Revenue
How a firm plans to earn a profit is one of the most important considerations in the business plan. Profit is defined as total revenue less total expenses (Investopedia, 2013) and there are basically three levels of profit. The first level is the gross profit, which subtracts only the cost of sales; the second is the operating profit which subtracts fixed costs as well. The final profit is the net profit, which subtracts all costs of doing business, including taxes and financing costs like interest.
Revenue Streams
There are going to be two forms of payment for the customers. They can either pay cash or with a credit card, but cash will be encouraged because the credit card company is going to charge to use a card, cutting into our margins. Checks and other forms of payment will not be allowed. The reason for this is that we want to reduce the risk of payments being rejected or bounced, since the service will have already been provided. One cannot take back a haircut for non-payment. Thus, the revenues that we earn will be very closely related to our cash flows, and this will allow the company to turn over the income quickly. It is expected that 90% of the money earned in a given week will be received by the company that week. This makes it easy to pay expenses such as wages and supplies as they occur or are needed.
There are two major types of costs in a business like this -- direct costs and indirect costs. The salon will foot most of the costs, paying the different stylists a wage plus bonus. The direct costs reflect the cost of the stylists and their supplies. These are the costs that go directly into the revenue generating activity. Such costs are expected to be the majority of the costs for the business. Overall, it is expected that direct costs will be around 50% of what is charged to the customer.
The other major type of cost in the cost structure is the indirect cost. Indirect costs are the background costs of the business that, while important, do not contribute in a direct way to the generation of revenue. These costs include the overhead costs and marketing costs, as well as additional costs like taxes that also come out of the net profit. There are going to be some marketing costs, although one of them, the bonus, is going to be built into the direct costs because it is directly related to the amount of business that the stylists generate. The overhead cost of management is expected to be low, because there are…
