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5 Budgeting-Related Activities that Lead to Profitability
By studying the 2 to 10 research, Qnity's Tom Kuhn determines the five budgeting-related activities the most profitable salons do, then shares his tips to get you started.
November 4, 2019
2 min to read
Based on the groundbreaking 2 to 10 Study*, 86% of companies that did five budgeting related activities were awarded top performer status in the profitability category. Although all five of these activities are completely under a salon owner’s control, only 16% of companies in this study perform all five of them.
In his complimentary new guide, Planning for Profits, Tom Kuhn offers owners the keys to success based on his research, including more than 300 assessments and his consulting work advising the best of the best.
Here is a summary of Kuhn’s five planning-related activities that the most profitable salons do, plus his tips for how to move forward in each of these areas:
Preparing a formal P&L budget: “The best way to prepare your budget is to start with revenue projections; then build in your expenses based on prior years, benchmarks and other factors; decide on your discretionary expenses; and finally, plan for profits,” Kuhn says.
Project your cash flow: According to Kuhn, include your key areas, such as debt repayment, tax payments, etc.; add in your discretionary items, for example owner draws; factor in your seasonal inventory buildups; then provide for contingencies, including the unexpected.
Budget for capital spending (CAPX): “Distinguish very clearly the difference between repairs, maintenance and capital improvements,” Kuhn advises. “Then decide on either a percentage of revenue or a specific dollar amount that you will allocate. There are pros and cons to each option—it depends on your business.”
Involve members of management: Kuhn recommends getting their input by asking them to come to the table with ideas after making sure they have done their homework. “Target their involvement based on the numbers they impact, following the ‘name to every number’ method. Finally, raise their level of financial literacy by providing financial management training.”
Incentivize members of management: Kuhn stresses the importance of creating bonus plans for managers that are based on sales for junior level leaders and profit for senior leaders. “Make sure the bonus plans are self-funding and provide financial training so these managers understand how they can impact the numbers!”
CLICK HERE to access Kuhn’s Planning for Profits guide.
* Participants in the 2 to 10 Study included many of the most successful independent salons in the U.S. with total combined revenue of $325M (189 locations); Brand (manufacturer) neutral. P&L analysis conducted by an independent financial analyst with 40 years experience (Barry Matthews). Conducted as part of a semester long study of salon performance by UMass Boston Entrepreneurship Center/College of Management. Direct correlation established between the 5 planning practices and high profits. P&L's were kept private, confidential and not shared with other participants.
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