Salon Owners Guide to Working Capital

Posted by Peter Buijs on

Just like any other business, a hair salon requires proper management of working capital to succeed. Working capital is vital to any business because it provides a way to fund the day-to-day overhead and labor costs of your business to keep it running smoothly and grow.

How you fund, manage, and utilize your salon working capital can make or break your beauty salon business. Read the following is a guide about working capital that every hair salon owner needs to know if they want to succeed beautifully:

How to determine the amount of working capital you need.

Determining your working capital needs is vital for the sustenance and growth of your beauty salon business. You need to have just the right amount of working capital to achieve balanced growth; but not too little that you are unable to make the repayments monthly, and not too much that you tie up funds that could be used more profitably elsewhere to the benefit of your business.

To calculate your proper working capital needs, it is important that you maintain accurate business records of your assets and liabilities. These balance sheets must be updated regularly to help you track the health and growth of your business.

You also must determine the cash flow of the salon business to know whether the business can meet its daily obligations sufficiently. This can be a daunting task particularly in a service-oriented business like a beauty salon. Try using this salon-specific cash flow statement template , running cash flow statement reports in your small business accounting software such as Quickbooks Online which has great reporting features or hire an accountant to help you prepare correct financial statements.

Here is a simple calculation for working capital:

>>Working capital = current assets – current liabilities

A positive result in the formula above indicates that you have positive working capital which means you have enough working capital to run your business smoothly. However, a negative result indicates that you have a negative working capital which means you don’t have sufficient working capital to meet your short-term obligations.

Compare this calculation to your cash flow statement to determine if your working capital is adequate to sustain and build your company. If not, you need to look into ways to fund your working capital, such as getting a working capital loan or line of credit for your beauty salon.

Proper management and adequate resources of working capital is a strong indicator of a small businesses success and survival.

What are working capital loans?

A working capital loan provides a short-term solution to solve your negative working capital and cash flow problem. It comes is utilized to help beauty salon business finance its everyday operations as well as funding smart investments in your business. There are two types of loans that can work for your salon business:

a) SBA Loans

These are loans backed by the American Small Business Administration (SBA) and issued by private banks, credit unions, and online lenders. SBA loans tend to have lower interest rates since the SBA sets a maximum limit on the spread that can be charged. However, SBA are notoriously difficult to apply for and get approved.

b) Business Lines of Credit

Business lines of credit are a great way to finance your working capital needs. A revolving line of credit gives you access to a pool of funds which you can tap into any time you need it for your business. Although there is a limit on the amount you can borrow, the amount is usually enough to cover any cash flow issues that may come up. Also they are far easier to apply for and get approved.

How to get a working capital loan

Before seeking a working capital loan, you need to first ensure you have a good credit history and accurate financial statements to show the health of your hair salon business. Lenders will want to see a solid history so that they can know if you qualify for the loan and how much they can offer you.

The next step is to find the right lender for your business. Traditional banks and credit unions have always a great option but mostly for established businesses with an existing business relationship with the financial institutions.

This new generation of online lenders, headed by my recommendation for your salon working capital needs Kabbage, requires no paperwork and no minimum credit score. They use technology and your salons’ actual business metrics to determine if you qualify. Simply go to Kabbage login or download the mobile app to connect your online accounts such as credit card payment processors (such as Paypal, etc), accounting software (such as Quickbooks), and, your bank account. Then within hours sometimes, computers calculate your eligibility and email you a notification of your loan approval.

The rates, amount, and general terms and conditions will vary depending on the lender, your total revenue, credit scores, length of time in business, among other factors. However, the rates range from 7% to 25% for lines of credit with most lenders.

How to utilize working capital

Once you have secured a working capital loan, it is important to use it wisely to grow your beauty salon. Below are some ideas:

1. Upgrade your equipment – in the salon business, there is no room for old, worn out, and faulty equipment. The tools you use to serve clients should be top notch or else you risk losing clients. You can also make upgrades to the salon space in terms of layout, decorations, and other aspects of interior design.

2. Marketing – proper marketing will do wonders for any business. Make use of various channels of marketing such as online advertising, social media, SEO, coupons, eye-catching flyers, among others.

3. Build your team – The success of your beauty salon largely depends on how good your staff is. You need to employ enough talented professionals and pay them well to ensure they give the best service possible to the clients. You can also take this opportunity to add more services to your repertoire.

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