8 Budgeting Basics to Keep Your Salon Out of Debt
“The first step in sticking to a budget is pretty obvious: having one,” states Neil Ducoff and his team at Strategies. It’s based on estimated expenses and sales projections for a specific period of time. Most people have personal versions; though a business budget is more complex, the concept remains the same, and they are alike in many ways. Here are eight tips to prevent your salon from slipping into debt, whether you are a practiced and disciplined budgeter, or just looking at the numbers for the first time.
Record all of the salon’s expenses, including utilities, taxes, supplies, payroll, cost of benefits and marketing, as well as the mortgage, credit cards and other debt. If the salon spends money on it, write it down. Then, add a line for “savings.” The best way to put money aside is to treat savings as an expense on the outgoing cash expense side. HINT: This is not ending cash, which stays in the salon. These funds are deposited in an outside account: bank, money market, mutual fund.
2. Define expenses as percentages
Convert the dollar amounts above to percentages. Example: Total expenses = $5000 per month; electricity is $500 per month. 500 divided by 5000 = .10 or 10% of your monthly expenses. This will give you a better idea of how expenses relate to each other, as well as to revenue. Many can be reduced a little at a time, which will bring the salon’s overall expenses down. Some owners, upon completing this exercise, will find their expenses total more than 100% of revenues. Though this can be frightening, you realize how important it is to control costs where you can.
3. Prioritizing spending
How important is each expense you listed? Eliminate the unimportant ones, and even some of the moderately important ones. Once the salon’s expense-to-revenue percentage is at a comfortable number, start writing checks to the savings account!
4. Making the change
You may need to negotiate compromises on pricing or compensation with suppliers and staff, or even yourself. You will need to periodically review the budget. The most important step is getting control of the numbers and ensuring the business pays itself by putting money aside regularly.
The reality check: looking at debt
A salon budget put together with a realistic, honest approach may not be “pretty” to look at, but also should not be overly difficult to stick to. Another strong comparison between personal and business budgeting is the need for debt management. No debt will disappear on its own, but certain kinds of debt are actually not too bad to have around.
Healthy vs. unhealthy debt
In a nutshell, you take on healthy debt in order to acquire things that grow in value. This can be your home or, hopefully, your salon. Unhealthy debt comes from the purchase of consumables that “disappear,” like fancy dinners; or from items that depreciate in value, such as a car. (Depreciation on business equipment can provide a nice tax break, but that’s a later discussion.) If the salon is buried in unhealthy debt, these initial debt management steps will help:
Look at the overall picture of healthy versus unhealthy debt. Are debts short-, intermediate- or long-term? What are the associated interest rates?
6. Prioritize payments
Go for high-interest debt first, especially credit cards and others for which the interest is not tax-deductible. Writing these checks can be hard, so keep credit card balances as low as possible. They are usually used to purchase consumables whose useful life is much shorter than the card’s repayment period.
7. Beware the minimum
Small payments are nice, but always calculate the total cost of interest — especially with credit cards and business leases on equipment.
8. Curb those impulses!
It’s simply a matter of need versus want. Try waiting 24 hours before making non-need purchases. The impulse, particularly if driven by emotional factors such as stress, just may pass.
Coping with debt
If you feel you’re losing ground in this particular tug-of-war, there are organizations that can help. Also, there are likely nonprofit credit counselors in your city — check online and in your local city business listings.