop, told me that when he actually ran the numbers and drilled down into his staff costs and product usage, the result was his words frightening. Not because the business was about to collapse but because he'd never seen it laid out so clearly before. Once he could see it, he could address it and he did. It's just another good example of, you cannot manage what you don't measure. That applies nowhere more directly than to your staff costs. Hey, it's Anthony here. Before we go any further, I wanted to take a quick moment to tell you about something that's happening this coming Monday, the 11th of May. And you are going to want to be there. I'm running a free live masterclass called Where Does All The Money Go. It's one hour, specifically for Salon owners. And I'm going to walk you through exactly why sometimes even when the Salon is busy, the money still never seems to add up. And more importantly, what you can actually do about it. We're going to be talking about the numbers that matter, why most Salon owners are flying blind when it comes to their finances and the first steps to changing that. It's completely free. You just need to register. The link is in the show notes or go to growmysalonbusiness.com/financially-savvy. It's in the show notes. I'd love to see you there. Register, grab your seat and I'll see you on Monday. Right, let's get back to the episode. Now that brings us to the fourth number and that is understanding which services on your menu are actually profitable. Now I know that's not one number. It's really the set of numbers that I've seen produce the most immediate reaction from Salon owners when they work through it for the first time. Most Salon owners price their services based on what the Salon down the road is charging or based on where they used to work, which means in most cases you've borrowed someone else's pricing and with it assumed someone else's cost structure. But their rent is almost definitely different to yours. Their staff costs are different. Their overheads are different. Their cost structure is completely unique to them. And so when you copy their prices, the reality is that some of your most popular services, the ones your clients bought most of the time, the ones your team does most of the time. dose may be your least profitable. David who owns two cellons worked through his price inculculator in the money course. He applied his actual cost to every service on his menu and two thirds of the services came back in red meaning they were unprofitable. The point isn't to scare you the point is that until you run your own numbers you simply don't know and not knowing means it you could be working incredibly hard on services that are costing you money rather than making you money. Once David had done the work he rewrote his menu from scratch based on his costs, his profit target, his business and since then his words again I haven't looked at what any competitor is charging. I know these are the right prices for my business. That sort of confidence comes from knowledge not from guesswork. That brings us to the fifth number and that is understanding what your cash flow looks like over the next 13 weeks. So once again the fifth number isn't really a single number. It's a window of view into 13 weeks ahead of you. My cell known as Manage Their Finances by looking at last week's takings and what they have in the bank which tells you where you've been but it tells you nothing about where you're going and the danger isn't just in not knowing. It's that when you don't have a forward view every unexpected expense feels like a major crisis. So for example if the boiler breaks down or a team member leaves and the clients and the revenue leaves with them or a quiet month follows a busy month and the cash position you had dries up. Any of those things when you don't have visibility can fill catastrophic and when you do have visibility most of them are manageable because you saw them coming or if not you at least had a financial buffer in place. A cash flow forecast sounds a lot more complicated than it is and it's most basic it's a rolling 13 week view of what money is coming in and what money is going out. 13 weeks because 13 weeks is a quarter and there's four quarters to the year. Now it's not a perfect prediction but a good enough picture that you can make decisions throughout the year with clarity rather than panic. Billy is another salon owner who works through the money course. He runs two salons and he told me now that he has the cash flow forecast open on his laptop all the time. He updates it every week it takes him about an hour for two salons and the result the anxiety is gone he said. Even if the numbers aren't looking great I at least know and when you know you can do something about it. As a side note he told me that using the cash flow forecast enabled him to go from breaking even to generating 80,000 in profit. That's it that's what financial clarity actually looks and feels like it's not perfection but just knowing and therefore being able to make better decisions accordingly. So let's bring all this together. Those are the five numbers. Break even, profit margin, staff cost percentage, service profitability and cash flow visibility over the next 13 weeks. None of them are complicated once you understand what they're measuring and why they matter. The issue isn't maths the issue is that in all likelihood nobody ever taught you the language and without the language you're flying blind you're making decisions based on feelings rather than facts. Here's another thing about these five numbers they're all connected. Your break even informs your cash flow. Your profit margin is shaped by your staff costs. Your service profitability feeds your break even calculation. It's like you pull on one thread and then the picture becomes clearer across all of them. The Salon owners I've seen transform their businesses, Clarissa, Billy, Ian David and many others didn't do it by working harder. They did it by understanding these numbers and making smarter decisions because of them. That's what being a financially savvy Salon owner actually means. It's not about becoming an accountant it's not about loving spreadsheet it's just having the systems in place and understanding your numbers well enough to run your business from facts rather than fear. So two things I want to leave you with before you go. First of all we've put together a 10 question Salon financial reality check. It takes about 60 seconds and it'll tell you exactly where your knowledge gaps are across these five areas and a few more. You'll find the link for the 10 question Salon financial reality check in the show notes of today's podcast. Now secondly on Monday the 11th of May I'm running a free live masterclass called Where Does All The Money Go. It's one hour. It goes much deeper than what we've covered today and it's completely free. So if you've been listening to the last couple of episodes and any of it has felt like a description of your business then this masterclass is the logical next step. The link to register is in the show notes of today's podcast. I'll see you next week for episode 347. Until then look after yourself. Bye for now.