Month: January 2015

Last year I did a couple of articles on Cost of Sales. The series was a little dry and theoretical and I wanted to follow it up with some practical points about how to monitor and manage your cost of sales so that you achieve as much gross profit as possible and this is something that all of us are interested in. Im not sure why its called Gross Profit, in my mind profit is awesome, not gross?

Before We Start

Cost of sales is made up of any variable costs that are directly related to sales volumes, ie if sales go up then these costs go up. For example, the total cost price of the retail items that you sell.

On the other hand fixed costs remain the same regardless of whether your sales volumes go up or down, for example, rent. Fixed costs are not included in cost of sales.

Some costs have variable and fixed components, for example, a basic salary that is constant plus commission, which is dependent on your sales volumes. The commission portion may be included in the cost of sales calculation whereas the basic salary would not.

Gross Profit, therefore, is the difference between your Sales Revenue and your Cost of Sales (or your variable costs).

Once you have determined your Gross Profit you then deduct all your other operating expenses like rent, telephone, insurance, advertising, ESP I.T costs etc and this will leave you with your Net Profit. And its your Net Profit that SARS is particularly interested in.

The Laws of Balance

When thinking about how I could spice up this topic in order to make it more inspiring and less like a sedative I concluded that people like articles and talks where there is a call to action and a set number of steps. For example, 3 keys to being a good boss, 5 traits of a bad employee, 7 ways to retain your clients etc.

So I was looking for a container or a way to package this topic so that it would be easy to absorb with clear calls to action.

I recalled a series of talks on personal finance by Andy Stanley (www.northpoint.org/balanced) where he compares being financially balanced to the laws of physical balance.

In this series Andy talks about the requirements to balance a pole in the open palm of your hand. First you need an objective, in this case the objective is to keep the pole upright. Without this objective the pole would fall.

Secondly, you need a focus point. In this case the focus point is the top of the pole. If you take your focus off the top of the pole it will fall down. Try this for yourself, take a broom and try and balance it upside down on your hand and take your focus away from the top and notice what happens.

Thirdly, you need to be making constant corrections. If you try this balancing act you will notice that you have to keep moving your hand in order to keep the pole upright. These movements are the constant corrections.

Andy then goes on to explain how this all applies to personal finance and if you get the chance I highly recommend that you check out this online series.

I will now use this comparison between physical balance and managing your cost of sales and gross profit.

Objective

First of all we need to define our objective. In this case the objective is quite simple, make as much gross profit as possible (in Rand value).

The goal of any business is to make a net profit, but this is simply impossible if you don’t first make a gross profit.

There’s not really much more to say about this.

Focus Point

In the balancing act, the focus point is the top of the pole. Remember that if you take your eye of the top of the pole it will fall. The focus point therefore is the monthly Gross Profit Margin, both as a percentage and as a Rand value.

One might argue at this point that Gross Profit is directly related to whatever your mark up is on your different supplier brands and so it will be pretty constant. In an ideal world this would be the case but in the real world you will see that it is not.

The outcome that we wish to achieve is that the Gross Profit margin is in fact consistent and if anything getting bigger (ie more profit) as time goes on.

Whenever there are variances that eat into the profit margin then action needs to be taken in order to firstly understand what has caused the variance and secondly to correct it (constant corrections).

Generally you can work on a Gross Profit margin of between 35% and 45% before commission. If you are going to include commission then take off another 10% from the margin. This will depend on the brands that you stock, the price you pay for your stock and the price you sell it for.

Arrange your data into monthly management accounts so that you can get a monthly Gross Profit percentage. Doing it monthly will alert you more quickly to any problems and put you in a better position to take action.

Here is a very simple example of what this might look like:

In this example you can see a Gross Profit Margin that is close to 40% but in one month (May) dropped to 34%. By keeping this as our focus point we can immediately be made aware when we need to make a correction. (note that I have not distinguished between Retail and Service revenue or Cost of Sales at this point, Im really just focusing on Retail).

Ask your accountant to help you in setting up this structure. Explain to them what you are trying to achieve. This will be right up their ally so they should be in full support of the process.

Once you have set this structure up you need to start looking at the constant corrections that you may need to start making in order to keep your gross profit margins at the level you require.

Constant Corrections

There are a number of things that affect your gross profit margin and would need constant correcting:

Commission paid to staff

In most cases this is fairly straight forward but if you have sliding scales in place then the more that staff sell the higher their rate of commission will become and the less your gross profit margin will become. Sometimes staff members get rewarded not on their retail sales alone but on the ratio between Service and Retail sales. This gets a little more complicated so you might need to run a few scenarios to see the effect it has on commissions and therefore gross profit margins.

Shrinkage

If stock is being stolen then this will be eating into your gross profit margins. Because cost of sales is generally calculated as Opening Stock, Plus Purchases, Less Closing Stock it means that all stock that has gone out of the business (whether sold or stolen) is being calculated in the cost and therefore eats into the margin. Therefore you need to be constantly correcting the issue of shrinkage in your business.

Discounting

If you are discounting then it means that you are selling at a lower value but you are still selling at the same value. Therefore you need to be careful of falling into the trap of over discounting. It is difficult as clients become more price sensitive and the effect of companies like Groupon have had. If you are going to rely heavily on discounting then you are going to need to increase your volumes in order to get the same Rand value in the bank with lower margins.

Choosing your brands

Often times people will change brands because they are not happy with the deal or the discounts they are getting from their supplier. While this makes sense at one level you must consider which brands sell the best because you may recover your lost margins purely by sales volumes. Therefore you need to get the balance right between margin and sales volumes when choosing a brand. Also you need to consider what else your supplier is doing for you in adding value to the brands they supply. This added value may need to be looked at as a savings in marketing costs rather than a savings in cost of sales.

Supplier price increases

If suppliers increase their prices this will eat into your gross profit margins immediately. There are one of two ways to deal with this, increase your own prices but this could scare clients and drive sales down. Or you could leave prices as they are and increase volumes based on a better price.

Stock Valuations

Because you are buying stock at different times and selling stock at different times the chances are that you will have items on your shelf that you have purchased at different prices. Therefore if you bought one item at R100 and another at R110 you will need to discuss with your accountant what method they are valuing your stock at so that it most accurately reflects your actual stock value because this value is used in determining your opening and closing stock values, which in turn are used to determine your cost of sales.

Conclusion

Do you know what your current Gross Profit Margin is? Do you know what it should be? Are you watching it carefully every month? Do you know what is affecting your margins and are you constantly making corrections in order to improve it?

Use this example of balance by remembering your objective, having a clear focus point and getting to work to make the corrections required.

I recently counted over 130 apps installed on my iPhone. 130 different programs that I have installed in the past year, since I last upgraded my contract.

I have them grouped according to what they do, for example, there is a folder for apps that relate to reading like Kindle, and other apps for magazines or bibles. I have social apps like Facebook and Twitter in a folder. I have news apps like News 24, BBC, CNN, Aljazeera and EWN grouped together. Now, I’m not sharing this with you to indicate how anal I am about apps, Im sharing it with you to indicate that I have over 130 apps that actually serve a purpose installed on my phone and I tend to get rid of apps that I havent in a while.

There are over 1 million apps on the iStore and many more for Android and Windows Phone. That’s a lot of apps! There are apps for just about every idea you can think of; a werewolf locator app that helps you locate Werewolves around the world, an app that tells you what nearby ghosts are thinking and even an app that claims it can detect a watermelons ripeness using the phones microphone. Really useful apps, I know …

But are all apps simply gimmicks that don’t add any real value to our daily lives? Well at this stage in the mobile revolution we can confidently say that apps are more than just gimmicks and have rooted themselves in our daily routines in good ways and bad.

Communication has been revolutionized with apps like Whatsapp, which allows you to not only send messages to individuals but also to set up groups for work, family, clubs or any other reason. News is now instant through social media like Twitter and news apps. Banking can now happen in your car (while you are stopped at a red light of course). Navigation no longer requires a map book or even a dedicated GPS. Reading no longer requires books and you can purchase just about any book and have it on your phone within a few minutes.

Apps for the salon owners

So, with this wave of mobile applications having taken the world by storm what does it mean for the salon owner. Should you be using apps? Should you have your own app?

In looking at the first question “Should you be using apps?”

Utility apps

I think the answer is a definite yes. However, my answer relates initially to the generic use of apps, ie utility apps that may solve a certain problem for you that is not necessarily directly related to managing your core business functions.

Whether it’s a notepad app for writing down ideas or meeting notes with staff or using Whatsapp for group communication within your business there are many small utility apps that you will find useful.

Third party apps

Then there are apps that third party companies develop with a specific problem they are solving or unique service that they are offering and provide you with an opportunity to take part in. For example, GoBeauty that enables you to upload last minute bookings at a special price. Then any member of the public that has downloaded the app will see your appointment become available and can book the service through the app. This solves the problem of any open slots at the salon that you cannot fill and also reaches an audience that may never had visited your salon before thus sending new business your way.

Core business related apps

Then there are apps specifically for your own salon. These apps can be anything from glorified web sites to interactive purchasing and booking engines.

They will be apps that have your own branding and do not list any other salons that may compete with you.

There are a number of ways to get your own app including having one custom built from scratch according to your own requirements. Alternatively you could take what is known as a white label app and have it branded according to your own brand needs. There are certain sites that let you actually build your own app using wizard driven tools on their web sites.

The choice you make in how to get your own app will depend largely on what you wish to achieve through the app. If you have very specific and unique requirements then you may need to go the route of a custom built app.

Custom built apps

The upside of a custom built app is that you won’t have hundreds of other competitors that have apps doing exactly what yours does but just branded differently. However, on the down side a custom built app can be very expensive. Remember that you have to have your app built for the different mobile platforms (ie for Iphone, Android, Windows Phone etc) and you can end up spending over R100k on each of these platforms if you have it developed locally. For most salons this prohibitive cost makes a custom built app a non-starter.

White label apps

A white label app may be the next best thing in that you will have an app that is most likely custom built for the salon industry requirements, has a company behind it that is maintaining it and does not have large upfront costs like a custom app. The pricing model will most likely be a few hundred Rand a month and you will be able to include your salon details, price lists, specials and news and bookings requests (amongst other things). On the down side any other competitor can make use of the same app and therefore offer the same to their clients.

D.I.Y apps

D.I.Y apps are similar to white label apps in that you are using the same engine as anyone else who builds their apps on the same site as you, except that you are putting it together yourself using the options provided to you. The app is published in the app stores by the company whose site you build it on and they charge you a monthly service for providing all these facilities.

Answer this question first

The big question is “What do you wish to achieve through an app?” If, for example, you wish to allow your clients to log in to your app and view their live loyalty points balance or buy a gift vocher in their app then a custom built app will most likely be the requirement as the app will need to communicate with your loyalty scheme and gift voucher server.

If you wish to advertise your salon and allow clients to request bookings then a white label app would most likely suffice. However, you may wish to first ensure that your web site is mobile friendly as this may cover much of this for you already. A mobile friendly web site also deals with the problem of the different mobile operating systems as it will work across platforms.

Apps can be used as a talking point as they have the initial hype factor but in order for them to be more than just a gimmick they should be offering your clients some real value else the clients will not open them and eventually delete them. Therefore, if you are going to go the app route think about it very carefully and come up with a very good reason for your clients to open the app.

What do you do when you have a power failure in the salon? The answer is simple really … follow all the steps in your policy and procedure manual on what to do in case of a power failure. Oh, you don’t have any procedures for a power failure? Well, in that case consider a few of the following points when putting together a power failure procedure.

Your computer system, which contains all your critical data (like bookings, client details and the ability to process sales records) will be shut off immediately in a power failure unless you are either working on a laptop or you have an uninterrupted power supply (UPS) installed. The danger of it shutting off immediately (apart from the fact that you cant access data) is that your data may get corrupted. So, it is very important that you do have a UPS if not working on a laptop.

In the case of a UPS you have up to about 15 minutes before it will run out of power. As a daily preventative measure you should have already printed out the days appointments (including contact details of clients). If this is not your practice then you should immediately do so before the computer shuts down.

A laptop will give up to about 2 hours before its own battery runs out so you should be able to achieve more.

The first thing you should do is communicate with your clients, ie all clients that are scheduled to come in for appointments that day should be notified to advise them of the power failure potentially reschedule. Remember, in order to reschedule you will need your computer else you may create a double booking so if you are working without a computer you will have to arrange to call the client back when the power is back on to re-schedule.

If you are on a laptop and still able to connect to the internet (ie 3G usb Modem) then you may want to SMS all clients with bookings today, or even your entire database to advise them of the power failure. This may even provide a marketing opportunity to communicate with your clients.

If you use a fancy PBX phone system that requires power then you may need to plug in an old school regular Telkom telephone that does not need power to work. This will enable you to call clients as well as receive calls from clients during the power failure.

For the clients that are still in store and any the come in that you are still able to accommodate (ie Retail sales etc) you will need some way of recording the details of the transaction so have some sort of manual docket/invoice book available. Remember that your credit card machine may not be working so you will most likely only be able to take cash.

Once the power is back on remember to insert all the sales that you entered into the manual docket book. On the dockets you should record the client name and cell number, staff name, items purchased and payment method (most likely cash).

Checklist of items required related to your computer

• Daily bookings print out
• Uninterrupted Power Supply
• 3g USB modem (if you have a laptop)
• Manual Docket Book
• Regular land line telephone handset

There are two types of people in the world, those that buy hair care products from salons and those that don’t.

It’s interesting for me to speak to some people who by middle class standards are considered to be relatively wealthy and hear that they don’t buy professional hair care products. The idea of spending R250 on a bottle of shampoo or conditioner is quite outrageous (remember these are people with large amounts of disposable income who can afford to take regular overseas holidays with their entire family).

If they are willing to buy a bottle of wine for R250 which will last all of one dinner (if lucky), why would they not be prepared to buy a good bottle of shampoo for the same price? Why would they rather choose to buy the R50 bottle at their supermarket?

The answer has to be that they don’t perceive the professional bottle of shampoo to be worth the price. They don’t understand the difference between the shampoo at the salon and the one at their supermarket. If they did they would surely buy the salon product, because they can afford it.

The honest truth is that they would rather have the bottle of wine as they can literally taste the difference between the cheap bottle and the more expensive bottle.

The answer therefore lies in knowing the difference.

Is there actually a difference?

The first and most obvious question to answer is whether in fact there is a difference between a product sold at a supermarket and a product sold at a salon. If there isn’t a difference then salons really are ripping clients off (and being ripped off by suppliers) with their high prices and salons should really just stock the same products as supermarkets and differentiate themselves by giving a professional consultation to clients on what products to buy.

If there is a difference do the staff members in the salon know the difference? If they do know the difference are they educating their clients as to what that difference is?

Listing ingredients is one way to go about educating clients on the difference but it seems that there are some camps of people quite vocal about the fact that there are not any real differences in ingredients between supermarket and professional products and you should be ready to deal with this question as it is the most obvious one.

Technical specs need to be backed by tangible outcomes, ie what real difference is the more expensive product going to make to me? Returning to the wine analogy above, you can taste the difference.

Therefore, the answer for clients should be focused on them experiencing a difference. If you said to me that a cheaper product (because of its ingredients) will leave my hair feeling thinner, drier and potentially cause damage to my hair in the long run and the professional product (because of its ingredients) will leave my hair fuller, healthier etc and have longer lasting positive results then I will be more interested. I will see the better product as more of an investment in my hair and should be able to experience the difference over time.

Is it worth it for salons?

Before we answer the above questions we need to answer the question of whether it is actually worth it to go out of our way to sell retail in the salon.

One way to look at retail sales in the salon is to compare it with beverage sales in a restaurant. The meals sold in the restaurant are like to the services you do in the salon. People book a table, like they book a cut. They come in and someone performs the service of making and bringing a meal to their table.

The kitchen has a capacity based on how many tables and kitchen staff there are in much the same way the salon has a capacity to perform services based on how much space and how many staff there are. You can turn so many tables in a night, just like you can see so many clients in a day.

However, there is no limit (apart from stock on hand) to beverages and similarly to retail. Now, I’m not advocating that restaurants send their patrons home drunk in order to maximize profits, but you get the point that there isn’t a people or space limitation to the beverages and in the same way retail – except how much stock you can physically keep on hand but I don’t recall any salon every complaining that they don’t have enough space to keep up with the high demand of retail sales.

Retail is definitely worth it. You can match and even beat your service turnover with retail sales. Clients who come in to buy retail can in turn be booked for services and vice versa so one hand can wash the other.

There is a huge market place, people are not using sunlight soap to wash their hair (well maybe some are). They are not using Vaseline to style their hair. They need haircare products, you have haircare products. They have money. You need money. Seems like a win-win..?

So when is the best time to sell retail?

The answer …. always. But maybe not in the way that you think.

When clients visit the salon to have their hair cut or styled they may not actually be in the market (at that time) for a retail product and may not like you try and push products onto them. At the same time salon staff may feel that it is very difficult and uncomfortable to try and sell retail to clients who have not actually enquired about retail.

I find that I need to buy haircare products when the ones that I am using run out. When this happens I will look for the most convenient and cost effective way to replace my products. I have an actual need and limited means to meet that need.

We usually buy groceries once a week (at least) and during this time we will make a list of things we need. In addition to food this list we will include things like toothpaste, toilet paper and yes shampoo. Now the problem becomes one of convenience as well as cost. I am a firm believer (because of personal experience) that professional products are better than supermarket products but I cannot deny the temptation to give the cheaper supermarket products another chance whenever the need for replenishing arises. It’s at this point that I am both most vulnerable (to buying supermarket products) and most ready to be sold a professional product.

Therefore, just because someone is sitting in a chair at your salon does not mean that they will walk out with a retail product. However, at some point you would like to get them buy a retail product from you so you need to start the conversation, find out their current product info, plant the seed about buying products from you and be ready to supply them when they are in need.

Conversion deals

If someone is using a supermarket product because of the price then why not offer them a special deal to try a professional product. You can do this on a case for case basis, ie you don’t have to make it a public offer to all your clients but rather you can do it on an individual level with your clients.

If you encounter a client that is using a supermarket product and you engage them on their product needs but find that they are not willing to move because of the combination of price and the perception that there is no difference in the results then why not offer them their first professional product at cost? It will cost you nothing because you will at least cover the cost that you paid for the product but it may lead to them buying their next product from you at full price and every product thereafter.

If the professional salon products are worth it then the client should be able to experience the benefits.

You will need to follow up with them to see how it is going and also to replenish their stock. The goal is to convert them from the supermarket to the professional market. Once they are converted you just need to ensure that they always come back to you for their professional stock.

The goal is to get them to cross over, if in fact you believe it is worth it.