Money Matters

Expansion Requires A Hard Look At The Books

When the time came to expand to a full-service day spa at five times her present rent, salon owner Leslyn Zak wondered if she could make the leap. So she brought in a financial professional to help crunch the numbers and create a winning game plan.

Editor’s note: Since opening a one-tech nail salon in 1995, Leslyn Zak has grown her business and expanded her menu to the point where she’s now contemplating opening a full-service day spa. Because opening or expanding a salon is the dream of many nail technicians, we offered to defray Zak’s cost for the professional guidance of a financial planner in exchange for sharing the details with our readers of what such a venture involves. Part one of this article concerns the planning stage of her venture. In part two later this year, we’ll see how it all works out.

Leslyn Zak had reached the fork in the road. In just three years, she had successfully grown her beauty business from a one-room/one-tech nail salon to a three-room mini-spa with a staff of five. A born entrepreneur with a “can do” attitude, Zak(left) had outgrown the 400-square-foot space she was renting in the basement of a historic inn and was hankering to take the next step: a full-service spa with hair, makeup, and wet treatments. Was she in the financial position to make the leap? Was the timing right? She discovered she didn’t have a clear enough understanding of her salon’s finances to make a sound judgment about the best path for her growth.

With more questions than answers, Zak approached Barbara Hargrove, a financial counselor with General Business Services (Gloucester, Mass.). “I’m a complete idiot when it comes to bookkeeping,” admits Zak. “I have a head for entrepreneurship and I’m a great practitioner, but numbers make my head spin.” Hargrove assessed Zak’s strengths and weaknesses similarly: “Like most small business owners, Leslyn spends most of her time generating revenues to reinvest in the business. She tracks her revenues and expenses, but does not know her net income on a monthly basis,” says Hargrove.

At the time of their initial conversations, Zak was weighing two options. She could expand her current location, which would mean renegotiating her lease and making a lot of improvements. Or she could move to a busy new site in a neighboring town at six times her current square footage and more than five times her current rent. Hargrove acknowledged a third alternative that was not very appealing to Zak – she could remain where she was, biding time until her debts were lower and her income was higher.

Zak hired Hargrove to help her slog through her options, get the books in order, and determine what was realistically possible and what was not. Together they would set up an accounting system and produce monthly financial statements. The financial statements would allow them to analyze the state of her current business and make projections for the immediate future. “We can use income statements and projections based on her existing set-up to give us a benchmark to work from,” explains Hargrove.

Equally as important, the financial statements could be incorporated into a written financial plan that Hargrove would assemble with Zak’s input. This business plan would prove essential, if, as it appeared at first look, Zak would have to get a loan to realize any expansion plans.

A Quick Ascent

Zak’s track record goes a long way to explain her consistently positive attitude. After she became a nail technician in 1995, she worked in a few different salons before opening her own one-room salon in an old office building in seaside Rockport, Mass. It was called Nails on Broadway, and she furnished it on a shoestring. “I never planned to be a salon owner, but I found this little spot that was perfect,” recalls Zak.

When she became allergic to artificial nail products, Zak learned skin care and kept to natural nail services only. “You can’t do nails and skin in the same room because skin services require a certain amount of privacy and relaxation. So I rented a single room at the Ralph Waldo Emerson Inn at the tip of Cape Ann to do facial services.” Between May and October of 1997 she had both locations going at once.

Finally she was able to renovate three rooms in the basement of the quaint, turn-of-the-century, 36-room inn, and Wild Ivy Day Spa was born. In just 400 square feet, she had a facial room, a massage and body treatment room, and a nails/pedicure/retail room. Her staff includes five technicians, plus two part-time salon coordinators. Despite limited space, she was projecting revenues of $65,000 in 1998.

With her appointment books filled with repeat customers and her standing appointment rate at about 50%, Zak felt ready to make the transition to full-service day spa by adding hair, makeup, and water treatments. She felt sure the business could support the additional staff. The Inn was undergoing a change of ownership. It seemed like a natural time to make a decision about her future.

A Meeting of Minds

Expansion options was the hot topic at her first official meeting with Hargrove in August 1998. In order to help Zak make an informed decision, Hargrove emphasized the need to understand Wild Ivy’s bottom line. “I was completely clueless,” says Zak. “I knew how much I was taking in, but not how much I was paying out. It’s amazing I got as far as I did without understanding my own finances.”

At their second meeting, the two got down to the nuts and bolts of the business, beginning their work by assembling a profit and loss statement for the previous month. Using Zak’s checkbook, receipts, invoices, and bank statements, they began to form a picture of the salon’s finances. They defined ongoing expenses such as rent, commissions, advertising expenses, and insurance. Using sales slips, they were able to break down and analyze revenue by department to see where they could increase profits, both at the present location and after the planned expansion.

Massage therapy, for which Zak charges $55 an hour, turned out to be the most profitable department, so they mulled over plans to expand it further to take advantage of the low overhead and high profit and volume. Zak would hire three to five new therapists, and with the purchase of a steam canopy she could add a 15-minute steam treatment to the standard massage.

Another area she could exploit to bolster profits was retail. Without much effort and in very little space, Wild Ivy was selling $600-$700 of take-home product per month. “I have only one skin care line, Aveda, and it doesn’t address every need. I’d like to ultimately have three. A lot of clients ask about Cellex C, for example,” says Zak. “I’d like to add that first.”

The next subject the two tackled was Zak’s sizeable credit card debt. She owed a total of $14,000 on several cards and freely mixed personal and business expenses – not a sound business practice, she learned. They made a goal to eliminate her debt over next three years. “I canceled two cards immediately and settled on $550 per month to pay off my total credit card debt,” Zak says. Hargrove advised her to start paying off the cards with the highest interest rates first.

The good news, Hargrove points out, is that the business itself has little debt. The former owner of the inn had loaned her some money for renovations, which she is paying back at the rate of $150 per month on top of her rent. Fortunately she has less than six months to go on that. Zak also has three remaining payments of $400 for some equipment she recently purchased.

At this very productive second meeting, they also reviewed Zak’s business insurance and found she needed to add a workers’ compensation policy and increase her liability coverage.

Their final deed for their second session was to get Zak’s future business objectives on paper. These goals include increasing her standing appointment rate, creating specialized bridal packages, and implementing a marketing plan.

By their third session the two were able to cobble together a profit and loss statement for the first eight months of 1998 and make projections for the rest of the year. Without any expansion, Hargrove forecast a $3,000 profit after salon expenses and credit card debts were paid.

For the first time in her professional career, Zak had a budget to follow and was able to project expenses. “The thing that first hit me was that I had a defined budget – something to follow rather than flying by the seat of my pants,” says Zak. Not that she feels constrained. “I’m not going to miss an educational event for the staff just because it’s not in the budget. If there’s equipment I really need, I’ll get it and figure out a way to make it work.”

As you might expect, Hargrove counsels a more cautious approach: “She needs to know she can only spend X dollars this month to stay within her budget. She’ll never get ahead if she doesn’t stick to a budget and realize that if things slow down she’ll need to cut back. Leslyn is a typical entrepreneur. She says, ‘Yeah, let’s do it.’ I say, ‘let’s look a little closer and see if we can afford it.’”

One budget item of understandable interest to Zak was the monthly owner’s draw. Previously she had just taken out just what she needed immediately to pay down her credit cards and cover the leasing expenses for her car, which she uses for both business and personal needs. Beyond that, she had been pulling out only small sums monthly (never more than $100) and reinvesting anything remaining in the business. In 1997 she withdrew a total of just $4,000. After sifting through the numbers, Hargrove recommended Zak start taking $1,250 per month from the business to cover her $550-per-month credit card debt payment, half her car expenses, and her draw.

Weighing the Options

With much of the number crunching behind them, they were ready to weigh Zak’s options from a more informed position. Her current rent was $400 per month under an agreement with the Inn’s prior owner. Unfortunately her position with the new owners was not secure. Since the Inn was for sale when she moved in, her lease specified she could be asked to vacate at any time with just a 90-day notice.

She entered into negotiations with the new owners to secure her existing space and to rent an additional 647 square feet. The owners proposed a new total rent of $2,000 per month (not including utilities) with $200-per-month increases each year. The annual cost, Hargrove figured, works out to about $24 per square foot in the first year. In addition to the increased rent, Zak had to consider the cost of renovating the new space. Considering the age of the Inn, the costs would be high, an estimated $30,000 for renovations alone. Zak also felt the facilities would still be less than ideal – the spa would share the basement with conference and meeting rooms as well as laundry and maintenance staff. The overall picture was not very attractive and Zak decided to look at alternatives.

Eventually she set her sights on a two-story house on a busy thoroughfare in neighboring Gloucester across the street from the bustling Cape Ann Marketplace. The 2,400-square-foot space with eight rooms and two bathrooms had previously been used as an office building. Heavy street traffic would ensure prominent visibility and encourage walk-in business, which the salon doesn’t get at its present location.

The proposed rent on the Gloucester site is $2,200 per month, with utilities estimated at another $350 per month. Hargrove put the annual cost at about $12.75 per square foot. Like the Inn, it will also need new equipment and extensive capital improvements, such as plumbing and electric work, at an estimated cost of almost $30,000.

Despite the huge financial commitment, this new location felt like the right way to go. “It’s centrally located for clients and staff and has the appropriate amount of space for present and future growth,” says Zak. Now only two big questions remain before Zak can make her move. Can she get the $30,000 loan she needs, and can she devise a reasonable plan to increase her income to cover the huge increase in rent and the new loan payments? To find out, check back in a future issue for part two of Zak’s story.

 

 Wild Ivy Day Spa

8 months actual plus 4 months projected*

 

 

Cash on Hand

Sales

Nail Services

Spa Services

Steam Treatments

Retail

Rental Income

 

JAN.

0

2,624

 

 

 

526

FEB.

 

2,770

 

 

 

526

MAR.

 

4,733

 

 

 

554

YEAR 1

 

58,513

0

0

900

8,458

2,400

TOTAL REVENUE

Cost of Goods Sold

MA Sales Tax

Commissions

Contract

 

Sales Expenses

 

3,150

263

 

267

 

 

530

3,296

263

 

599

 

 

862

5,287

277

 

291

 

 

568

70,271

4,711

0

13,661

6,414

 

24,786

NET REVENUES

Ralph W. Emerson Inn Loan

Equipment loan

Supplies

Expenses – Misc

Rent

Utilities

Phones

Insurance

Misc and Credit Card

Bank Charges

Car Expense

Travel and Entertainment

Advertising

Dues and Subscriptions

Professional Fees

Office Supplies

Interest Expense

 

2,620

 

 

934

50

400

 

262

 

937

67

303

45

70

60

36

121

16

 

2,434

 

 

1,261

3

400

 

232

89

469

47

268

 

233

76

45

97

15

4,719

 

 

551

42

400

 

218

 

212

133

346

69

 

52

 

49

14

45,485

596

800

7,009

1,026

5,600

1,050

2,872

505

5,328

1,002

4,715

315

2,313

600

731

1,806

180

 

TOTAL EXPENSES

Other Income/Expense

Income from Operations

SBA Loan Fee

Debt Service

Owner’s Draw

 

3,301

 

<681>

 

 

42

3,235

<93>

<894>

 

 

266

2,086

<40>

2,593

 

 

237

36,448

 

9,037

480

1020

5,199

NET INCOME

 *Rough estimate.

<723>

<1,160>

2,356

2,205

 

Keywords:   salon finances  

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