Cash Control

by Stacey Soble

“I never have any money.” “My financial statements show I’m making a good profit but I never have any cash in the bank.” “At the end of the year I had $50,000 in the bank, but now I’m overdrawn.”

These are just a few of the cash flow concerns that Larry Kopsa, CPA, hears from salon owners on a daily basis. “Many believe cash flow is just an issue for small salons, but it doesn’t discriminate,” says Kopsa, one of the founders of Kopsa Otte CPA, an accounting firm specializing in the salon industry. “Cash flow can be a problem for both large and small, new and old, and high-ticket and low-ticket operations.”

Lack of cash flow drains both the owner and the entire salon, and can be a devastating problem, both financially and emotionally. 

“When an owner is working so hard but there’s never any cash in the bank, it deflates his enthusiasm. It’s a heavy weight that just won’t go away,” explains Kopsa. 

The first step in solving any cash flow problem is to find the cause or causes, then work out a solution. Often, the solution requires planning, energy, patience and the willingness to change. Some of the most likely causes of a salon’s cash-flow crunch include:

Overstocking Inventory

Being able to have the correct amount of inventory on hand takes experience and planning.  Expanding into too many lines, purchasing more than you need and not having proper inventory control and reorder points can tie up a large percentage of a salon’s cash. 

“Recently I talked to a salon that decided to put in a high-end make-up line. Although in the long run this looked like it would be a profitable move, right now their hands are tied—all of their cash is tied up in inventory,” says Kopsa.

Gift Certificates

Although there are many benefits to gift certificate sales, they can give you a false sense of available cash. This is especially true with year-end gift certificate sales. Those salons that have high gift certificate sales in December see a swell in their cash, but they often don’t realize that they are going to eventually have to pay for the products, back bar, producer pay and payroll taxes associated with those services. 

“Given that most profitable salons work on a gross profit margin (not net profit) of 35 to 40 percent—then $30,000 in gift certificates in December will have a cost of  $12,000 to $20,000 in subsequent months,” explains Kopsa.

Improper Financing

“At times, we see salons that try to pay off debt too quickly,” says Kopsa. “Although being out of debt is a worthy goal, there are times that we need to allow debt to work for us. Doing a major renovation or purchasing equipment and trying to pay off over three years versus seven can really squeeze the cash flow.”