Five Common Roadblocks to Profitability

By Shannon Wells

Ah, profitability. That ever sought-after term drives every business owner to work hard in their business. Even before times got rough with the economy, there was a study that showed over 70 percent of beauty salons and spas were not profitable. Can you imagine what that number might be now?

Profitability seems simple. Technically, profitability is what’s remaining when you take revenue minus cost. If it’s so simple, why do so many owners and booth renters alike have such a hard time achieving it in their business?

One of the biggest problems is that perceived profitability in business is based more often on emotion than on a real number. Many people feel profitable because they can pay most of the bills. Real profitability, however, is when you are able to pay all expenses, save additional money and still have revenue left over to reinvest in new areas of your business.

Some common roadblocks inhibit many people from being profitable. Let’s look at the five most common:

1. No Plan for Profit.

The first and most common roadblock is people simply don’t plan for profit. When starting in business, a mistake many owners make is making purchases before planning for what type of profitability they want. Things like high leases, expensive equipment and unbalanced compensation plans are all decided on before the financial plan is in place. It is important to lay out your business plan and consider what you intend to charge and how many clients you plan to see rather than making up a revenue estimate based on what you hope you will generate. Breaking down the details of how you will spend money before making major purchases will let you make decisions based on numbers rather than emotions.

2. Not Priced for Profit.

When asked how owners determine their pricing, many say they shopped the competition in the area and set a price somewhere in between the prices they found. This system has paralyzed so many businesses because their pricing structure has nothing to do with their own situation. Setting your prices is a very personal procedure that should be unique for each business. If the salon two blocks down the street is paying half the price in rent as you are, how can you possibly compare your prices to theirs and expect to be profitable? Determining your prices is a system that includes adding up all your expenses, adding what you want your profit to be and using that as your grand total. Then divide that number by the number of revenue producing stations in your business. Last, when you have the total of what each station needs to produce each month, you can create a clear plan of actual services and products that each person running a station needs to produce for the business. Only then can you determine what you should be charging for all of your services, from haircuts to waxing.

3. Managing a Busy Business.

Many people think because they are busy they are making the money they need to stay in business. “If the chairs are filled, we must be doing great.” Again, this is managing profitability by feelings, not numbers. You can have every slot in your book filled and if your clients aren’t generating the revenue you need to make your business profitable, you can still be taking a loss in your business everyday. Get a handle on managing profitability by numbers and you won’t be deceiving yourself. Working hard doesn’t necessarily equate to working smart.

4. Not Counting All Expenses.

We touched on this earlier, but it can’t be emphasized enough. Because there is no plan for profit, expenses that affect revenue each month can easily be missed. On top of the obvious hard costs like rent, payroll and supplies, there are many other aspects that fall under the expenses category. Things such as taxes, interest, depreciation, reinvestment and benefits are all things that might easily be overlooked but absolutely need to be considered when creating your profit plan. Having money to invest in new areas of your business isn’t a luxury; it should be part of your plan and is essential in any successful business.

5. Cost of Goods Out of Balance.

There are some good numbers to live by when determining how much you should be spending on each areas of your business. Here is a good rule of thumb: You should be spending only 75 percent of total revenue on the three biggest expenses, which are rent, compensation and products. That 75 percent breaks down as follows: No more than 50 percent on compensation, 15 percent on product and inventory purchases and 10 percent on rent.

In real numbers that would break down as follows:

Total monthly revenue: $10,000

Total spent on compensation (50 percent): $5,000

Total spent on product and inventory purchases (15 percent): $1,500

Total spent on rent (10 percent): $1,000

Keeping these percentages as your general rule of thumb will put you on the path to profitability.

All too often, we are seeing businesses go under, not because there is no passion, will or commitment, but because the plan to generate profit in the business is weak. Especially in today’s economy, it is important to have a clear handle on your expenses and be clear about the revenue that you need to produce each month to be profitable. Profitability can be an ebb and flow occurrence, but if you don’t know exactly how much money you need to bring in from month to month, as well as have a solid plan of how to do it, you will never get yourself in the black and create a business that thrives.

Shannon Wells is the marketing manager of Your Beauty Network, a beauty industry ongoing business support service, offering a membership based business support resource used by over 700 salon and spa owners. For more information, visit www.ybn.com, call 866-364-4926 or email shannon@ybn.com.