The Profit Trilogy - Part 2 - The REAL cost of investment

How much does it cost to grow your business? Join me as we find out the real cost of investment. Hello, hello, hello, my salon lovelies. How on earth are you? Achingly well, I hope. Phil Jackson, your navigator through the world of profit and queen of salons, coming in your eyes and ears again with another dose of Wise Owl Wisdom. So this is part two of my three-part special, all about getting to grips with the profits in your salon business. So last week we talked about profit margin. How much is left of every pound, dollar or euro that goes into your till for you to reinvest in the business or take out of the business as your reward for being the amazing, gorgeous entrepreneur that we know you are. So this week, I want to talk about investing in your business because one of the things that I alluded to last week, and if you didn't see last week's episode or didn't catch last week's episode, head over to buildyoursalonpodcast.com. All of my previous episodes are there. And if you go to buildyoursalonpodcast.com forward slash money, there's a cheat sheet to help you through this trilogy of profitable episodes. So how did you get on? Did you do your homework? Did you find out what your profit margin was? Because one of the things that I said that we could do last week to increase your profit margin was to look for efficiencies in the business. And sometimes those efficiencies come from scale because there are what we call economies of scale. And you know this because the more of particular products that you buy, usually the cheaper the unit cost gets. So we can look for efficiencies through scale. The other way we can do it is by investing in equipment or training, which makes the business more profitable overall by reducing our direct costs. OK, so by reducing the amount that it costs us to carry out a service or bringing in more lucrative, more profitable services. But here's where I'm going to annoy a lot of product companies and an awful lot of particularly equipment manufacturers, because I don't think they're being particularly honest with you about what the real cost of that investment is. So let's unpack that just a little bit. Let's figure out exactly whether, and I'm going to use a laser hair removal machine as an example,

because I see lots and lots of people getting into laser hair removal. It seems to be the thing at the moment that people are turning to to increase their turnover and hopefully increase their longer term profits. But in the short term, what's going on in the business? OK, back to basics. Every pound or euro or dollar that makes its way into your till is split into three. Firstly, it has to cover your fixed costs. So your rent, your business rates, your utilities and so on. Second, it has to cover what we call the variable costs or direct costs. And these are the costs associated with carrying out a service. So it's things like the stock that we use up when we carry out a service or the wages that are involved when we're allocating time to a service. And then finally, there's a bit of profit left. And that's what we were talking about last week, your profit margin. Now, if we're investing in a new piece of equipment or bringing a new service into the business, there is only one place that that investment can be funded from. It's not a fixed cost. It's not something that we're accumulating monthly or quarterly, which keeps the lights on and keeps the water flowing. It's not a direct cost. It's not a variable cost because it's not directly associated with carrying out each extra service. So the only place that's left for you to fund that investment is through your profit margin. So when I hear about laser hair removal companies selling machines to my wonderful salon owners, telling them they're going to recoup and cover their investment in three months, I'm sorry, I'm calling bullshit because what they're saying is that you can cover the investment with revenue. But the problem is the revenue isn't paying for the machine. The profit is paying for the machine. Let me unpack that just a little bit and show you what an impact this can have. So I'm going to pretend that I've been offered a laser hair removal machine for £20,000, which is not wildly out of sync. You know, somewhere around that number, you can probably get yourself in on the laser hair removal game. There are some machines that are much more expensive and some that are a lot cheaper, of course. Let's say that you've done your homework from last week and your profit margin is 20%. So it's not the whole pound that the laser hair removal machine generates that's going to start paying you back. It's the 20%. So it's not a case of generating £20,000 in extra income to cover the cost of the machine

because we're only going to cover 20% of that is going to be profit, OK? So if you generate an extra £20,000 with laser hair removal, a fifth of that, £4,000, goes towards paying the machine and no more, OK? Now, it might be that bringing a laser hair removal machine starts to increase your profit margin. And this is a little bit blunt, I appreciate. But if your profit margin stays the same, in fact, you've got to generate an extra £100,000. So five times that £20,000 investment because we're on a 20% profit margin. So we need £100,000 extra revenue in order to cover our investment. And I don't believe that's going to happen in 90 days or less, even if your marketing is absolutely exceptional. So when people are trying to persuade you to spend big chunks of money and they're telling you you're going to get your money back in a month or three months or even six months sometimes, really dig down because I bet those people don't even know what your profit margin is. They've got no idea how long it's going to take in order for you to recoup your investment and pay back that lump sum. And the amount of time we take, we call the payback period. And it's really, really good business practice for a project or an investment before you do the sums to figure out how long you're willing to wait for that piece of equipment or that piece of training to pay you back. So have that line in the sand ahead. Figure out now, are you willing to tie up £20,000 for six months or nine months? Are you OK with that being a cost for a year before you start making a profit on it? Because if the sums don't add up and you can't get the payback in that time that you've put, that you've allocated, that line that you've drawn in the sand, then I would argue it's not a great investment. And perhaps you either need to shop around or find ways to reduce that payback period to something that's acceptable to you. So there we go. I'm sorry, my darlings, if I was ranting just a little bit, but I went to a trade show in March and I swear to God, the bullshit that was flying around that room on how quickly we can make huge amounts of money, it was frightening to me.

And it's my job to make sure that people aren't taking advantage of you. So I hope that makes sense to you. Head to buildyoursalonpodcast.com forward slash money. Get that cheat sheet where I've laid this out in a bit more detail. It's going to make a lot more sense when you see it in black and white. If you've got any questions, please ping me a line, phil at buildyoursalon.com. Also ping me a line if you would like to be a guest on a future episode of the Build Your Salon podcast, or you know someone who would be an exceptional person for me to interview. Just seven short days until I'm coming in your eyes and ears again. Next week, we're talking about the true cost of discounts and how that affects your profit margin. And until then, take care. Sit down and see what's going on With the queen of salons Hair, beauty, and more Successful tips for business owners All on Build Your Salon