A client pays for a full head of foils at your salon. Most of that $190 is already spoken for: it buys the colour, it pays the hours for your apprentice, it pays for the rent. Where does each part of that money go? And, what is each part of that money called?
Ten sections, about an hour all up. One section is one sitting. Do that one and stop.
You already know more about this than you think. Have a go at these in your head.
No, you do not get to keep the $55. Some of it goes straight back out again before you see any of it: the products you used, the hours your apprentice worked, a share of the rent, and the power and the laundry. These are all expenses. And then you need to pay tax on the profit, so what you keep is well under $55 after expenses and taxes.
Colour, foils and shampoo · your apprentice's wages · rent on the building · power, water and laundry · insurance · scissors, dryers and chairs
If you named three, you already understand the idea this whole lesson is built on: the salon spends before any money comes in.
Yes, you would be $10 better off on that job, because charging more for the same haircut doesn't make the shampoo or the rent cost any more. However, you do pay taxes on that extra $10. Tax comes off at the end, so what you keep is a little under $10.
Five Star Hair Studio is Sierra's. Two chairs, on a main street in a New Zealand town. Sanjay is your second-year apprentice, a year and a half in.
The reason why you opened Five Star is to make a living, a profit, from doing hair well. That reason why Five Star exists has a name: pūtake.
Write pūtake with the macron over the u, or puutake with the double vowel.
Five Star's pūtake is to make a profit from doing hair well.
Five Star's putake is to make a profit.
| Service | Price | Chair time |
|---|---|---|
| Fringe trim | $15.00 | 15 min |
| Cut and blow wave | $55.00 | 1 h |
| Colour retouch | $110.00 | 1 h 30 |
| Full head of foils, cut and blow wave | $190.00 | 2 h 30 |
A client sits down for a full head of foils. Two and a half hours later she pays $190.00. Watch it leave.
↓ Tap any row below or click on Next Step to learn more about the money words.
The $190 is revenue, money the salon gets from selling a service. If you refer to revenue as simply "money", you will lose marks.
You buy your colour from a supplier. This is an expense.
Wages are paid for the hours someone actually works. Sanjay was on this client for an hour and a half.
Compare a salary: such as the one paid to your teacher - a fixed amount for the year, paid in instalments - monthly, fortnightly or weekly, whether this week is busy or quiet.
Sanjay is paid wages, not a salary.
The salon pays $600 a week for the building, open 40 hours, so every hour of chair time costs $15 in rent, whether anyone is sitting in it or not. This job used two and a half hours of it.
Towels get washed. Dryers use power. None of it is optional, and all of it is an expense.
Profit is what's left of the revenue once every expense is taken out. $190.00 came in; $113.50 went out; $76.50 is profit.
Profit is what the salon made on this job. Tax comes next, and tax comes out of this figure.
Tax is money that must be paid to the government. You set aside about a third of your profit so the bill doesn't catch you out.
Notice where this sits: after the profit has been worked out, not before. Tax is not one of the expenses; it is worked out from the profit. The section called Three types of tax explains why that has to be the order.
That third is your own rule of thumb, a guesstimate so to speak, not a tax rate, real rates work differently and aren't part of this course.
$51.00. Everyone the salon owes has been paid and the tax is set aside, so this is the part of the job that is yours.
Taking it home is a decision, not something that happens by itself. Most owners leave a good part of it in the business, for the quiet weeks and for any unexpected repairs.
That is why profit and what the owner has are two different words. Five Star made $76.50 on this job. What you could take home is $51.00.
Four of those five slices are tagged EXPENSE: four different bills in one category, $113.50 of the $190.00 between them. Only Profit stays with the salon. Press Now split the profit to see what happens to it next.
Revenue, less every expense.
This is one of the easiest things to get wrong. Move the price and watch what happens.
Try charging something different
Your actual price is $190.00. Drag it and watch which numbers move, and which do not.
This is your actual price.
On screen this is a slider. Moving the price between $150 and $250 changes revenue and profit by the same number of dollars, while expenses stay at $113.50.
| Price | Revenue | Expenses | Profit |
|---|---|---|---|
| $150.00 | $150.00 | $113.50 | $36.50 |
| $190.00 | $190.00 | $113.50 | $76.50 |
| $200.00 | $200.00 | $113.50 | $86.50 |
| $250.00 | $250.00 | $113.50 | $136.50 |
If you put your price up $10, you are $10 better off on that job, because your expenses didn't change. But look at the size of it:
Profit is what's left over, so it swings much harder than revenue does.
Tax is money a business or a person must pay to the government. There are three kinds of tax in this course, and each one is paid on something different.
The government spends tax on things like roads, hospitals and schools.
Five Star's company tax is worked out from its profit. So company tax is not one of the expenses.
1. Sanjay is paid wages for the hours he works. Which tax does Sanjay pay on his wages?
Income tax. A person pays income tax on their wages.
2. You buy your groceries at the supermarket. Which tax is included in the price?
GST. The price of what people buy usually includes GST.
3. Five Star makes $76.50 profit on the foil job. Which tax is worked out from that profit?
Company tax. A business pays company tax on its profit.
4. Some workers lose their jobs. Which tax does the government receive less of from those workers?
Income tax. Those workers earn no wages, so they pay less income tax.
5. People spend less on goods and services. Which tax does the government receive less of?
GST. People buy less, so they pay less GST.
Name the tax: income tax, company tax or GST.
The government receives less income tax.
The government receives less tax.
Revenue is money from selling. Income is everything coming in, including the revenue.
A client pays Five Star for a haircut. Five Star sold the haircut, so that money is revenue.
A client pays Five Star for a colour. Five Star sold the colour, so that money is revenue.
A client buys a bottle of shampoo from the salon's shelf. Five Star sold the shampoo, so that money is revenue.
The bank pays Five Star a small amount for keeping the salon's money in its account. Five Star sold nothing to get it, so it is income, not revenue.
A subsidy is money the government gives to help pay for something. If the government paid Five Star money towards Sanjay's training, that money would be a subsidy. Nobody bought anything, so it is income, not revenue.
Five Star pays an insurance company to cover damage. If the front window is smashed, the insurance company pays for the new glass. That payment is income, not revenue.
A hood dryer is the big dryer a client sits under. Five Star sells hair, not dryers, so the money from selling an old dryer is income, not revenue.
Write revenue or sales revenue for money from selling. Never write money.
The foil job brings Five Star $190.00 of sales revenue.
The foil job brings Five Star $190.00 of money.
You may have these questions about the $190.
The bank holds your money, the government receives your tax, and the power company sells you electricity.
Pays you interest on savings, and charges you interest on a loan.
Does not collect tax, or lower its interest rate because you are doing well.
Receives tax, and spends it on roads, hospitals and schools.
Does not supply your power or water.
Sells you electricity.
Does not collect tax.
The government collects tax.
A bank collects tax.
The government supplies power or water.
No, the profit is not the same as what you take home. Profit is what the salon made. What you take out for yourself is a separate decision you make afterwards.
Most owners leave a good chunk of it in the business, for the quiet weeks, for a new basin if the one you have cracks, and for the tax bill that is already on its way. On this job: $76.50 profit, $25.50 put aside for tax, $51.00 still there.
Remember a business making a profit and its owner having money are two different things. The owner decides how much money to take out of the business.
Students keep making these six mistakes, and each one costs marks.
Not achieved“The salon got more money, so the business was affected.”
“Money” is not a money word, and “affected” gives no direction.
Every card in this section is a sentence a student wrote and lost marks for. Read it, work out what is wrong with it, then check.
The problem. "Money" is not a Commerce word. A marker cannot tell whether you mean revenue, profit or cash in the bank, so the marker cannot give you the mark.
The salon's sales revenue went up.
Listed under Not Achieved in the Assessment Reports for AS92030: “used the description money rather than profit or revenue”.
The problem. Affected which way? Up or down? With no direction this sentence tells the marker nothing they can credit.
The salon's sales revenue decreased because some regular clients moved to the new competitor.
Reported more than once: “made general comments such as ‘the business would be affected’ rather than specifying whether there was an increase or a decrease”.
The problem. Those two halves cannot both be true. If revenue went up and the expenses stayed the same, the salon has more to spend, not less. A marker who finds a contradiction cannot award the mark, even if one half was right.
Sales revenue increased. Because expenses stayed the same, profit increased too, so the salon had more to spend.
Reported more than once: “provided contradictory answers within the same question”.
The problem. Revenue is not profit. $190 is what came in; $113.50 of it went straight back out. Keep revenue and profit apart in every sentence.
The client paid $190, which is the salon's revenue. After $113.50 of expenses, its profit was $76.50.
AS92031 Merit answers must name “the effect on sales / expenses, profit and financial viability”, the chain only works if the words are used exactly (assessment report).
The problem. Both may be true, and neither is financial. If the question asks about money, an answer about atmosphere does not achieve.
Friendly staff bring repeat clients, so bookings rise, which increases sales revenue and therefore profit.
AS92030, under Not Achieved: “described non-financial elements that were not relevant to the question”.
The problem. “A lot” and “not much” are not amounts. When you have the figures, use them. A number is evidence, an impression is not.
The colour cost $28.00 of the $190.00, which is about 15% of what the client paid.
NZQA's guidance for AS92028 expects “actual dollar values and amounts as needed”.
1. Ten clients pay for a cut and blow wave. What is the $550 they hand over called?
Revenue, money the salon gets from selling. None of it has been taken out yet.
2. Sanjay is paid $24 for each hour worked at the salon. That payment is called…
Wages are paid for hours actually worked. A salary is a fixed yearly amount.
3. The salon's power bill is an example of…
An expense. Money that has to go out for the salon to operate.
4. Revenue $190.00, expenses $113.50. The $76.50 is…
Profit is the amount left after every expense is taken out of revenue.
5. Which sentence would a marker accept?
That sentence names the exact thing (revenue) and gives a direction (increased). The other two sentences do not achieve.
Every one of these will be used in every lesson after this. None of them will be explained again.
At Five Star$190.00 for a full head of foils with a cut and blow wave; $55.00 for a cut and blow wave on its own.
At Five StarThe whole $190.00 the client handed over, before a single cent came back out of it.
$190 is both income and revenueThe $190.00 from the foil job, somebody bought something.
Income but not revenueThe $4.00 a month the bank pays in interest. Money came in, but nothing was sold.
At Five StarThe $28.00 of colour and the $37.50 share of the rent on that one foil job.
At Five StarThe colour wholesaler. $28.00 goes out on every foil job and a box of colour comes back.
At Five StarSanjay's $36.00 for the hour and a half on the foil job, at $24.00 an hour.
A salaryYour teacher, paid the same amount every month whether the term is busy or quiet.
Nobody at Five Star is on a salarySierra and Sanjay are both paid by the hour, so what they earn is wages.
At Five StarOn the foil job: $190.00 of sales revenue, $113.50 of expenses, $76.50 of profit. The tax comes out of that $76.50 afterwards.
At Five Star$25.50 set aside on that job, a third of the $76.50, worked out only once the profit was known.
Now it is your salon and your numbers. A client books a cut and blow wave, your $55 service, one hour in the chair. Trace it exactly the way you just traced the $190.
| Cut and blow wave price | $55.00 |
| Products used (shampoo, treatment, styling) | $6.00 |
| Sanjay's wages, 30 minutes at $24.00 an hour | $12.00 |
| Share of the rent, 1 hour at $15.00 an hour | $15.00 |
| Power, water, laundry | $5.00 |
a.What are the total expenses for this job?
All four lines are expenses. Every one of them had to be paid before the client could sit down.
b.What is the profit on this job?
Worth noticing: the $55 cut is under a third of the $190 foils job, but its profit is barely a fifth. Price and profit do not move together.
c.You set aside a third of the profit for tax. How much is that on this job?
Notice what you did not do: you did not add tax to the four expenses in part (a) and take it off the $55. Tax comes out of the profit, after the profit has been worked out. If you had put it in with the expenses you would have been going round in a circle.
d.That leaves about $11.33 in the salon. Is that your pay for the hour you just worked? Write one line saying why or why not.
“No. The $11.33 is what the salon has left after expenses and the tax set-aside. What I pay myself is a separate decision, and some of it needs to stay in the business for quiet weeks and for replacing equipment.”
The thing being tested is the difference between the business having money and you having money. They are not the same, and telling them apart is what this section is for.
e.Ten clients book a cut and blow wave next week instead of five. Write one sentence that says exactly what happens to Five Star. Use the exact words. Give it a direction.
“Five more clients book a cut and blow wave, so Five Star's sales revenue increases by $275.00. Its expenses increase by $190.00 for those clients, so its profit increases by $85.00.”
Yours does not have to match that. It has to do the same three things:
The numbers, if you want them:
Using the figures is always stronger than saying “a lot” or “not much”. That is one of the mistakes in Six ways to lose a mark.
Go Sierra, go!
You took one haircut apart down to the last cent and said what every piece of it is called. That is the whole foundation of this subject, and you have it. Lesson 2 when you are ready.