What are the three most important performance metrics?
The lifetime value of a customer is king, and the three things that drive it at salons are
- client retention
- technician retention and
- retail sales per client.
Client retention. Repeat customers generate a higher return on every dollar spent getting them in the door. Having a client return means higher average tickets–they buy more from you on subsequent visits–and they are also probably recommending you to other clients.
But identifying cash cows is not enough; you have to give them great service, too. Make your staff keep an especially close eye on those who tend to come in more often.
Customers are more likely to develop a bond with their technician than with the salon or the salon’s brand. That’s why technician retention is so important: If your technician leaves, her customers leave with her. In the salon business, technician turnover rates can run as high as 40% annually. That means more than a third of your staff might leave during the course of the year.
A third important, though often overlooked, metric for measuring the health of a beauty salon is retail dollars per client. Salon revenue comes from two sources: services and retail (product) sales. Per square footage, the footage devoted to selling products is more profitable than footage devoted to service.
Salons should aim to generate about 20% of their revenue from product sales and 80% from services. That 20% is as profitable as the 80% coming in from services. Most salons don’t realize that until later on when they’re busy but struggling.
How much will I need to shell out in start-up costs and ongoing expenses?
Smaller beauty salons with talented technicians can make good money with only a handful of chairs. Still, there are economies of scale in this business, so a good bet is to have at least five or six chairs (and the same number of technicians).
Once up and running, your biggest expense is people. In the commission-based model, each technician receives a percentage of what he or she brings in. Commissions typically range from 35% to 60%. Some salons use a graduated commission scale to encourage technicians to lure more customers. For example, a technician might keep 35% of the first $1,000 she brings in per week, and 5% more for each additional $1,000. However, if you’re paying more than 50% in commissions, you’re not making any money.
As for other ongoing expenses, rent and property taxes (10% of sales); supplies have been historically 2% but we recommend 2-8%; marketing and advertising has been historically immaterial (under 1%) but we recommend 2% to 5%; maintenance historically has been under 1 % but we recommend budgeting for 3%; and insurance, 2%.
Finally, if you want to stay on the cutting edge, you’ll need some sort of in-house training program. Allot 2% of sales for education–including outside classes and the lost time in-house technicians burn teaching younger staff. Good salons clock pretax operating margins of 36%.
What are the biggest external threats to your business?
Unless you comply with the Canada Revenue Agency’s recordkeeping requirements in regards to the tips their technicians earn, you will get taxed on the tips your technicians make–meaning you are effectively paying taxes on income you never received. Second, many talented technicians would rather have cash in hand today than wait two weeks for their paychecks.
These trends have given rise to one of the biggest threats to established beauty salons: booth rentals. In this model, technicians rent chairs, or “booths,” from the salon owner instead of sharing those commissions. That way, they get to pocket their cash from customers right away (and the salon owner avoids paying taxes on phantom income).
This is bad news for traditional technicians who boast neither a compelling location nor a big name to lure talented technicians. For example, one salon was doing well until a salon opened across the street and offered a signing bonus for booth renters, plus free rent every fourth week.
Under this method of compensation, the consequences of losing a key technician are dire. Every time a technician leaves your salon to rent a booth elsewhere, you are out not only the revenue from lost clients but also the investment you poured into training the technician or into purchasing the business complete with trained technicians.
In the salon world, the most precious resources are technicians, so keeping them around and happy is critical.
Inventory count procedures
Due to the susceptibility of supplies to misappropriation, supplies should be counted on a monthly basis. The furniture and large equipment may be counted on an annual basis. The tool counts should be conducted by a partner and approved by the second partner. The results of the supply counts are then forwarded to and reviewed by your external auditors.
The individuals conducting the count should sign the supply count sheets upon completion of the count and those sheets should then be forwarded to the other partner for approval.
The lack of segregation of duties creates an opportunity for staff to misappropriate funds. We recommend that the daily deposits and monthly bank reconciliations be prepared.
We recommend that all cheques be used in sequential order. We also recommend all unused cheques be stored in a locked room or cabinet until they are ready to be used in order to minimize the risk of misappropriation. We also recommend that the owners obtain the bank statement directly from the bank and review the bank statement and supporting documentation for handwritten cheques and other unusual items before forwarding the bank statement for reconciliation.
Virus and spyware protection software should be in place on all individual terminals. The accounting data should be backed up nightly and taken offsite by management. The data should also be backed up monthly and taken offsite by an external auditor.
Our two server hard drives are set up with mirroring software (RAID) so that if one of the hard drives fails the other drive could assist in recreating the information that was stored on the failed hard drive. In addition, we back the server up on a portable hard drive every day.
Nature of controls
Controls are classified as detective controls or preventive controls. Detective controls are designed to identify errors after they have occurred while preventative controls are designed to prevent errors from happening. We recommend management have at least some detective controls in place, including the review of the balance sheet and income statement on a monthly or quarterly basis and a review of actual performance versus budget.
While these controls would likely detect errors or misappropriations after they have occurred it may take more than a month or a quarter to detect the errors and misappropriations. We recommend therefore that the company consider the recommendations in this report in an effort to strengthen many of the preventative controls. The recommended preventative controls will act in conjunction with the detective controls to strengthen the overall control environment of the company.