A reader asked me to explain the cash flow plan and how it has affected my business.
A lot of business owners don't prepare financial reports for their business. They run the business by the checkbook - if there's money in the bank I must be doing ok. Or maybe you have a tax bill at the end of the year and wonder "how could I owe taxes - I have no money!"
Well the first important point is understanding that CASH does not equal PROFIT. They are two different things. Who cares if the tax man says you made money if you've got no cash? Without cash you can't pay employees, suppliers, etc. Basically, cash is king. A cash flow plan lets you decide in advance what you are going to do with the money coming into your business.
My cash flow plan starts with what I expect the business to do in sales for the month for Service and Retail. Some of those sales won't be paid for with cash, the'll be paid with gift certificates. So I also include gift certificate sales and redemptions in my plan.
On the outgoing side, I have cash outflows in two different sections:
1. Direct expenses are costs directly associated with providing a service. For example, technician pay, cost of retail products, and backbar cost.
2. Administrative expenses are everything else. Rent, front desk payroll, owner/manager pay, insurance, utilities, etc.
As the month goes on, if I see that my sales are going to be less than my plan called for, I take a look at my controllable costs and decide whether I'm still going to do everything in the plan. Of course, some things aren't an option! I still have to pay the salaries, the rent and utilities, etc. But I don't necessarily need to buy a new manicure table or an iphone if my sales are down.
Having a cash flow plan accomplishes a couple of important things:
1. It makes you set goals. You have to set a revenue goal in order to build your plan. Then you take action to help make the plan happen. My whole team knows our goal and we work together to meet it. We have a daily scoreboard so everyone always knows where we stand.
2. You manage your cash responsibly because you don't blindly spend money.
How has it helped me and my business? Having goals that are shared with the team gives everyone a sense of ownership. Instead of just coming in to work everyday and doing the same old thing, the team has a goal and a purpose. Our sales increase because we're paying attention to them. Basically, I'm running my business instead of it running me.
Preparing a cash flow plan is difficult if you don't have a history working with numbers, but it's worth the effort! Being a business owner takes different skills than being a hairdresser. You can't just step out from behind the chair and expect to know how to run the business side of things!
Most salons are either just barely profitable or not profitable at all. You beat the odds by having a plan.