Budgeting 101

Featuring, Director of Finance, Dawna Pettipas

*Podcast available below*

A budget is crucial to the successful operation of any business as it allows you to measure the performance of your company.  It provides information that owners/managers need in order to make decisions about the salon company.  An owner needs to know if they are going to have enough money to fund the business, so they need to ensure they are not spending more money than the business is taking in.  A budget can help them achieve this goal by allowing them to monitor and control the business in a timely manner.

I always recommend you start with the Sales Budget and build from there.  There are several ways to achieve this such as applying a set % increase to your prior years sales to determine your budgeted sales for the current year. You would look at the sales figures from the prior year, by month.

However, in order to build an accurate and achievable budget I would recommend a slightly different approach:

The first step would be to print the sales figures from your POS system for the prior year by service provider.  You should then meet with each individual service provider individually to discuss what their plans are for the next year and what they think they are able to achieve. Before you meet with the service provider you should have an idea in your head based on the current market, the salon success, and the individuals track record what % increase they should be able to achieve and if they are way off of your thought process, you can use this as a coaching opportunity with them.  This planning should actually begin in the fall of the current year (I.e. Sept/Oct) so your budget will be ready for the beginning of the next year.

This method provides several benefits:

1. It provides a more accurate budget figure for the salon as a whole as opposed to using a set % as most salons have service providers at varying levels.
2. The service provider is more dialed in as they were part of the planning process and will have more attachment to the budget, they will have some ownership in it.
3. The budget becomes more achievable as it is based on a more detailed analysis of the business.

Salon Owners often forget to budget for their own salary and expenses when they are creating budgets.  Additionally, Depreciation Expense on their capital assets is another area that is often neglected when salon owners are building their budgets as this is a non-cash expense, it is often forgotten about.

Dawna’s Top 5 TIPS for creating a realistic budget:

1. Take the time to do it properly. 
   • Throwing a bunch of numbers into a spreadsheet in order to ‘get the budget done’ without putting a little work and effort into it, is a waste of time and time is money.
2. Separate the business and personal expenses of the owner. 
   • Putting personal expense through the business is never a good idea as it makes it very difficult to determine how the business is actually doing and becomes an issue later if the salon wants to sell or offer shareholders.
3. Factor in some contingency. 
   • Slightly overestimate the expenses, to allow for the unexpected.
4. Identify the difference between ‘needs’ and ‘wants’. 
   • Which purchases are essential to the successful operation of the company and which purchases are not essential.
5. Use industry benchmarks.
   • This will ensure your expense are line with where they should be for your salon to be successful (such as the SSBC Budget Guidelines).

What do you think? What struggles do you often have with creating a budget?

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