Recently I was honored to lead a Teleclass for Your Beauty Network. They asked that I address mistakes that salons and spas make. If you are interested in hearing the Teleclass, it is posted on the YBN website at www.yourbeautynetwork.com. I thought that you would be interested in the outline. YBN Teleclass Outline
August 27, 2007
COMMON SALON BUSINESS MISTAKES
INTRODUCTION
As a Certified Public Accountant that specializes in salons and spas, I have found that there is a common thread of activities salon owners have that spell success and/or failure. As one motivational speaker has said, “Success leaves clues.” This is really a true statement. If we can learn from other people’s success and failures, it can help us to make sure we are following a successful pattern or that we don’t make the same mistakes. If I were to summarize the entire success and failure items into one item, I would say Act as a Business Person.
Many times we see salon owners forgetting they are running a business and act as just another one of the employees that has administrative tasks. It’s very important for you to step back from that position and do things that a business owner would do.
The following is a summary of some of the items I have seen lead to success or failure of salons.
· EDUCATING YOURSELF
The owner should educate him or herself on business and technical matters. A trend that we see in successful salons is that they are aware of not only what is going on in the industry, but with business trends as well.
· EDUCATING YOUR STAFF
Time and time again, we see that in order to create job satisfaction, we need to make sure the staff knows we care about their future and their growth. This includes educating them.
· FAILURE TO CREATE A CULTURE
When you started your salon or spa you had a vision of what you the personality of your business. In many salons the owner loses that vision.
Many times salons are just a gathering of several different cultures that are a combination of stylists. Stylists come in and bring “their clients” along with “their culture.” Along the same line, I know salons have had eight or nine different product lines. When asked why they carry so many lines, it is because the stylist working there prefers that line.
The question I always have to ask is: “Whose culture and whose salon is it anyway?”
· UNDERSTANDING THE XY GENERATION AND THE ISSUES THEY BRING TO THE SALON
It is a fact of life that younger people do not have the same priorities as the older generations. Many times they are not interested in owning a salon or being the top producer. They are interested in their lifestyle and having enough money to pay the bills.
· HAVING SYSTEMS IN PLACE
It is your salon and they should be your systems. You should think these systems through and make sure everybody follows them. Good systems are the key to a good salon.
· FINANCES
Know when it is time to increase prices. Many times salons do not raise prices. I know as a fact that if you do not increase prices by 3-4% every year, you are going to go backwards simply because other costs are increasing. Raising prices is the key. October is a great time to do a standard increase, along with setting up a system to increase individual’s prices as they reach certain levels.
· UNDERSTANDING KEY BENCHMARK NUMBERS
Knowing your gross profit percentage, average ticket price, average service price, retail per service client, back bar percentage, cost of back bar, cost of credit card, cost of retail, all of these items are important to your bottom line. You need to make sure you know how to get these numbers and monitor them on an ongoing basis. It does you no good to wait until the end of the year to find out your back bar percentage is out of line. You have just cost yourself thousands of dollars and probably most of your profit.
· PAYING TOO HIGH OF A COMMISSION
Salon owners that are not successful usually are paying too high of a commission rate. Many times they are paying a commission, plus benefits, plus Social Security tax, plus tax on tips. This can amount to 60-70% of services. You need to understand what your commission structure is costing you.
· NOT HAVING A BUDGET
A budget is a road map. A budget will tell you where you are going. If you are not satisfied with what the budget tells you, then you need to know what changes you should make. These changes do not just happen; you have to make them happen.
· NOT GETTING THE EFFECTIVENESS OF ADVERTISING
Most software programs will allow you to monitor where your new business is coming from. Make sure you monitor your advertising.
· GETTING TOO COMFORTABLE WITH YEAR END GIFT CERTIFICATE SALES
Many salons that sell gift certificates look at their cash in the bank at the end of the year and feel they have been successful. Many salons then spend that money either personally or utilize it in the salon. You need to realize that 60-65% or more of those costs for the gift certificates will be coming in January, February, and March. Many times I have salons ask me: “What happened to my cash flow?” With a quick analysis, we can see they spent too much after the first of the year because of gift certificates.
· GIVING THINGS AWAY
This is another problem many salons have. I see no reason for most salons to have any type of a loyalty program. I can see giving things away for referrals, but not for just coming back. They don’t come back to you because you give them a coupon; they come back to you because of the service you provide.
· GIVING AWAY TO STAFF
You need to monitor this. Many times, people allow staff to take care of relatives and sometimes friends. When you consider your back bar cost is probably 5-7% percent of the services, this can be very expensive.
· INCOME TAXES
Most salons hire tax preparers that probably do a good job of preparing the tax return, but do not do a good job of tax planning. Our firm offers a “Second Opinion,” where we review your tax return and tell you a lot of the nuances that you can use to lower or eliminate your income taxes. When we do “Second Opinions” on salons, we usually find there are hundreds, if not thousands, of dollars they could save if they just implied some strategies. This does take some knowledge. You need to make sure your tax preparer is also a tax planner. If you are interested in a “Second Opinion,” you can log onto the YBN website or contact me at lkopsa@kopsaotte.com.
· IRS ISSUES
o TIPS – Many salons still do not realize the importance of tip reporting. If you are an owner of a commission salon, you have a responsibility of reporting the tips received by your employees. There is a separate webcast out there in YBN, where I have dealt with tips. I would suggest you review this webcast. In addition, I have an audio CD plus a book that explains tips. If you are interested you can either get this off the YBN website or contact me at lkopsa@kopsaotte.com.
o CASH – In addition, most salons are not reporting all their cash. This can be damaging and also very dangerous. It can be damaging that if you are trying to sell the salon, you aren't going to show as good of numbers as you actually have. Secondly, if you are applying for a loan, if your numbers do not substantiate the loan for the bank, most likely it will impact your credit. It is dangerous, in that, if you are not reporting all your income and the IRS should audit you, you are actually committing a felony, which is punishable by jail time.
o AUDITS – The IRS has been fairly lax on audits the last few years, but we are currently seeing audit rates jacked up. Both the general accounting office and the Congress have been very critical of the IRS for not auditing more often. The IRS has presented a list of targets. On that list are cash basis business and “S” corporations. Many times, salons think the IRS is just going to be looking at the “big guys.” In actuality, we know that many small cash basis businesses are the ones not reporting their income.
· LETTING YOUR BUSINESS RUN YOU INSTEAD OF YOU RUNNING YOUR BUSINESS
It is so important to have a business plan in place, which includes not only some of the financial information I discussed above, but also a succession plan. Running your business will help you to become successful.
If you have any questions on these or other matters, you can contact me at lkopsa@kopsaotte.com.
