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2014 is now history, and it’s time to close the books for your spa or salon. Your accountant may handle the creation of your business’s financial documentation, but it’s important that you know how to deconstruct and interpret the numbers you receive.
If you’re like many beauty industry professionals, numbers may not “be your thing.” After all, we work with our hands, eyes, mouths, in an active way—that’s what we hire accountants for! However, when your financial professional hands over your year-end Income Statement and Balance Sheet, you need to be able to make sense of it. You can’t lead your business to better results if you don’t know how you are creating the results you get now. Your Income Statement should be the key to understanding how your business is performing against industry benchmarks.
The Income Statement records your business performance over a period of time, and summarizes the results as a profit, or loss, (which is why this document is also called a Profit & Loss Statement). Income Statements follow a specific pattern, no matter the industry, which looks like this:
Sales Revenue is the total of retail and service sales performed. If you have memberships or event revenue, that goes here too. What doesn’t go here? Gift card revenue – see my recent blog on this topic for more information!Let’s define each area:
- Cost of Goods Sold is the costs incurred in creating sales revenue. For beauty businesses, the main three costs are technician labor (unless your staff is on salary), treatment supply costs, and retail product costs. You would also add in items such as credit card fees that are paid in order to process a sale.
- Gross Profit is your Sales Revenue revenue minus your Cost of Goods.
- Operating Expenses are the costs incurred on a daily basis, whether or not you make a sale. These include rent, marketing, software, management salaries, laundry expenses, utilities, etc. All of your Operating Expenses are paid from your Gross Profit.
- Net Profit is what you’re left with after the bills are paid.
Net Profit is obviously what you’re hoping to produce, but it’s not enough to just know that you are profitable. In order to continue to maintain and grow your business, you’ll need to analyze the details from your Income Statement to determine HOW you made a profit, and where you might focus your efforts in 2015 to improve your results.
For instance, knowing what your revenue was is great, but what you really want to know is how much was created in sales of treatments and how much in retail, and what was the accompanying Cost of Goods for those activities. Your Income Statement will show something like this:
As you can see, you now have a lot more detail to go on. You can quickly see if certain departments are operating outside of expected parameters, and thus develop an action plan.
Keep in mind that your accounting professional is only going to give you information that is as good as what you give them, and their goal is different: They’re interested in filling out tax returns, not optimizing your business. If your operating software is not set up correctly, and you are not recording important sub-totals, that is going to negatively affect the helpfulness of the Income Statement you receive. Says Lisa Neufeld, Operations Lead at Wellness Capital Management, “Many CPAs and accountants will take the data from a client's accounting system and gather what they need for the tax return. But they won't dig in to validate every single entry—they expect that part to already be done. Payroll tax year-end reporting is due January 31st (that's W2s, 1099s, etc.), so your bookkeeper has a lot to juggle in January, and they need your help to get it right.”
Remember the saying, “You can’t improve what you can’t measure.” Accounting is simply a language that helps to translate your financial performance into guidelines for operating your business. You don’t need to become an accountant, but you do need to have enough financial literacy to understand how your business could be improved based on your Income Statement. Once you’re fluent with your income and expense patterns, you can then create your annual budget and goals.
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