Revenue and cost structure for a home-based hair salon

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.

Margin Model

The path to profits goes through the margin. The key statistic here is the contribution margin, which reflects the degree to which the direct costs are contributing to the indirect, overhead costs of running the business. The expected gross margin, or contribution margin, is 50%. This means that for every dollar of fixed costs associated with supplies or stylist time, the markup will be 100%, doubling that cost. This margin leaves a full 50% of the revenue to contribute to the fixed costs of the organization, and that is good because there are a number of direct costs that must be paid for.

This margin model assures that there is sufficient money left over for all other expenses. It is important to contain those costs that do not specifically have a markup attached to them. This includes the interest expense on financing, which leads us to the conclusion that equity financing is better. In addition, it is also felt that minimizing the tax burden is an optimal strategy. It is important therefore to understand how the taxes derive and to develop a system that works within the confines of the tax laws to minimize the taxes, since these cannot be included in any markup. Thus, the margin model approach focuses on two things -- setting the right margins for those goods that are sold with a markup, and leaving enough money left over the cover those cost items that are not subject to markup. This includes ensuring that these non-markup cost items are minimized entirely.

Works Cited:

Investopedia. (2013). Definition of profit. Investopedia. Retrieved April 12, 2013 from http://www.investopedia.com/terms/p/profit.asp

No author. (2013). What is a cost structure? WiseGeek. Retrieved April 12, 2013 from http://www.wisegeek.com/what-is-a-cost-structure.htm