© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Chapter 3 Salon and Spa Operating Costs

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Operating Costs Costs should be held to a certain percentage of the salon and spa’s gross income A fundamental way to calculate profit is Profit = Revenue − Expenses

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Salon and Spa Expenses as a Percentage of Gross Service Income Profit will be determined by: –how well you can cut expenses and still maintain a high quality of service

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Wages: 40–50 Percent Wages should never be more than 50 percent of the gross sales Wages must be paid to productive and nonproductive workers

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Wages Wages of technicians (productive workers) Wages of nonproductive laborers Taxes and licenses Insurance Retirement plans Records Technician’s expense Special events

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Supplies: 5–10 Percent Product pricing: –each price: actual price on a unit of merchandise –list price: price on a unit of merchandise where the unit represents several items –deal price: set by manufacturers to promote sales on a given item (specials; to obtain them, you must purchase the merchandise during a given period) –show price: usually applied to items sold at a dealer’s show

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Rent: 5–15 Percent Flat rent Base amount plus a percentage of profit Included in the rent cost: –property taxes –maintenance of items directly related to the building (exterior painting, decorating, snow removal, trash collection, etc. should also be discussed when agreeing to rental terms)

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Cleaning and Maintenance: 2.5–4 Percent Cleaning supplies (i.e., soap and wax for the floor) Brooms, dustpans, mops, polish Small electrical appliances used in cleaning Toilet paper, paper towels, toilet soap, air freshener

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Towels and Linens: About 1 Percent Soap and bleach Washing machine, dryer, equipment maintenance Towels Rented linens

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Utilities: 5 Percent Telephone Heat Lights Electricity Water Gas Note: If utilities are considered part of rent costs, this row would not appear in your budget sheet.

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Advertising and Promotions: 5–10 Percent Between 5 and 10 percent during the first year Between 2 and 4 percent in the following years Track the effectiveness of your marketing

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Depreciation: 6–10 Percent Governed by tax law Varies; most commonly 10 percent of purchase price –some small items can be depreciated in one year and are included as supplies. These are clippers, brushes, combs, small appliances, and other small items

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Spending as a Percentage of Gross Service Income Salon and Spa A Salon and Spa B Wages40% 50% Supplies 5% 10% Rent10% 15% Cleaning/Maintenance2.5% 4% Towels/Linens 1% 1% Utilities 5% 5% Advertising/Promotions 5% 10% Depreciation 10% 10% Total78.5%105% Profit21.5% −5%

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Cost of Goods Sold: 55–60 Percent Factors that influence your profitability: –excess inventory: Don’t run out, but don’t have more than a two-weeks’ supply on hand –poor retail sales performance by your staff: Your staff should average at least 15 percent of their gross service sales in retail –poor buying habits: Take advantage of distributors’ special show prices or special promotions and don’t buy items on sale that you cannot sell

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Supplies: 0.5 Percent Bags and packaging (holiday gift packages) Invoices and other business supplies

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Marketing/Promotion: 2–4 Percent Tent cards Shelf-talkers Signs in salon and spa Samples

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Commissions: 10–15 Percent Encourage sales Can be paid directly to the employee or put into an education fund

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Retail Sales Profits: 20–25 Percent Important part of the overall salon and spa income –for example, a salon and spa that does $250,000 in service sales in a year could easily do another $50,000 in retail sales with a profit of $12,500

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Projecting a Budget Start with the cost of rent Factor in the cost of staff using the following formula: Number of technicians needed = Gross sales needed per day ÷ (Sales per hour per technician  Hours worked by each technician per day) Finish by using the chart in the book to calculate the remaining costs

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Summary Salon/spa profits range from 6 to 20-plus percent Salon/spa expenses as a percent of gross income should be: –wages: 40–50% –supplies: 5–10% –rent: 5–10% –cleaning and maintenance: 2.5–4% –towels and linens:1% –utilities: 5% –marketing and promotions: 5–10% –depreciation: 4–6%

© Copyright 2012 Milady, a part of Cengage Learning. All Rights Reserved. Summary Retail sales expense percentages are: –cost of goods sold: 55–60% –supplies: 1–2% –marketing and promotion: 2–4% –commissions: 10–15% Total profit should be 20–25% A budget projection gives management the number of team members needed and the amount of income that must be produced in order for the business to work