Every brand needs to know the basic terminology surrounding its finances—your nail salon is no different. Just like the perfect manicure or pedi needs a tech’s expertise, you need financial know-how for business success. These 15 terms are vital to the day-to-day operations and planning that help your company thrive financially.
1. Assets
Whatever your enterprise owns is considered an asset. Three primary assets include:
- Tangible assets: The organization owns valuable physical things like hair brushes, blow dryers and UV lights.
- Intangible assets: These include untouchable things like client lists and your reputation. While you can’t hold these, they generate money for the business.
- Current assets: Your salon has stock you can sell, which is called a current asset. Money in the bank or shares are also current assets.
2. Liabilities
When you owe someone money — such as a firm you bought equipment from or a business loan — it is your liability. You must repay these to stay operational. For example, when repaying a vehicle you purchased for your salon, the remaining repayment balance is a liability until repaid, when it becomes an asset.
3. Capital
Things that make you money are your capital. So, money in the bank or equipment that generates income are forms of capital. Since you've invested money into these items, it makes them capital assets.
4. Working Capital
When reviewing your trade operations each fiscal year, you'll note that you have liabilities, costs, incomes and assets. Your working capital is the financial value of all assets and incomes minus the cost of liabilities.
5. Break-Even Point
The goal of any business is to run at the break-even point, where income and expenses are balanced. Running below it means running at a loss.
An organization that generates more profit than expenses has a higher taxable income, so stay current on the latest allowances from the IRS regarding what taxable expenses you can claim. The type of business you register for — whether a sole proprietorship, a partnership or an independent contractor — will determine your taxes, influencing the break-even point.
6. Profit
Your profit is the difference between cost versus price. If you sell a bottle of hand lotion for $50 but it costs you $30 to purchase it, you're turning a $20 profit per bottle.
7. Cash Flow
The money you receive for your services is your cash flow. If you do 10 pedicures at $50 each and 5 manicures at $60 each every two days in a six-day week, your cash flow will be $4,800 over two weeks.
8. Sales and Revenue
When you sell the bottle of lotion for $50 (your sales value), the $30 you paid for it is an expense. The $20 profit you made is your revenue or actual earnings.
9. Profit and Loss Statement
The profit and loss statement—commonly known as a P and L—is a statement your accountant generates that shows sales, expenses and the revenue or profit from those sales for a given period, such as a month. It's a quick way to see your business's gains and losses over a set time.
10. Accrual Accounting
To accrue something means to obtain it over time. In accrual accounting, you log your income on the dates you earn it, not when you pay. So, if you spend money on a box of gel polishes, you’ll only account for the sales you generate once you sell them.
11. Creditors and Debtors
The manufacturers or suppliers you purchase goods from are your creditors, as you owe them money, while debtors are customers who have yet to pay for services they have already received.
12. Franchising
Say you want to grow your business but need a bigger reputation to attract clients. You could then approach a name brand for franchising options. This is when you purchase the right to operate under that franchise name or sell their products. The initial payment or royalty is what access to a more extensive customer base costs you.
13. Depreciation
Over time, the tools you buy will be worth less, which means their value has depreciated. Their value is affected by wear and tear and technology decline.
Your accountant calculates the loss of value over time, which gives you the depreciated value for tax deduction purposes. You can also use a simple depreciation calculator tool to estimate your remaining value when making a future purchase.
14. Liquidity
Your liquidity is how readily you can pay for things. It takes your cash flow and assets into account.
15. Reconciliation
Reconciliation is when two data sets match or agree. It’s a measure of good accounting. For example, your income sheet matches your cost and profit total.
Get Fluent in Finances
While your passion may be doing the perfect pedi or mani, your success depends on much more than excellent service. Your business runs on sound financial management, which only comes from accurate insights regarding your money and operations.
