It is important for a business to set a budget for each aspect of the business and account for everything separately. This will check the relative profits of each part and illustrate where improvements and adjustments must be made in the merchandising plan. Here are some of the expenses that must be considered in your salon operation: rent, utilities, professional services, telephone service, insurance, advertising, labor and equipment.
The big cost for many tanning salons is the equipment. Some salons prefer to lease equipment because of service contracts, convenient terms, tax advantages and rapid technological advances that tend to date equipment quickly. Equipment is a major expense to many salons and the cost is a major drawback to entering the business. However, the manufacturers of tanning equipment have come a long way in terms of offering enough models to satisfy nearly every budget.
Salon owners should project expenses and income before they even begin, in order to avoid the possibility of unwelcome surprises later. On the left is an example of an outright purchase of eight tanning beds, based on a slightly higher than average cost of a medium priced bed, along with many of the necessary start-up costs. Below it, the figures showing approximate income are based on operating 12 hours a day, 25 days a month and 300 days a year.
By projecting these figures month by month, you’ll start to see an accurate picture of what to expect from the business.
A large share of your income will be derived from your tanning services. The amount is based on how many sessions are given and what is charged for each session. Another portion of your total income will be derived from retail sales and from other services you provide. These too should be added into both the expense and income projections.
Of course, all of these costs and income projections are estimates and they will vary, depending on your locations and suppliers. Let them serve as a guide when considering what kind and size of salon to open. Research the actual costs in your area and adjust the tables accordingly. Then, once you’ve been open for a month or two, get in the habit of comparing the month’s bills and receipts with your projections, and see if you need to make any adjustments. Also plan to set aside some money every month to cover the cost of maintenance and equipment replacement down the road. Living off of the depreciation of your equipment can give the illusion that you are making money, when in actuality, you’re just taking it out of the business.
The simple picture presented above is made more complex by the addition of retail products to the salon business. A new level of expenses and profits must be factored into the calculations.
The simplest way to visualize the scenario is to view the expenses and profits for the salon and retail operations separately (on the next page) and add them together at the end.
1. Salon service expenses, including profit:
- Equipment and supplies
- Labor
- Utilities
- Rent
- Advertising
- Profit
- Cost of service per month
2. Retail operation expenses, including profit
- Goods
- Labor
- Utilities
- Rent
- Advertising
- Profit
- Cost of goods sold per month
The costs are somewhat different in every situation, but from the foregoing, the salon operator can see that a retail operation will create many more challenges for his business than will an operation that is geared strictly to service. Still, most salon people can get some idea of what the total profit/cost analysis would be for each operation independently by figuring the following equations for both the salon and retail sides of the business. The simplified equation tells the salon owner how much it will cost to provide a product or a service and this is how much must be charged to make a profit.
In tanning, expenses tend to be continual while business is seasonal, making realistic budgeting even more important. The retail side of the business may or may not have a seasonal base. It would be better if it didn’t have a seasonality to it, or if it did, one that was opposite the tanning business so that one could carry a positive cash flow during the weak months.
If, in computation, the salon owner figures expenses by the month for the salon operation, it is given that he knows how much he must charge for the tanning services during that month (no matter how many customers he has) to make back that month’s investment and a profit. Unfortunately, many salon owners cannot just consider their expenses and needs in this business. They must consider their enterprise against the face of competition and the market demands for their tanning services.
The picture for determining profits for retailing is a little different. Here the price of goods is not tied to the number of buyers, but to the number of units. A retail operation has to move so many units during an accounting period to make a profit. Whether there is one customer or 50 customers isn’t the issue. Volume of goods determines whether the operation can be successful or unsuccessful. If the salon owner or retailer doesn’t feel he or she can move merchandise at the rate needed to make a profit, the salon owner should not consider the retail operation without further planning to maximize profit.
Tanning Operation With Eight Tanning Beds
Income Sessions $21,000
Income Retail Products $1,000
Monthly Income (based on eight beds, 12 sessions/day, 25 days/month):
Total Income $22,000
Less Cost of Goods Sold $600
Net Income = $21,400
Monthly Expenses:
Rent $1,000
Electricity $600
Utilities for Cleaning $200
Payroll $1,600
Insurance $200
Accounting and Legal Costs $400
Advertising and Promo Costs $500
Miscellaneous $500
Total Costs = $5,000
Net Income Before Taxes = $16,400
