3 Words Every Stylist Needs to Set their Financial Foundation
Digging into your numbers can be a bit overwhelming. Especially if you’ve never been trained to manage your books before. It is essential to know and understand the cost of doing business to create a strong financial foundation. Because at the end of the day if you don’t know your numbers, you don’t know your business.
That’s why we pulled together these top 3 words that every salon owner, stylist, and independent stylist must know:
Success starts with good roots and a foundation. Understanding revenue, break-even, and profit will provide you with a strong foundation to operate your business. When you start hair school, you begin to learn the basics. The same goes with operating a business. It is important to know these 3 financial terms to help you make strong and confident financial decisions.
Definition: the money generated from business operations before expenses and taxes. Revenue is the top-line of your business also known as sales on the income statement.
Salon revenue is the total amount of sales made by the salon, including both sales incurred from salon services and retail products. To run a profitable salon you need a good top-line revenue (i.e. sales).
Measuring revenue is the key to being able to understand the profitability of your salon. Knowing your revenue is important so you can determine which actions to pursue and which to avoid.
Your top-line can help you decide how much you have to invest in education programs, general upgrades, and other growth investments. In addition, when you analyze your revenue over time, you may begin to notice several trends. Revenue peaks and troughs can be used to identify customer patterns. Lastly, sales revenue is one of the most important considerations when setting your pricing strategy. Knowing your revenue will strengthen your financial foundation.
Following a Parts + Labor pricing strategy ensures you are accurately charging for your color services. Read our Guide to Labor Pricing blog for more information about the Parts + Labor pricing strategy.
Definition: The break-even point is the level of production at which the costs of production are equal to the revenues.
Break-even point: Total Revenue = Total Expenses
On average 25% of salons across North America break-even. The break-even point is critical to know, as it reflects the point where there’s no profit; it’s simply net zero. This figure is important because it is the simplest way you can determine if what you are charging for your products and services will cover the costs of business operations. It also shows the amount of products/services you need to sell/offer to ensure that you make a profit and how much revenue your salon will make at each level of output.
Definition: the financial gain realized when the revenue generated from a business activity exceeds the expenses, costs, and taxes. A simple formula to calculate your profit is:
Profit = Total Revenue – Total Expenses
Every company needs to earn a profit to be sustainable. The bottom-line truly indicates how healthy a business is by showing how much revenue remains after all expenses are deducted. A positive bottom line is a great indicator that your salon is healthy and performing well.
Even if your revenues are high doesn’t mean your business is healthy. Top-line revenues are great, but after all of your expenses are deducted it’s your bottom line that matters. Salons on average have a profit margin that ranges from 2% to 17% depending on how well the salon is managed. If you are at the bottom end of this range this means you are walking on a very fine line between profitability and losing money.
Having a strong financial foundation sets you up for success. Knowing your costs of business through revenue, break-even, profit will give you as a business owner more confidence. Learning how to become financially confident and build a healthy relationship with your finances is a critical step that you must take to set yourself up for success long-term.