How To Keep Your Retail Profit!
Do you take your retail sales earned and put it in your account and pay bills with it? While most salons and spas would answer “yes” to this question, this is not a wise financial strategy in the long term. Think of your retail business separately from your service income and your gift card income. In fact each of them should be tracked separately and have their own budgets. For now, let’s set our sights on retail.
For every dollar you bring in with retail sales you can count on roughly 34% (.34 cents) profit after inventory is purchased, commissions are paid and you cover any sales tax, credit card processing, discounts and/or shrinkage. If this amount is left in your bank accounts and used to pay monthly bills then the salon is taking away pure profit and, with it, a chance to make that money work more efficiently. Let’s look at an example of what we mean and then introduce a plan to get that money back into savings.
Let’s say you sell $1,000 a month in retail sales. Based on the averages this would mean a profit of $340 dollars. (Keep in mind this may vary based upon inventory over purchasing or if the retail commission is high, low or not offered.) If this $340 dollars is left in the account to pay monthly bills then it is being lost. Over a 12 month period this adds up to $4,080! Think about what this amount of money can be used for. A salon or spa owner could use this money to chunk down credit card debts, make a double loan payment, invest in education or marketing and, of course, building a nest egg by saving for future retirement. Any of this would be smart business, not to mention the boost of confidence and empowerment in seeing true financial progress being made.
Seeing this is powerful, making the change is important but takes some patient steps to make happen. Up to now, the business has been used to having the $340 to pay bills each month, to just take it away with no plan to replace it wouldn’t work. To get this money back the salon or spa would have to grow its average services sales each month to cover it. However, it would have to grow by more than just $340 a month because any service sold includes expenses to perform the service.
If your goal is $340 for the month you have to add on payroll, payroll tax, cost of back bar, and credit card processing. These are your basic hard costs to perform the service. This is where keeping an up-to-date P&L (profit & loss statement) becomes vital. Look to the P&L to see what your average percentages are for the above costs. (A good idea is to get at least a 3 month up to a 6 month average) For example, let’s say your service payroll percentage is 45%, your payroll tax percentage on the services is 12%, your cost of back bar is 7% and your credit card processing percentage is 2%. Here’s how you would do the math so you know exactly what your service sales increase goal would have to be to get your $340 retail profit back in your hands:
|Service Payroll (45%)||$340 × 45%||$153|
|Payroll Tax (12%)||$153 × 12%||$18.36|
|Cost of Back Bar (7%)||$340 × 7%||$23.80|
|Credit Card Processing (2%)||$340 × 2%||$6.80|
|Monthly Service Sales Increase||$340 + $201.96||$541.96|
This would be your new goal. You can make plans to increase your service sales by an additional $541.96 each month, above and beyond your current goals. Each month, when you achieve this, you can then move $340 back over to your savings account and see your retail profit back in the right place!
A few final reminders:
Tracking is crucial. Be sure your P&L is current and that you know what your percentages are. If you don’t know them, I have created a Breakeven Analysis Spreadsheet. It’s part of my Financial Fitness book! When you plug in your numbers from your P&L it will show you exactly what your percentage is versus what it should be. This will help you have your current percentages in place so you can do the above equation and set an accurate goal!
Lastly, do not look at an additional $541.96 as being a big number to hit, because it’s not. Let’s say you have 5 service providers. By breaking the goal up between them, each person would have to grow their monthly services sales by $108.39 a month. Take that a few steps further: Break it up weekly to $27.09 a week and if they work 5 days a week with clients it’s $5.42 a day! Not hard at all!
Take this information and the equations, get your numbers in front of you and do the math. Set your goals and take the first steps to get that retail profit back where it belongs and working for you. Your business will run more efficiently and you’ll have less worries and more money for all of your hard work!