Continuing our Daily Business Management series

Knowledge is Power

Productivity equals Profitibility

By Ralph and Flo Barret-Hill

Beauty Therapists are loving, giving people, we thrive in the service industry, but when it comes to managing our clinics and businesses our success is not the same.

I would like to share with you some simple steps that will make all the difference to the profitability of your business. By putting these systems in place, your clinic will run smoothly and you will gain not only professional satisfaction but business success. This will be a series of articles spread over the next three issues giving you time to put each step into place and get it under way before you move on to the next step. These systems can be used regardless of the country you live in.

Owning and operating a successful business is both gratifying and financially rewarding, but for many people finding exactly what they need to do to help steer their business down the path they want can be a mystery.In any beauty and skin care business; there are three distinct elements that require knowledge and effective management to allow the rewards of success to be reaped. They are:

The understanding and respect for financial & operational systems and controls.

Effective human resource management.

Effective marketing strategies.

This series of articles focuses on the first of these and through a series of examples and exercises, we will share with you simple, effective methods of determining the current health of your business, what options you may have to make it more profitable, and the ways of measuring performance to ensure you can be proactive in steering the business down the path of success.

First things first:

We will begin by determining what the true costs of running your business are, and what the average weekly costs are. We will then look at the labour content of the services we offer, and how much they really cost us.

We do this because in any service based business it is important to separate the labour cost content, as it is not effected by the brand of product you use or sell.

As an example, if one of the products you use in a particular treatment has a price increase, you only have to re-cost on the materials (product) portion of the treatment. The labour cost remains the same. Conversely, if a basic cost of operation changes (rent etc) then that price increase is factored in to the labour portion of the cost of all treatments you offer.

We will use weekly costs as much as we can during this course, as it will be easier to relate to the smaller numbers of weekly revenue, weekly wages, etc. Most of us can relate to weekly expenditure and income.

During the calculating of the basic cost of running the business, we will not include any cost of buying stock. This is because at this stage, we only need to know how much it costs us to be in our clinic doing nothing.

Basic cost to "exist"

We need to know how much it costs to "exist" first before we can determine how much we need to charge for labour and how much profit we need to generate to make the business viable.

Remember that any stock purchased is used either to add value to the labour provided (services) or sold directly for profit. We will use some typical treatments as examples later in the exercises to determine what the real charges should be from what we learn in this first part of the course.

ACCURATE LABOUR COST + ACCURATE PRODUCT COST = TRUE SERVICE COST

A few rules before we begin:

Rule No 1: The first rule is to do all your costing calculations without the GST or VAT or TAX content. The reason for this is simple: we do not get the use of this money because we collect it on behalf of the Government. In a profit making business we always pay more GST, VAT or Sales Tax to the tax department than we get back through our purchases.

Rule No 2: Be totally honest with yourself. If you are in a situation where there is any "siphoning" off cash, you will be simply "robbing yourself" and this excersise will be a waste of time.

Remember that any time you spend with your clients, any product you use or give away, every consumable item, whether a dirty towel or cotton bud, is an expense to the business.

Taking revenue out of the business before it has been "accounted for" only leads to incorrect information being used in your financial calculations.

Things will simply not "add up", and in a worse case scenario, could invite catastrophic errors of judgement that could lead to business failure or worse; bankruptcy.

Treat till dipping like a staff member stealing.

The first step in having a profitable business is to address the serious problem of the Salon Hour.

This Salon Hour is the basis of your profitability; there is no point in continuing in business if your basic accounting is wrong.

Most of these expenses are paid on a monthly basis, so to determine the average weekly cost, either add 12 months worth together and then divide the total by 52, or take the total of an average three months, multiply by four to get an average 12 months, then divide by 52 to get your average weekly base costs.

The first method is the most accurate, however you may have insufficient history depending on how long you have owned the business.

Be sure you have taken every "non stock" expense in to account, such as any time payment on furniture or equipment used in the business. If you have a company vehicle, include the payments for this also. (Dont forget the average weekly running costs!) If you have calculated your expenses from the figures in your cheque book, remember that these payments include tax, so remember to deduct the tax from those gross figures.

Establishing the salon hour will assist you in setting your prices for salon treatment and any future promotions, growth or expansions you may envisage. It takes some simple maths and I will even give you the equations for working out each step so you know your salon hour.

It all begins with you gathering the data required. This will take you a few days but will be well worth the effort.

Begin with...

Monthly Expenses

Rental / Mortgage $

Power $

Phone $

Insurance / ACC $

Loans / finance $

Cleaning / laundry $

Advertising $

Any other monthly $

Example Total $3099.00 These will all add to your total monthly expenses.

Now multiply that figure by 12 then divide by 52.

Example:

$3099.00 x 12 = 37.188

Div 52 = $715.15 This will be the average weekly outgoing.

You now total your staff pay rates and the hours worked per staff member. Don't forget to include yourself!

Example:

Staff 1 $14.00 x 37hrs = $518

Staff 2 $12.00 x 30hrs = $360

Total all hours and all wages

Example:

67hrs = $878.00

Now we add holiday pay to our weekly wage bill. This is often over looked when working out the salon hour, and gives nasty surprises at the end of employment or working year. Always budget for holiday pay, just as you would GST, VAT or Sales Tax.

Take the total weekly wage bill

Example:

$878.00 x 0.06 = $52.68

Put this amount away in a term deposit / savings account every week.

Now add

Total weekly outgoing of $715.15

Wages of $878.00

Holiday pay $52.68

Total $1645.83

We now know this example business costs $1645.83 per week to simply "exist".You can clearly see in this business that almost 60% of the total costs are labour costs.Does it not make sense that at least 60% of the amount these people charge for any service they offer will need to cover the labour expense?

Establishing productivity %

Productivity is important

Lets go back to our example clinic with the two operators and the weekly expenses of $1645.83.This particular clinic is open Tuesday to Saturday with one late night.

While they have a total of 42 trading hours per week, the two staff have a total of 67 "man" hours with earning potential, (see hours worked in wage calculations) however they are not busy every hour of every day.

Looking through their appointment book for the past 3 months, we get an average pattern of 5 hours per day spent with clients for each operator. What does this mean? It means that an average of 50 "man" hours per week is actually productive time, while 17 "man" hours per week is unproductive or "down time". In other words: 25% of the time this clinic is open and paying wages they are not making any money.

It is important that the productive time the business enjoys pays for the "down time", and consequently any labour rate charged as part of a service must take this in to consideration.We now work out the salon-hour by dividing this final total by the productive hours worked in relation to hours paid to working staff.

Example:

$1645.83 div by 50 = $32.91

This is the salon hour $32.91

This is what it cost you to for every down hour you have $32.91 And stock has not even come into the calculation.

As the name suggests, the Salon Hour is the minimum amount per hour the labour content of any treatment or service can be charged out at.

Why? Because any real profit the business will make will be generated from the value add items such as the products used in the treatment and any retail sales. These are the real profit generating items.

Labour units

For the beauty and skin care industry, breaking the "Salon Hour" down in to smaller "labour" units is vital for the correct costing of the labour content of treatments and services, and in this industry, 15 minute increments work well.

In the case of our example clinic with a $32.91 salon Hour, their 15 minute "labour units" would be charged out at a minimum of $8.23 each.It is a good idea to think of this labour unit cost as just that: In the example, it costs the business $8.23 to buy every 15 minutes of labour.

The final calculation is working out the individual labor unit. A labor unit in beauty therapy is a 15-minute time slot. Divide the salon hour by 4.

Example:

$32.91 div 4 = $8.23.per labor unit or 15 minute time slot.

I always say in my lectures this is what it costs you to open your clinic door, sit on your bottom and do nothing for 15 minutes. Just adding up that down time when working out the profitability percentage was frightening enough wasn't it?

We often feel we are sooo busy there couldn't possibly be down time, let alone there being a cost for it. But there it is, the sad truth, we work very hard, there is a lot of cash moving through a beauty clinic, it is one of the few business left that still has a cash flow. It is this cash flow that deceives therapists into thinking they are making a lot of money, "NOT"! If most clinics had to rely on payment being the 20th of the following month they wouldn't make it through the first year in business.

So we have to work smarter not harder, working smarter means managing our time and money efficiently.

In the next issue of beautymagonline we will look at how to evaluate staff profitability, wages to sales ratio and much more.