Oftentimes, salon owners cringe at the thought of looking at their finances. You know the feeling: simply glancing at your bank account balance may make your stomach turn. But you know it’s important. In order to make financially sound business decisions, it is essential for every salon owner to take the necessary steps in managing their finances - and that begins with checking your books more than “once in a while.”
What’s your relationship with money?
The first step in this process is to develop a healthy relationship with money. Typically, how you handle your finances is a direct reflection of your relationship to money and your personal money story. If you’re not sure how to describe your relationship with money, ask yourself a few questions:
- If money was a friend of yours, what would your relationship with this friend look like?
- Would the friendship be flourishing and supportive, or toxic and destructive?
- Do you look at it with optimism, confidence and aspiration, or with fear, anxiety and uncertainty?
When you’re financially confident, you have respect for money. You take care of it, and treat it with the same respect as you would a friend. Learning how to become financially confident and build a healthy relationship with your finances—on both a personal and business level—is one of the most important steps that you can take to set yourself up for success.
Separate streams for transactions
Next, it is crucial to keep business and personal transactions separate. Start by ensuring you have separate checking/savings accounts and credit cards for your business. Combining personal and business transactions makes reporting inaccurate, confusing, and can lead to more mistakes, which can also increase the likelihood of being audited. Take time to put a system in place to keep accurate records of receipts and payments. This will provide a clearer picture of your business’s financial situation.
Also, by ensuring all transactions are recorded properly, you can take advantage of tax deductions. Your tax preparer can only do so much with the information that is provided to them. They are not taking the time to ensure all of your transactions are properly recorded.
Finally, by ensuring that your personal finances are not intermingled with your business, this will aid in protecting your personal assets from legal liability should something happen. You will also want to ensure that you have your business set up with a proper legal structure. This is an important topic to discuss with your attorney.
A third step in managing your money is to set business and personal financial goals. Without setting goals, you have no idea what direction you are heading in or what steps you should be taking. Take the time to look at where you’ve been and where you want to go. Begin determining what your revenue goals should look like.
How much profit do you want to be able to take from your business? What adjustments need to be made to enable you to do this? You should always have a clear vision of exactly what is happening in your business and where you are headed so that you can make informed decisions that line up with your goals. If a decision isn’t going to help get you to your next goal, then re-evaluate and adjust.
Set a business budget
After you have your goals set, the fourth step is to review your expenses and establish a budget according to your goals, rather than just adding them up at the end of the month. This could entail intentionally increasing your spending on advertising, but cutting unnecessary spending elsewhere. It is important to use these funds wisely to get the best results.
Keeping your goals in mind, take the time to determine what your ROI might look like on a new investment. For example, determine if the initial increased expense of a new hire will enable you to enjoy bigger profits in the future. Analyzing your expenses will also assist in making sure that you’re not overspending throughout the year on unnecessary items or items that you may be able to find cheaper elsewhere with the same or better quality.
While planning and budgeting, a few additional factors to consider are an emergency fund, taxes, and payroll:
Having an emergency fund is vital, especially as we all saw during COVID. It can also assist with the seasonality that many salons face. Planning for unforeseen circumstances and having proper systems in place can be imperative to the success of your business.
Regarding taxes, you should make a habit of setting money aside each month or even bi-weekly so that you are prepared for your tax bill. These funds should be placed in a separate account so that you are not seeing it as part of your primary account balance; therefore, thinking you have more funds available to spend than you actually do.
Budgeting for payroll can help you ensure that you’re utilizing your employee’s properly, as well as compensating them correctly.
Make your budget actionable
Once you have taken these steps, step five is to learn how to understand your financial statements so that you can use them when making business decisions. Financial statements show a snapshot of your business and can also help you determine where your business is going. It is easy to simply skim over financial statements; however, there are many important aspects that are often overlooked or misunderstood.
Truly understanding your financial statements can aid you in making sound financial decisions. Here’s a few components you should know:
The Income Statement shows how much money you are making and how profitable your business has been over a certain period of time.
The Balance Sheet will tell you the overall condition of your business by listing out what your business owns and owes. This is the statement that is most important for investors or lenders to look at.
The Cash Flow Statement shows how much cash is flowing in and out of your business during a specific time period. This is especially important for businesses that deal with seasonality. A business can come to a sudden stop without warning if they are not paying attention to their Cash Flow Statement.
Financial statements can also show you which are your best selling products and services, as well as which of these have the highest profit margins. It can also show you how much it costs to provide specific services to a client by determining your Gross Margin.
Paying attention to your Gross Margin will help you to determine which products you should’ve stopped selling a long time ago and which one’s to push because they’re making more money. The best way to know is to look at your financial statements and records, but these must be accurate if they are going to provide you with an accurate picture.
Understanding Gross Margin can also answer whether or not you should increase your prices. Price should not just be based on what you think you’re worth (less or more), but rather on your financial data. You can stand firm on your pricing if you know exactly what you need to make on each product or service to keep your doors open and to grow your business. When determining your prices, consider that due to COVID, many salons are now required to purchase extra equipment for safety and cleanliness. The only way to determine this is to run the numbers and determine how much it costs to deliver each service. You will need this information to run these types of calculations.
Build your team
Finally, step six is to build your team. As a salon owner, you should have a team of experts that can help you run and grow your business. For example:
- You will need a banker to assist with setting up the proper accounts and lending for your business,
- An attorney for all legal matters,
- A CPA to provide you with tax advice,
- And a bookkeeper that can work with you and your CPA to ensure that all the information is accurately recorded. Some of today’s bookkeepers also offer advisory or fractional CFO services, where they come alongside you to aid in understanding your financial statements and how business decisions can impact them.
There are oftentimes other essential partners, such as a business coach or a marketing manager.
When determining your team members, have an idea of what you would like that relationship to look like. One requirement should be that you have regularly scheduled meetings with each of them. Another may be that they are a specialist in your industry. If they are familiar with your business industry, their guidance could lead your company in a better direction, ultimately leading to increased revenue and growth. In many instances, it is still more cost effective to hire an expert than doing it yourself. Having an expert saves you time and allows you time to focus on what you do best. You became an entrepreneur because you have a passion for what you do and your time is better spent doing just that!
As a salon owner, it is time to stop feeling anxious about your finances. Take ownership of running your business like a business, rather than just a side-hustle. Begin by working through these steps one at a time. Some steps will take longer than others, and that is okay. Soon, by taking these six essential steps, you will finally feel confident in making informed business decisions and stepping into your true role as CEO.
About the Author: Rechelle Kennedy, Advisor, Breakaway Bookkeeping + Advising
Rechelle Kennedy is an advisor at Breakaway Bookkeeping + Advising who specializes in assisting small businesses owners turn financial reports into strategic decision-making, growth plans. She specializes in the beauty industry and works with salon small business owners, with an expertise in sunless tanning boutiques. She supports her clients with valuable financial insight to improve efficiency in their businesses and optimize performance
Rechelle is dedicated to collaboration with small business owners on creating actionable business plans to achieve their goals. Having previously owned her own spray tanning salon, Rechelle brings first-hand experience in understanding the challenges that many small business owners face and brings this expertise to her client work.
Rechelle obtained her Master of Business Administration from The Pennsylvania State University as well as her Bachelor of Business Management and Bachelor of Marketing from Pensacola Christian College. During Rechelle’s free time, she enjoys spending time with her hard-working husband and two daughters. She also enjoys taking her two boxer fur-babies for walks and enjoying the outdoors. Rechelle was a feature bonus speaker at the 2022 Slay the Spray conference.
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Originally posted on Modern Salon