Did you write your business plan?

Starting a small business is always risky, and the chance of success is slim. According to the U.S. Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years. Whether you are starting a new Salon, are looking to raise additional capital to expand your currently profitable Salon, or looking to evaluate and value your Salon to sell, current statistics prove that you will do much better with a business plan than without. According to Dunn and Bradstreet the primary reasons for failure vary, but all of the reasons  come under the category of poor planning. You are a part of the one of the most competitive Industries in the world. Your management decisions will decide whether your Salon survives or thrives in the face of increased competition. The most important benefit of a business plan is that it sets the stage for the future of your Salon as you want it to be positioned in the marketplace. A business plan will make it easy for your banker/investor to take action as he/she gains insight into the details of your Salon and the goals that you have outlined. Potential investors can review your plan and decide whether or not to make an investment based upon the risk. You will benefit most as you study and gain detailed insight into your own operations. Updating and constantly reviewing your plan will give you more insight as both a manager and decision maker.

According to the Regis Corporation the Worldwide Salon Industry is now worth more than $150 Billion dollars annually and since 2003 it has been growing at a 5.5% average annual growth rate. They also currently estimate the Domestic Hair Salon Industry to be worth more than $53 billion dollars annually. In 1997 the Industry was estimated to be $40 billion dollars indicating an annual average growth rate of approximately 2.6% compounded since 1997. That rate however took a hit at the end of 2008 as the recession that started in the last quarter of 2007 took hold and expectations are currently for the contraction in growth of at least 2.5% with growth slowing moving back to at least a positive 1.5% in 2010 as the Economy continues to exit the current recession. We are now in a high-tech, high-touch world. Consumers are demanding knowledgeable, highly skilled professionals to perform their hair care, skin and body care services. Consumers’ main needs are to look professional, well-groomed and more youthful. Hair salons that diversify to offer personalized packages and spa services outperform others. Also, salons must offer styles that are easy to maintain and services at more convenient times. Between stress, aging and time constraints women are demanding more and more services and with higher disposable income, facilities to answer to these needs. According to Info USA databases, the Industry lost 5,527 facilities or 2.19% in 2009.  The CBO (Congressional Budget Office), expects that over the next year and a half, consumer spending will grow more slowly than in recent years. Contractions within any Industry are not all bad and in fact they can be very profitable for operators with an established clientele or new operators who have the understanding and the cash available to weather the storm. Already lower numbers of new  salons are coming into the market and the Economy will shake the weakest operators out leaving a much more profitable environment for operators who survive. The Industry is tied directly to the health of the U.S. Economy and consumer disposable income. The CBO anticipates that the current recession, which started in December 2007, will have lasted until the second half of 2009, making it the longest recession since World War II they anticipate that real GDP will have dropped by 2.2 percent in calendar year 2009, a steep decline. Severe economic downturns often sow the seeds of robust recoveries. During a slump in economic activity, consumers defer purchases, especially for housing and durable goods, and businesses postpone capital spending and try to cut inventories. Once demand in the economy picks up, the disparity between the desired and actual stocks of capital assets and consumer durable goods widens quickly, and spending by consumers and businesses can accelerate rapidly. Although CBO expects that the current recovery will be spurred by that dynamic, in all likelihood, the recovery will also be dampened by a number of factors. Those factors include the continuing fragility of some financial markets and institutions; declining support from fiscal policy as the effects of ARRA wane and tax rates increase because of the scheduled expiration of key tax provisions; and slow wage and employment growth, as well as a large excess of vacant houses.

In CBO’s forecast, real GDP increases by 2.1 percent between the fourth quarter of 2009 and the fourth quarter of 2010 and by 2.4 percent in 2011. Given CBO’s estimate of growth in potential output, those GDP growth rates will narrow the difference between actual output and potential output (the output gap) only slightly. Growth of real GDP will accelerate after 2011, spurred by stronger business investment and residential construction.

Source: Congressional Budget Office Economic Projections and revisions.

The rebound in GDP and will also affect real disposable income growth which is expected to grow by 1.2% in 2010 after .50% growth in 2009. For 2012 through 2014, CBO projects that real GDP will increase by an average of 4.4 percent per year, which would close the output gap completely by the end of 2014. Even though economic activity began to increase again during the second half of 2009, the unemployment rate continued to rise, finishing the year at 10.0 percent. Hiring usually lags behind output during the initial stages of a recovery because firms tend to increase output first by boosting productivity and by raising the number of hours that existing employees work; adding employees tends to occur later. CBO expects that the unemployment rate will average slightly above 10 percent in the first half of 2010 and then turn downward in the second half of the year. As the economy expands further, the rate of unemployment is projected to continue declining until, in 2016, it reaches 5 percent, which is equal to CBO’s estimate of the rate of unemployment consistent with the usual rate of job turnover in U.S. labor markets. Reflecting the large amount of slack in the economy, inflation will decrease further from its already low level in 2009, CBO forecasts. The core price index for personal consumption expenditures (that is, the PCE price index excluding the prices of food and energy) will rise by about 1 percent (on a fourth-quarter-to-fourth-quarter basis) in 2010 and by 0.9 percent in 2011. The overall PCE price index will rise by 1.4 percent in 2010 and 1.1 percent in 2011.

For operators just getting started this may be the best time within the business cycle to plan and open your new facility understanding that with interest rates still at all time low levels and marginal operators going out of business you will have accounted for the marginal efficiencies necessary to not only survive against the competition but to thrive as we cycle once again into economic expansion.