As a salon owner, a crucial component of your business success is proper accounting. It’s not just about keeping track of your revenue and expenses, but also understanding the financial health of your salon to make informed decisions. In this guide, we’ll cover everything you need to know about salon accounting, from the basics to more advanced financial reporting and analysis, along with tips to keep your salon’s finances in tip-top shape for 2024.
Understanding Salon Accounting Basics
Before diving into the nitty-gritty of salon accounting, let’s begin with the basics. Accounting is simply the process of recording, organizing, and analyzing financial transactions. As a salon owner, your financial transactions may include service and product sales, payroll and employee expenses, inventory and supplies costs, rent, and other various expenditures.
Accounting can be viewed as telling the financial story of your business. Expenses like your financial transactions should be categorized and tracked to add color to that story: how you’re spending to grow and provide valuable services to customers.
Accurately categorizing and tracking those expenses is essential to gain insight into your salon’s financial performance and make informed business decisions.
When it comes to salon accounting, there are a few specific factors to consider. For example, you’ll need to keep track of the different types of services your salon offers and the prices associated with each. You’ll also need to track inventory levels for products like shampoo, conditioner, and styling tools, as well as keep an eye on supply costs like towels and cleaning supplies.
Why Accurate Accounting for Salons is Important
Keeping accurate records is crucial for any business, and salons are no exception. Reliable financial records help to identify profitable service and product lines, curb overspending, and make informed decisions regarding future investments. Precise accounting makes it easier to create budgets, balance cash flow, monitor expenses, and track the success of promotional campaigns. Moreover, accurate accounting can help you prepare for tax season and avoid unnecessary legal issues.
One key benefit of accurate accounting is that it allows you to identify areas where you can cut costs or increase revenue. For example, if you notice that a particular service is not generating enough revenue to justify the cost of supplies and labor, you may want to consider adjusting the price or discontinuing the service altogether. On the other hand, if you see that a particular product is selling particularly well, you may want to consider stocking more of it or even offering promotions to encourage customers to purchase it.
Key Accounting Terms and Concepts for Salon Owners
As a salon owner, there are some accounting terms you need to understand to keep your salon’s finances in check:
- Chart of Accounts: A comprehensive list of all accounts used to organize financial transactions. This includes accounts for revenue, expenses, assets, liabilities, and equity.
- Income Statement: A financial report detailing your salon’s revenue and expenses over a specific period. This report shows your salon’s profitability and is often used to track financial performance over time.
- Balance Sheet: A report providing an overview of your salon’s assets, liabilities, and equity at a given point in time. This report is useful for understanding your salon’s financial position and determining its overall value.
- Cash Flow Statement: A financial report that tracks the amount of cash and cash equivalents entering and leaving the salon. This report is useful for understanding your salon’s liquidity and cash flow, which are important factors in determining your salon’s financial health.
How to Set Up Your Salon Accounting System
Now that we’ve covered the basics, it’s time to set up your salon’s accounting system. Proper organization and implementation of accounting software will save you time, prevent errors, and ensure the accuracy of your financial records.
1. Choose the Right Accounting Software
With a variety of accounting software available in the market, it may be difficult to choose the right one for your salon. Before selecting an application, consider your salon’s specific needs, such as tracking employee hours, managing inventory, and generating financial reports. Ideally, find software that integrates with other salon management tools to streamline your business’s finances.
Accounting software which could be right for your business include Quickbooks, Xero, and Freshbooks. Quickbooks seamlessly syncs to NorthOne business banking so you can track transactions and close your books, with ease.
2. Organize Your Chart of Accounts
Once you’ve chosen the right accounting software, organize your chart of accounts to reflect your salon’s unique financial structure, such as categories for service sales, product sales, payroll expenses, rent, and utilities.
A chart of accounts is the foundation to your finances on which everything from financial statements to forecasting is built. Your chart of accounts should be built to track what is important to your business at a granular level. It is important to track each revenue line item separately to be able to accurately measure their performance individually.
Your cost of goods sold (COGS) should match revenue streams when possible to yield your contribution margin.
3. Implement a System for Tracking Expenses and Income
With a chart of accounts in place, it’s time to implement a system for tracking expenses and income. Integrate different payment methods, such as cash, credit, and debit cards, and generate detailed invoices that clearly state the services and products purchased. Ensure all transactions are recorded under the correct accounts to assist in generating valuable financial reports.
NorthOne simplifies transaction management by connecting to account software and providing a full account historial, receipt management, and automatic categorization of transactions.
How to Manage Salon Revenue and Expenses
Keeping track of your salon’s revenue and expenses is critical to staying on top of your salon’s financial performance. By monitoring these areas, you can optimize operations to boost profits and minimize unnecessary spending.
This is where the importance of your chart of accounts comes into play. By setting the chart of accounts up correctly you reduce the difficulty of tracking the below information.
1. Track Service and Product Sales
Salon service and product sales are the primary sources of revenue. To monitor these transactions accurately, ensure that each service or product is assigned an SKU or unique identifier and is recorded in your salon’s tracking system. Keep detailed records of customer demographics, preferred services, and purchase history to tailor your offerings, boost customer retention, and enhance revenue streams.
2. Monitor Payroll and Employee Expenses
Employee salaries and benefits are often among the most significant expenses in a salon. It’s essential to keep track of all payroll-related transactions and understand how it compares to your salon’s revenue. Tools like salon payroll software can streamline payroll management and help you track employee work hours, benefits, and tax withholdings.
3. Manage Inventory and Supplies Costs
Managing inventory and supplies cost is crucial to control your operating expenses, improve cash flow, and offer excellent customer service. Maintain precise inventory records by recording each product’s purchase date, amount, and price once it enters your salon’s storage space.
Implement an inventory management system that tracks product usage, alerts you when stock levels are low, and prevents over-purchasing. One inventory management system which is Salon-specific is Rosy Salon Software.
4. Budget for Marketing and Advertising Expenses
Salon marketing and advertising are vital to attract new clients and generate revenue. Create a marketing budget that reflects realistic expenses such as social media marketing campaigns, influencer collaborations, and promotional events. Monitor the results of each campaign and allocate funds accordingly by focusing on the most effective channels to maximize your ROI.
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12 Financial Reporting and Analysis Metrics for Salons
Financial reporting and analysis is essential to monitor your salon’s financial performance, identify trends, and make data-driven decisions. Below are key metrics from your financial statements which can help you analyze your business performance.
You don’t need to calculate all of the below ratios. Identify a few which are most important to you and your business and track them to get clarity for your business. Make sure to diversify the ratios you use. For example, if you only choose revenue-driven ratios, you might be missing critical information from cash flow ratios.
Income Statement Metrics
Gross Margin
Gross margin measures the profitability of your salon’s revenue after deduction of direct costs of providing services or selling products. Gross Margin tells you the percentage of cash you have left from revenue earned after considering the direct costs of that revenue. It will help you determine the level of sales you need to meet your operating costs or hit desired profitability targets.
The Gross Margin formula is Gross Profit / Revenue
Contribution Margin (per product)
Contribution margin represents the profitability of a particular product based on revenue generated after costs are deducted. This margin can help you determine your most profitable products to focus on those sales, which will ultimately help you earn higher profits.
The Contribution Margin formula is similar to gross margin but for individual product lines
Net Income
Net income represents the profit or earnings a business generates after deducting expenses from total revenue. This metric tells you if you are profitable or not.
Revenue per employee
Revenue per employee measures the amount of revenue generated by a company per employee. Revenue per Employee helps you understand, at a high level, how much each employee is bringing in revenue and iif you are breaking even on salary costs with the revenue being brought in.
This metric can help you with compensation philosophy with employees by indicating if employees are productive.
The Revenue per employee formula is Total Revenue / Average Number of full time employees.
Revenue growth
Revenue growth measures the increase of total revenue over a period of time, for example year-over-year. Revenue growth helps you understand how you are growing. This can also help you understand if your growth tactics have been paying off.
Revenue mix
Revenue mix measures a company’s total revenue across different products, services, or business segments. Revenue mix helps you understand if your business is overly dependent on one line of business. What if that line of business crashed tomorrow? Identifying a reliance can help you identify if you need to diversify your revenue.
The Revenue Mix formula is Revenue line item / Total Revenue.
Balance Sheets Metrics
Current ratio
Current ratio provides context if you have sufficient assets to pay your short term liabilities. It can also help you understand if you have sufficient room to take on any new short term debt.
The Current Ratio formula is Current Assets / Current Liabilities
Interest coverage (if your salon has a loan)
Interest coverage is a ratio which measures a business’s ability to cover interest expenses with operating income. Banks will use this ratio to help them understand your suitability to take on debt. This is not important if you do not have any debt or plan on taking on any debt.
The Interest Coverage formula is Earnings before Interest and Tax (but can just simplify to Net Income) / Interest Expense.
Return on assets
This ratio is going to tell you what your earnings are for invested capital. It will tell you how your investments are paying off in relation to your current net income levels.Return on assets is important because a salon will be medium-resource heavy. Chairs and hair washing equipment are not cheap!
The Return on assets formula is Net Income / Total Assets
Cash Flow Statements Metrics
Cash burn (monthly, weekly, or any chosen period)
Cash burn is the rate at which a salon is depleting its cash reserves over a period of time. This metric is important because this feeds into your runway formula. It is a critical number to help you understand and plan your path to being cash flow positive
Runway (if your salon is burning cash)
Runway is important because it can help you with planning. Understanding your position can help you plan out the path forward for ensuring that your business does not run out of cash (be that through increased revenue, bank loan, etc).
The formula for runway is cash burn / cash on hand.
Ending cash balance
As the saying goes, cash is king. Understanding how much cash you have on hand in conjunction with runway and burn can help you plan your business. For example, do you have the cash to further expand or hire that new employee?
You can find your ending cash balance by performing bank reconciliations.
Power your salon accounting with NorthOne business banking
NorthOne has designed business banking services for small business owners across America. Our services help small business owners manage their finances, save for expenses, monitor cash flow, and more. With 90,000 ATMs available across the United States, integrations with your favorite apps, and free financial management tools in the website and app, you can power your salon accounting with our robust services.
