How to Determine If You're Making a Profit

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After shutting doors due to COVID-19, reopening provides a fresh start. But you must know where you are financially in terms of customers, service prices, revenue, operating cash flow and expenses. Keeping track of your business numbers is essential.

The primary intent of being in any business is to provide a profit for the owner—otherwise, the owner is just engaged in an expensive hobby. Making money in business is a simple equation:

PROFIT = INCOME – EXPENSES!

This is based on the regular collections and monitoring of business numbers.

How does a business owner make more profit?

  1. Increasing the income while keeping the expenses constant
  2. Reducing the expenses while keeping the income constant
  3. Increasing the income and reducing expenses (by far the best)

We first will start to define what the numbers are for a small business, such as an independent hairdresser or small service business. Several indicators monitor the health, progress and ultimate success of the business. Just as a person's vital signs are an indicator of their overall health, the business numbers are indicators of the health of the business. Without this critical data, the hairdresser, salon owner or small business owner will be making important and business-altering decisions based on how they feel instead of facts. Without this data and evaluation, critical business decisions could be delayed, and the consequences of quick decisions could be unpleasant, to say the least.

Vital numbers that must be collected continually to monitor the health of the business are:

  1. Total number of clients served (per week and month)
  2. Number of new clients (per week and per month)
  3. Number of repeat clients (per week and per month)
  4. Number of referral clients (per week and per month)
  5. Number of pre-booked clients
  6. Total revenue (per week and per month)
  7. Percentage of total revenue per service
  8. 8. Number of clients that purchased retail products (per week and per month)
  9. Retail revenue per clients (per week and per month);
  10. Where your new clients come from (per week and month)
  11. Identify the most frequent services performed (per week and per month)
  12. Total cost per service (per week and per month)
  13. Fixed operating costs (per week and month)
  14. Cost of replacement inventory purchases (per week and per month)

Some small businesses collect more detailed data for other purposes, however, for the independent hairdresser and salon owner, these will be sufficient raw data to calculate the important Key Performance Indicators (KPIs). Several salon software packages can be used to collect all the raw data needed to calculate the business KPIs.

Again, before we launch into the importance of the KPIs, let’s define they are. KPIs are calculated measurements used to determine if you are moving toward your business goals. More precisely, KPIs must adhere to the following criteria to be of maximum use to the business owner:

  1. Specific – Clearly defined and identified
  2. Measurable – Easily calculated to give a number value
  3. Attainable – Realistic to obtain this measure (Can actions be taken to improve this value?)
  4. Realistic – Is the measurement down-to-earth and can it be changed with appropriate practice or action
  5. Timely – Can the measure be looked at on a weekly, monthly, quarterly, and yearly basis

The following is a general list of common KPIs for the hairdresser and salon owner to be aware of:

  1. Client average spending dollars per service (weekly and monthly)
  2. Client average retail product dollar spending (weekly and monthly)
  3. Client total average service and retail combined ticket (weekly and monthly)

From the regular analysis of these KPIs, conducting a Break-Even Analysis of the current business, the individual hairdresser and hair salon owner can project how much additional revenue they could take home if they increased the average service dollars, the average retail sales dollars and reduction in operating expenses. This evaluation process equals a projected increase in profit!

Now, do you know why your business numbers are so important?

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