November 2008

Understanding Profitability

By Ken Cassidy

It’s not what you know… it’s what you don’t know that can make the difference in how successful you are in the beauty industry.

Why is our industry afraid of its business side, afraid of fully understanding ownership or management? Could the fear of becoming a businessperson be making us afraid of losing our creativity, which is the thing that has made us successful to this point in our careers?

The facts are the opposite of this fear; therefore, we must be willing to walk through our fear. We need to gain understanding of how we can have a better business and enjoy the benefits of that business.

A person can be just as creative in business as in the services one provides—which gives you the best of both worlds. So when you understand profitability, then the real value of having a profit and loss statement becomes obvious to you.

Such statements are part of the financial picture of a business. A greater understanding of where income is generated and the cost to produce that income becomes clearer when an owner starts receiving their profit and loss statements. This statement, if received at least twice a year, will serve as a tool to forecast the temperature of the business. Is it running hot, mild or cold? How good or bad is your business doing?

A problem exists with the way most people create a profit and loss statement. Too often, they dump things into a single category. Therefore, most owners do not attain a real understanding of where their profits and losses come from. This is especially true if you have employees or booth renters, or a combination of both.

For example, if there is a partnership and partners produce revenue, each one should have their own income category. This is a great value to them, as it tracks partners’ value in the partnership. Next all employees should have a separate category to track their income, or perhaps a few categories to list each type of income they generate. And if you have booth renters, then you will have three new categories to track income.

Another problem many profit and loss statements have is when all the retail income is lumped together. Here it is good to have three different categories: one for the owner’s retail, another for the staff’s and renters’ retail and one titled “other,” as in walk-in sales or non-commission sales. Without receiving this type of information more than once a year or after the year’s end, how can owners or managers correctly make good business decisions, or try to forecast numbers into the future?

For example, if we want to raise our prices for haircolor, perhaps $3, what would that equal in income at the end of the year? More importantly, how much would it reduce inventory expenses? And would it get us above the inflation factor for the coming year? Without having this kind of valuable information, by having a well-designed profit and loss statement at your fingertips, how can one make good business decisions to be profitable? We need the information that will allow us to make decisions that help our companies grow.

The cost of producing income is important also. Here again, too many things are lumped together for any owner to make the right management decisions—whether it is a tax issue, cost issue or compensation issue. The right information is essential to make the right decisions.

You need to have a category for what it costs to keep the door open, like accounting, insurance, supplies and all employee tax categories.

If you are still confused or intimidated by the thought of trying to understand what may seem to you to be impossibly complex data, it’s important to get professional advice. A sample profit and loss statement is available by using the contact information below—including the best category information laid out the way you can understand it easiest—and further information and instructions on how to create and use your own.

It is important to understand your business, just as it is vital to understand your craft and your creativity. By understanding profitability, you can better ensure your business’s future, and the future of all the people in your life who count on you to bring home the income to keep their families fed.

Ken Cassidy has been president of Kassidy’s Salon Management Consulting Company for the past 15 years. He is a licensed hairdresser, a salon owner and a licensed cosmetology instructor. For information, call 562-432-4462, fax 562-439-6992, e-mail kassidy122@earthlink.net or visit www.kassidys.com.