“How much money will my salon make? What will my profit margin be?”
If we had a dollar for every time someone asked us this question, we would have enough money to pay each of them not to ask us this question ever again.
If we could predict your future, how much more would our advice be worth? We can’t even be sure you’ll make a profit at all, especially if you make foolish decisions. It’s our experience as consultants that potential salon owners who ask these questions are in no way prepared for business ownership. This is not a salaried position, or a job that you can neglect in the evenings and on weekends; ownership is a financial risk in which you control many of the variables, to your benefit or detriment.
Not only do we find that many potential owners do not understand the risk, but they fail to prioritize properly–allocating funds to the wrong places: decor, build, premium product lines and extensive retail product. Their projections and “performance forecasts” are always obscenely optimistic and based on fake numbers. This causes owners to overspend, assuming that the money will quickly be repaid.
Instead of projecting income using estimations and variables, project expenses based on hard, known numbers.
Costs vary so widely from salon to salon that it’s imperative to do this for yourself, and make every effort to reduce these costs whenever possible. However, for the purpose of our discussion, we’re sharing Jaime’s real numbers from Precision Nails. Let’s start with income generated by providing services and selling retail to salon clients. (Some background: the salon is open Tuesday through Friday only. Three professionals provide services; within every two week period, one employee works 8 days, a second employee works 4 days and Jaime works 6 days.)
For 2014, The salon collected the following:
- Services $171,145
- Retail $12,062
- Tips $27,614 (Note that tips are taxable income!)
This comes to a total of $183,207 in gross sales. Tips are taxable income, but they can’t be counted towards gross sales since they are paid directly to the service providers, but we wanted to include the amount for any owner who wants to make assumptions about how much clients will tip.
Let’s account for the 2014 employee expenses:
- Wages $59,725
- Employer Taxes $5,007
- Workers’ Compensation $1,784
This comes to a total of $66,516 in payroll expenses, whacked right off that impressive $183,207–leaving Jaime with $116,691 . . . but the deductions don’t stop there.
Here are the most significant expenses, other than payroll:
- Accounting $1,366
- Advertising $1,421
- Bank Charges $5,258
- Insurance $1,169
- Office $5,563
- Rent $22,200
- Supplies $13,269
- Taxes: Retail $580
- Uniforms $590
- Utilities $4,070
This comes to $55,486.
Having real numbers means you can do real math. (Note that we purposefully excluded any income or expenses specifically related to Jaime’s consulting/education endeavors, like traveling to teach at beauty shows. That’s not a factor in the salon’s operations.)
When you total Precision Nails’ expenses (payroll and operational), the total is $122,002. That’s 66% of the salon’s gross sales. Gone. *Poof.* Paid out. This leaves $61,205.
Jaime’s salon is a really fantastic example of a salon that has a healthy financial balance. She pays out 36% of gross sales in payroll–average salons pay out 50-70%. Her operational expenses are extremely low because she purchases products in bulk, uses vendors that offer quality products at affordable prices, did not pour money into an expensive build or equipment and doesn’t burn money on unnecessary professional services, like a PR firm or “web management service.”
That’s good news, but there’s always room for improvement.
While $61,205 may seem like a lot of money, you have to remember that Jaime works in the salon, but doesn’t collect a salary. She doesn’t employ any support staff; Precision Nails has no receptionist, cleaning service or assistants. She also doesn’t have any loan payments to make. (If Jaime were paying for these things, that $61,205 would easily be cut in half–leaving her with barely $30k before taxes.)
Many of our best ideas originate from NOT wanting to spend money. Just because you have a sizable chunk doesn’t mean you should spend it, whether you’re starting a salon or already operating one.
You may think that Jaime can just pocket that $61,205, but you’d be wrong. The salon needs to maintain its own savings account to cover unexpected expenses. A responsible owner will make sure a portion of the profit gets tucked away to protect the business–and will reinvest some money into improving the business (updated stations, for example). Adequate savings gives Jaime more options for both planned (and unplanned) expenses. For example, she orders paraffin once every 2 years.
To ensure success, don’t rely heavily on loans, credit or “potential income.” If you can’t afford to put down a sizeable amount on your business, you aren’t ready. There’s no risk associated with waiting until you’re better prepared financially. However, jumping in too early with too little funding will practically guarantee your failure. Don’t go in until you can deliver a quality experience from Day 1.
We believe that having fewer resources, like money, makes you more resourceful and practical. When we work with consulting clients, we recommend against wasteful spending as if the money were mine. Salon owners may have different visions for their businesses, but the numbers tell the story.
When you picture your salon and the clients in it, what do you see? Who are you serving? What is their income level? What do they value in a salon? Think about who you’re targeting and research your local economy. If you don’t know your target market or your area’s statistics, you could end up in a bad position. For example, if you envisioned a quaint, affordable nail salon that caters to retirees, but you’ve signed a lease on an expensive space and purchased luxury spa products, your overhead expenses will require your service pricing to be higher than your target market will likely be able to afford.
You can’t grow a salon business if you start too large and fail miserably. This is why starting smaller is more advisable; you can always add more hours, staff and/or locations later. Once you have your expenses under control, you can work on increasing your income.
Play with the business on paper. The first step to creating a salon that makes financial sense requires assessing it in multiple scenarios.
- After identifying your demographic, establish service protocols and compare cost per service (CPS) with several competing product lines.
- Research and select a web host, salon management software company, and other support firms (like accountants, web designers, and lawyers).
- Total up your initial investment–including build budget, equipment, and backbar expenses.
- Create an ongoing advertising budget (yes, you need one).
- Determine your payroll expenses (keep your payroll expenses below 35% of gross and always ensure you’re compliant with state and federal tax and labor laws).
When you’re done, work your numbers comparing different potential locations. Service prices need to be based on hourly operating expenses–then inflated to reflect perceived value. (Tina’s Salon Service Pricing Toolkit actually automates these calculations for you. You can get it here.)
This is what we do to ensure our clients are prepared to succeed. No, it isn’t easy, but it IS necessary.