April 2010

Shannon Wells

Better Business | by Neil Ducoff


The Cost of Instant Gratification

A disturbing daily ritual is regularly played out at most tip-oriented businesses: At the end of long, busy day, employees head to the front desk/reception area with their hands outstretched, to collect their tips.

Well, it’s time to examine and rethink exactly what’s going on — and how much it’s really costing the business.

Here are the issues:

1. A tip is a transaction between the customer and the employee. The ability to generate tip income is a nice benefit for employees, but when tip handling begins to drive up operating costs, the red flag goes up and the siren goes off.

2. What do daily cash tip payouts really cost you? Take a few minutes to complete a simple calculation; it will most certainly turn your ears a nice, bright red.

Add up how many hours each day it takes some lucky individual to tabulate each employee’s daily tip earnings. Multiply that by the number of days a week you’re open, and then by that lucky individual’s hourly pay rate. Oh, and don’t forget that most customers now pay by credit card, which means you may not even have sufficient cash on hand to cover tips.

This means someone must write a check, go to the bank, cash it, come back, put on a funky green banker’s visor — and divvy all that money into neat little envelopes for each employee. This is not only a totally unjustifiable expense, but also a major hindrance to the productivity of administrative staff.

3. How many customers are crushed by the walking dead as they close in on the front desk to collect their tip cash? Alright, this may be a bit of an exaggeration, but you must admit only a bit. We all know that during certain periods, employees will rush the desk to get their tips so they can leave for the day — and that means customer service takes a hit, which is unacceptable. The customer comes first. Always.

4. Tips are income earned at work, and Uncle Sam wants his fair share. The days of cash tips are coming to a close as we move ever closer to a cashless/all-plastic economy. And that means the paper trail that documents tip income is easier to follow than Dorothy’s Yellow Brick Road. The IRS not only has the road map, but they are aggressively using it in tip-oriented businesses. There is no debate: Tips are income. They must be reported to the business. And they are taxable.

There is a simple solution to all of the above: All tips collected at reception or applied to credit card charges will be added to the employee’s paycheck and taxed accordingly. No more daily tip payouts. No more compromised service at the desk. No more grossly under-reported tip income.

We coach clients that have done this and never looked back. Sure, employees moaned and groaned about not getting their daily cash fix. But most reported that, within a matter of weeks, employees were expressing gratitude for the new procedure. When they saw all the accumulated tip income in their checks, they realized how much money they had been throwing away.

Neil Ducoff is the founder and CEO of Strategies, a business training and coaching company specializing in the salon and spa industry. He’s author of Fast Forward, and a new book, No-Compromise Leadership, published by DC Press and is available at www.amazon.com. For more information go to www.strategies.com. You can email Neil at neil@strategies.com.