A Basic Business Lesson
January 26, 2019
A Basic Business Lesson

By Cliff Ennico

"I have been a hair stylist for over 20 years.

Last year my salon shut down and I decided to start my own salon since I had over 100 customers.  I rented some space in town at a very affordable price, and the good news is that almost all of my customers stayed with me.

The bad news is that I know nothing about running a business.

I hired an accountant and meet with him every 3 months, but everything he tells me is over my head.  I also suspect I'm paying too much in taxes, since I keep in touch with the other stylists from my old salon and they seem to be paying a lot less in taxes than I am.

Where can I go to get a basic education in how to run a business?

You have come to the right place . . .

First of all, congratulations on having the courage to strike out on your own.  You have already conquered the first step to a successful business - getting lots of customers and keeping them happy.

The good news is that you don't have to become an accountant or a lawyer to learn how to run your business.  You just need to learn what to do, and when to do it.

The first step is figuring out how much money you need to make each month to stay in business, pay all your bills, and have something left over to have fun with.  Here's the simple way to do it (trigger warning: if any accountants or financial professionals are reading this column, I'm going to be really dumbing this down).

First, sit down with a pad and paper and figure out how much you need to live on each year after taxes.  Start with what you used to take home from your former salon (you can find this information on the IRS Form W-2 you received from your old employer last year).  Add another 25% to that number (multiply by 1.25) because, hey, you deserve a raise.

Then, figure out what your business expenses will be this year - your accountant should be able to help you with this by putting together a "chart of accounts" (basically, a list of everything you spend money on in your business, broken down by categories such as "equipment," "supplies" and so forth).  For a sample of what this might look like, go to www.easysalonbookkeeping.com, click on the "USA" link and then click on your state.

Then, figure out what your effective tax rate will be this year.  Your accountant should be able to give you this information based on what you've done to date.

Armed with these three pieces of information (how much you need to live on, business expenses and effective tax rate), you are now ready to do some business planning.  Let's assume that you need $60,000 a year to live on, you will have $20,000 in business expenses this year, and that your total effective tax rate (federal and state income tax plus Social Security and Medicare) is 35%.

Start with the $60,000 you need to live on this year, and divide that by 0.65 (since the $60,000 is after taxes and your effective tax rate is 35%, the $60,000 is 65% of your total taxable income which is what you are now calculating).  You should end up with $92,307 and some change.

Now, add the $20,000 in business expenses for a total of $112,307.  This is roughly what you will need to earn this year in order to end up with $60,000 in take-home pay.  Divide that number by 12 and you will end up with $9,359.  This is how much you need to earn each month to end up with $60,000 in take-home pay at the end of the year.

Of course, it is highly unlikely you will earn exactly $9,359 each month.  Some months you will make more than that, and some months you will make less.  The $9,359 is merely a "target" you try to hit each month.  If you are making consistently less than $9,359 a month over several months, then something is wrong - you will need to make more money each month (by raising your prices, or working harder), cut back on your business expenses, or learn to live on less money.

This is not an exact science, but as you work through your numbers each month you will get better and better at it, so just be patient.

As for where to get business advice, your best bet is to contact your local SCORE chapter.  SCORE is a nationwide organization of people (mostly older and retired business people) who volunteer their time to provide free business advice to people just like you.  To find the SCORE chapter nearest you, go to www.score.org, click on the "find a mentor" link, and then type in your zip code.     

With any luck, your local chapter may know a retired salon owner or hair styling professional who will be able to answer all of your questions.          

Cliff Ennico
(crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2019 CLIFFORD R. ENNICO.  DISTRIBUTED BY CREATORS.COM Permission granted for use on DrLaura.com.

Posted by Staff at 10:13 AM