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SEARCHWhen you earn net profit, you know you're winning the game, and your Profit and Loss statement is your scorecard. Strategies' Neil Ducoff walks you through analyzing your net profit.
In business, you play to win. But winning has nothing to do with how busy your salon/spa is. Winning in business is about creating Net Profit — what’s left after all expenses are paid.
To know if you’re winning, you must keep score. That means reading and understanding your Profit & Loss Statement — and doing it no less than every month.
So … if your Profit & Loss Statement can tell you if you’re winning or losing the business game … why is it that so many salon/spa owners ignore or avoid this massively critical financial report?
Some owners think it’s complicated and the numbers don’t make sense.
Well, there’s nothing complicated about a Profit & Loss Statement. Even in its most basic format, it lists dollars in, dollars out, and dollars left for a specific period of time (a month, quarter, or year).
Here’s the simple math: If your salon/spa generated $1 million in service and retail sales for one year, and had $900,000 in total expenses, you earned a $100,000, or 10%, Net Profit.
Okay, nothing complicated about a Profit & Loss Statement so far.
Some owners are horrible at keeping organized expense records. Yup, got it. It’s a pain tracking and documenting expenses.
Consider the above example of $1 million in service/retail sales, $900,000 in expenses, and $100,000 in Net Profit. Getting that $100,000 Net Profit takes work, budgeting … and sticking to that budget.
What would happen if payroll was up 5% and product cost was up 3%? That $100,000 would be sliced down $20,000. Add in a few other unexpected expenses and you go from winning the game to losing.
The above $1 million example was for one year. What if your Net Profit went negative at the end of the first quarter? If another three or six months go by with no corrective measures, and little or no profit, you find yourself in a financial crisis. Why? Because you didn’t pay attention to your Profit & Loss Statement.
There are more factors to consider like gift card deferred revenue and managing Gift Card funds so it’s available at the time of redemption when the real expenses kick in.
And what about that loan payment where the principal is paid out of Net Profit? Only loan interest appears on a Profit & Loss Statement. That means, even though you may show a profit — that profit isn’t cash in the bank.
Here’s my challenge to you: Profit doesn’t happen by accident. Profit is planned. All owners must be relentlessly driving profit and that means monitoring, planning, budgeting, and practicing financial discipline.
With programs like QuickBooks, there’s no reason why any business can’t have accurate and timely financial reports. It’s so easy to enter expenses as they occur and allocate them to the proper account.
Yes, you can hire a bookkeeping service to maintain QuickBooks for you … but your bookkeeping service still needs timely and accurate revenue and expense entries to “maintain” and keep QuickBooks current. The “Garbage in/garbage out” rule applies to keeping accurate financials.
So, if you can’t rattle off exactly what your Net Profit percent is for the month and year-to-date — you’re flying financially blind. You’re “hoping” for profit and NOT playing the business game.
Interested in learning how to REALLY understand your numbers and how to drive them? The best place to start is by attending Strategies’ Incubator Training. Click here to see upcoming dates.
Want some one-on-one help? Click here to schedule a free strategy session, and let a Certified Strategies Coach take the weight off your shoulders, and help you put together a plan together to move your company faster.
This article was provided by Strategies, a coaching and training company that’s been helping salon/ spa owners grow amazing companies, cultures, and bottom lines since 1993. Visit strategies.com to discover how they can help you create a better future for you, your company, and your team.
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