Opening a Beauty Business: Forecasting Costs, Cashflow & Pricing

December 9, 2015

Pricing Salon Products and Services

It can be tough pricing new products.  It’s easy to start worrying about whether the price is too high or low, and if it’s more attractive than your competitor’s price.  It’s even trickier when it comes to a service as you’re pricing yourself, your skills and experience.

When pricing salon services, calculate the cost to your business and consider:

Cost of Beauty products – If you’re doing a manicure, how much does the top coat cost you? Most suppliers should be able to provide you with a cost per service for each treatment, or tell you how many treatments a product can be used for.

Variable Costs – These are costs associated with running your business including marketing, bookkeeping, or running your website.  These will increase as your sales increase.

Equipment – How much do your scissors etc. cost, and how often do they need replacing?

Labour – If you need to pay staff, how many hours will they work, and how much will you pay them?

Fixed Costs – Fixed outgoings including rent, rates and salaries that aren’t directly related to a particular treatment.  For example, your receptionist usually works set hours and gets paid the same salary each month.

Costs, Cashflow, and Pricing

Competitor Research

Next, you’ll need to think about how attractive your treatments are to customers.  How much are your competitors charging? Collect price lists from local beauty salons and note how much they charge for similar treatments. Be careful to only use similar salons as a benchmark. For example, if you’re opening a Barber Shop offering luxury beard trimming, you should use salons offering premium men’s haircare as a benchmark.

Luxury Beard Trimming Services

Customers Disposable Income

How much will your customers pay for a treatment? The value of your services is reflected in the price you charge. You don’t have to be the cheapest. Customers will use the price as an indication of the quality of your service. For example, if your main focus is offering remarkable customer service and top quality treatments, this will be reflected in your pricing structure.

You’ll need to think about the location, how affluent the area is, and ultimately how much clients can afford to spend on a beauty treatment. After all, a salon in central London will be priced differently to a salon in a small town in the North of England.

Putting Prices Up

From time to time you’ll need to put your salon price list up. Some clients may be understanding, but some may not.  Always brief your staff to explain why the prices have gone up, using examples the customer can relate to.  For example, if your supplier has increased their prices or the landlord has put the rent up, this will be reflected in your prices.

Raising Salon Prices

Salon Profit

Here’s a helpful hint for Calculating Salon Running Costs:

Add 1 month’s outgoings together and divide it by the number of days you are open. Divide this total by the number of hours you open each day, to calculate your hourly running costs.

(Variable Costs + Fixed Costs) / No. of days per month your salon is open e.g. 28 = Daily running costs

Daily running costs / No. of hours your salon is open = hourly running costs

Hourly running cost + Cost of beauty products = Cost of Treatment (to your business)

You can break this down into 15 minute or 30 minute costs if necessary. Use this as a baseline when running promotions too. If you have a salon special offer, you’ll be able to ensure it’s not costing you money.

Salon Profit

To get an indication of how profitable your salon business is, you can subtract the weekly running costs from the payments you received from clients. This will leave your net profit. Remember, you will still have to deduct costs for equipment and any expenses you haven’t included above.

You can use a Breakeven Calculator to work out how much money you need to receive to cover all your costs.  This will help ensure your business isn’t making a loss.  Enter your estimated outgoings and sales for the year and it displays how much you need to take each month to break even.

Cash Flow Forecasting

Cash flow is often confused with profit and loss, but it’s more concerned with the timing of your incomings and outgoings.  Having good cash flow can save your business during quiet periods.  It is the timescale between paying suppliers and receiving payments from customers, and can make or break your business.

If you know January and February will be quiet, you should save enough finance from the busy Christmas period to cover all your monthly outgoings and salaries.

Some salon owners use overdrafts or credit accounts with suppliers to help manage cash flow.  If they expect to be busy during July, they might order extra beauty supplies at the beginning of the month and pay for them 30 days later, after they’ve used the products and received payment from the clients.

A cash flow forecast is not a random guess into the future of your business, but an educated calculation and prediction based on your customer’s payment history, seasonal activity and upcoming expenditure.  Take care with assuming payments received will always fall on the same date, or bills can be paid during the same grace period as they have previously.

Cash Flow Forecasting

Start by adding the physical cash you have to payments owed to you.  As most beauty salons charge customers straight after their treatment, you probably won’t be waiting long to get paid.  But, if you’re a mobile hairdresser, you might allow clients to pay on account.  Will they pay you on time?  If you rent out a massage table, will the therapist always pay you on the same date?

Next, you need to know exactly how much money you will pay out and when.  You should include every single expense such as rent, equipment, stock materials, salaries, marketing, and professional fees.  It may seem difficult predicting all your outlays, but this is one of the most important parts of running a business.

If you’re improving your cash flow, you might want to:

  • Take deposits for bookings, especially costly treatments.
  • Generate invoices promptly and remember to chase outstanding payments.
  • Keep an organised log of payments owed to you and monitor it. This could be as simple as doing your bookkeeping regularly.
  • If you have a credit account, make the most of the payment terms.
  • Transfer money electronically to get it there quicker.
  • Communicate with suppliers – If you’ll be late paying a bill, tell them. This will encourage trust and a good working relationship.
  • Consider discounts you might get for buying in bulk or paying supplier invoices early.
  • Don’t always choose the cheapest supplier. Sometimes more flexible payment terms can improve your cash flow.  For example, if you sell hair products online and your customers pay with Paypal, choosing a supplier that accepts Paypal might be a better solution than a supplier that only accepts BACS payments.

At some point, most business owners will find themselves in a situation where they can’t pay a bill on the expected date.  This is not a reflection of an under-performing business, but an indication that cash flow needs to be improved.

cash flow diagram

If you’re managing cash flow shortfalls, the below might help:

  • Become aware of the problem as soon as possible. Staying on top of your paperwork will help with this.  If you think you might need to borrow finance, don’t wait until the last minute to approach a lender, banks like forward planning.
  • If you anticipate quiet months, you could pre-arrange an overdraft, just in case.
  • If you need cash for beauty products, you could consider opening a credit account if you don’t already have one. Suppliers are likely to want to keep your business and will know more about your business than a bank.
  • Consider offering an incentive for cash payments. Many retailers have a minimum spend for card payments or charge a small fee.
  • Sell off surplus stock. If you’ve had a box of green nail polish sat in the store room for 12 months and never used it, think about selling it.  Some retailers sell excess stock or last season’s range in job lots or at discounted prices.  This could work for your salon too.

Carefully choose which bills you pay first.  Ensure you always pay employees on time and don’t just pay the smallest bills first.

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