Financial Management and Budgeting
Core financial concepts
Candidates should understand gross and net profit, fixed versus variable costs, cost of goods sold (COGS) for back-bar and retail, break-even analysis, cash flow, and markup versus margin. Know how a budget differs from a forecast: a budget is a target, a forecast is an expectation. Understand payback period for equipment purchases and the difference between capital expenditure and operating expenditure.
Traps in questions
A frequent trap is mixing markup and margin. A product bought for $20 and sold for $30 has a 50% markup but only a 33.3% margin. Another trap is treating revenue as cash: card settlements, deposits and gift vouchers affect timing. Questions may also imply that cutting the marketing budget always improves profit; it can reduce future revenue. Watch for average ticket calculated across all clients versus only service clients.
Worked example
Break-even: fixed costs are $9,000 per month, average service price is $90, and variable cost per service is $30. Contribution per service is $60. Break-even = 9,000 ÷ 60 = 150 services per month, or about 5 per day. If bookings average 4 per day, the salon is below break-even.
Rule of thumb
Review weekly cash position, monthly profit and loss, and quarterly variance against budget. Investigate variances above 10% rather than waiting for year-end.