Industry background of cosmetic industry

A beauty salon is a major part of the cosmetic industry, and this industry is rapidly increasing day by day. For example, in Australia this industry created annual revenue of A$5 billion (2007)[1]. According to insiders of the industry, there is an increase in the popularity of day spas, which in return increase in the sales on the hair and salon industry. A beauty salon is an institution which deals with cosmetic treatments for both men and women. Beauty salons are establishments which provide more of generalized services, which are related to skin health, facial aesthetic, foot care, aromatherapy, even meditation, oxygen therapy, mud baths, and innumerable other services like hair styling and cutting, manicure and pedicure, waxing etc.[2]

Managing a Small Business like a Beauty Salon

Once a business is set up and running, how does the owner manage it? Often the traits of self-confidence, creativity and internal locus of control lead to financial and personal grief as the company grows. A hands-on to the entrepreneur who gave birth to the small business or company, loves perfecting every ting detail of the company. But after the start-up, continued growth requires a shift in the management style. Those who fail to adjust to a growing business can be the cause of the problems rather than the solution for the company. A small business goes through distinct stages of growth; with each of the stage the company requires different management styles and skills. There are 5 stages in the growth of the company:[3]-

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• Existence
• Survival
• Success
• Takeoff
• Resource Maturity.

Role of Manager

Managers in small businesses tend to emphasize roles different from those managers in large companies. Role of managers in small companies is very important, because they must be very creative and help their company to develop new ideas so that they can be competitive with other companies. Small business managers tend to rate lower on the leader role and on information processing roles compared with counterparts in large companies. As the world of small organizations become increasingly complex, managers should carefully incorporate the 3 categories for roles. They must simultaneously mange by information; manage through people, and mange through action to keep their organizations healthy.

Human Resource Practices

The human resources in a small business differ from large organizations. The primary goal is to remain alive within the industry. As the company grows, formal kind of planning is not usually instituted until the company does not reach its success stage in the growth stages of the company. In the 2 stages of company’s growth, the company’s organization structure is very informal, where all the employees are reporting to the owner of the company. By the third stage the functional managers are hired to take over the duties from the owner. A functional organization will be created and there will be changes in all the departments of the company. In this stage the managers will be able to learn how to delegate responsibilities to others.[4]

It is also important that there is a financial control in the company. In the company’s starting days control was exercised by simple accounting records and through personal supervision. The control techniques usually become more sophisticated during the resource maturity of the company.

Risk Management in a Beauty Salon

Beauty salon risks can be classified in several ways; one simple approach groups them by cause of loss. For example fire, theft or injury would be categories of a risk in a beauty salon. Another approach identifies business risks by grouping them into two categories: generally insurable (fire loss) and largely uninsurable (product obsolescence).2

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Risk management consists of all efforts designed to preserve the assets and earning power of a business, since risk management has grown out of insurance management, two terms are often used interchangeably. Actually, risk management has a much broader meaning, covering both insurable and uninsurable risks and including noninsurance approaches to reducing all types of risks.

Risk management in a small establishment like a beauty salon is very different with a large organization in several ways. For one thing, insurance companies aren’t always eager to insure small businesses and may even turn them down in some cases. Also in a large business, the risk responsibilities of risk management are frequently assigned to a specialized staff manager. In contrast, the manager of a small business like a beauty salon is usually its risk manager. It is a known fact that small businesses generally are always slow to focus on managing risks. It has been said that it is easier for a small business not to address risk management because people wear many hats, i.e. it is not something that requires immediate attention of the company until something happens like a fire, or theft etc. In practicing risk management the manager of the beauty salon needs to identify the different types of risk faced by his or her business and find ways to deal with them.

Risk associated with Personnel

Personnel oriented losses occur through the action of employees. Employee theft is an illegal and intentional act against the business and constitutes a major concern for many small businesses and this can also include the beauty salon. There are three types of personnel oriented risks that the risk manager should be aware off, they are employee dishonesty, former employee competition and loss of key executives.

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Employee Dishonesty:

One form of employee dishonesty is theft. Estimates of the magnitude of employee theft are difficult for a risk manager to make and these thefts vary considerably. A dishonest employee can steal a hair product or a makeup item or even steal petty cash from the register. It must be remembered by the manager that small business like the beauty salon are particularly vulnerable to theft because they tend to be lax in establishing antitheft controls within the company. To prevent from such things from happening in the beauty salon, the manager can bond employees. Bonding employees i.e. is purchasing from a bonding company insurance that will protect the purchasing firm (the beauty salon) against a loss from employee fraud or embezzlement, is one way to counter cost of employee dishonesty.4

Competition from Former Employees:

Good employees are hard to get, they are even harder to keep. When a business experiences employee turnover and it always will because it is given, there are many risks associated with the former employee. For example, if an employee of the beauty salon, let’s a hair stylist leaves the establishment, he or she can take with him or her, the salon’s clients. The risk is always acute with turnover of key executives, as they are likely candidates to start a competing business or to leave with trade secrets and this happens a great deal in the cosmetic industry, a great deal of beauticians when they leave a salon end up opening one of their own. Most companies are very sensitive to the activities of their former employees. What the risk manager of the beauty salon can do is apply the most common practice to avoid this kind of employee oriented risk. The manager can make the employees sign employment contracts that clearly set forth the employee’s promise not to disclose certain information or use it to compete against the employer.4

Loss of Key Executives:

Every successful small business has one or more key executive as the stylists and beauticians of the beauty salon. These employees could be lost through death or through the attraction to other employment. If key personnel cannot be successfully replaced, a small firm like the beauty salon may suffer appreciably as the result of the loss of their service. In addition to valuable experience and skill, key executives may have specialized knowledge that is vital to the successful operation of the salon. There are two solutions that are available to the risk manager of the beauty salon. First solution is to buy life insurance and second is to develop replacement personnel. A potential replacement (like an assistant to the hair stylist, who can learn the art) should be groomed for every key position, including the position of the risk manager as well.4

Risks Associated with Property

Property oriented risks involve tangible and highly visible assets; the risk manager needs to be aware of it as well. When these physical assets are lost or destroyed, they are quickly missed. Fortunately many property oriented risk are insurable, they include fire natural disasters, burglary and business swindle and shoplifting.

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Fire: building, equipment (like hair brushes, dryers, mirrors, chairs, irons etc) and inventory items (like shampoos, conditioners, makeup items etc) are destroyed by the fire can damage the business considerably. Fire not only causes direct property loss but also interrupts business operations, although the salon’s business might come to a halt but other fixed expenses like rent expense, electric/water expense, employees’ salary and insurance fee continue etc. To minimize these losses what the risk manager of the salon can do is ensure that the salon has alternative sources of electric power (like their own generators) for use in emergency time.

Burglary & Business Swindles: the unauthorized entering of premises with the intent to commit a crime such as removal of cash or merchandise is called burglary and this is very common. What the risk manager needs to do is install a burglary alarm system or arrange for private security service. Small business like a beauty salon is also very much susceptible to swindles, such as bogus office machine repairers or billing for listings in non – existent directories, sale of advertising pace in publications whose nature is misrepresented and advance – fee deals. Risks of this kind can be avoided only through the alertness of the risk manager of the salon.4

Shoplifting: it is estimated that as many as 60 percent of consumers may shoplift at some point during their lives. Few shoplifters are professional thieves; most are consumers. Even though shoplifting would be hard to do in a beauty salon, but nonetheless the risk manager needs to some precautionary measures to minimize shoplifting such as:-

• Training the employees
• Post signs around the shop warning potential thieves that you will prosecute and then follow up on that threat
• Install alarms on exists
• Attend to the needs of the customers
• Reduce clutter.

Debt: debt is risky, it is hard and demanding, if the salon fails to produce a profit its creditors insist on their interest payment and in an extreme case creditors can force the salon into bankruptcy it if fails to honor its financial obligations. It must be remembered that debt is a two edge sword, it cuts both ways. If debt financing is used and things go well the will go very well, but if things go bad, they will go very bad.

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Risks Associated with Customers

Customers are the source of profit for every business, but they are also the center of ever increasing amount of business risk. The risk manager needs to be aware of two kinds of risks which are associated with the customers, they are:-

• On Premises Injury: customers may initiate legal claims as a result of on premises injury, what the risk manager can do is to avoid such kinds of problems he or she can keep a regular check of the premises for hazards. The concept of preventive maintenance applies to the management of this risk factor.
• Product Liability: a product liability suit may be filed when a customer becomes ill or sustains damage from using a product that was being sold or used at the salon.4

Highest Priority Risk

• Fire: building, equipment and inventory items.
• Loss of Key Executives: lost of the stylists and the beauticians of the beauty salon.
• Debt: fail in profit by creditors.

Recommendations

Once the manager is fully aware of the sources of risk, programs of risk management need to be developed. The three basic programs for coping up with risks can be pursued individually or in a combination, it’s a decision that is up to the risk manager of the beauty salon. The basic programs are 1) preventing risk reduction, 2) self – insurance, and 3) risk sharing. The beauty salon mostly relies on sharing business risk by purchasing insurance when they should be using the options in combination.4

• Preventive Risk Reduction: it must be remembered by the risk manager of the beauty salon that small business risk preventive maintenance applied to risk management calls for the elimination of circumstances and situations that create risk. For example, a beauty salon needs to take every possible precaution to prevent fires, including the following:
• Use of safe construction: the building should be made of fire resistant materials and the electrical wiring should be adequate to carry the maximum load of electrical energy, because in a salon all kind of electrical gadgets are used like a hair dryers, different kinds of irons and others etc. and these gadgets needs a great deal of electrical energy.
• Installation of a completely automatic sprinkler: it an automatic sprinkler system is available, the fire insurance rate would be lower and the fire hazard itself definitely will be reduced.
• Provision of an adequate water supply: water is greatly needed in the salon and the manager needs to make sure that it is available.4
• Institution and operation of a fire prevention program involving the entire employees: it is important for the risk manager to keep the employees of the beauty salon conscious of fire safety measures. Regular fire drills for all employees, including both building evacuation and practice of actual fire fighting procedures may be undertaken.
• Self – insurance: self – insurance can take general or a specific form in a small business. What the risk manager of the beauty salon needs to do is to move in the direction in which other small firms are moving that is in the area of medical coverage. The beauty salon can provide its employees with dental care benefits. But it must be remembered by the manager that self – insurance is not affordable by every small business. There are very few small business companies that can practice unlimited self – insurance, especially when it comes to liability claims. Unless a small company has insurance to cover losses above a certain level, any large loss could put it out of business.
• Risk Sharing: a rapid increase in insurance has resulted in the liability of many small businesses to obtain affordable insurance. Nevertheless, insurance still provides one of the most important means of sharing risks; this must be in the knowledge of the risk manager of the beauty salon. It is important for the manager to ensure that the beauty salon has a sound insurance program, why, because it is imperative for the proper protection of the business.

Accepting of the Risks

I believe it is important for a manager to accept the three highest priority risks, because if he/she is not able to do so then they will not be able to move forward which means that the business will not grow. All small businesses face some degree of risk, risk would involve in the marketing of the salon, in HR practices, in the operations etc.

Alternatives

The alternatives for the risks would be:-

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• Relating Premium Costs to Probability of Loss in Case of Fire: insurance is most applicable and practical for improbable loss that is where the probability that a loss (due to fire) will occur low, but overall the cost of the loss would be high.
• Surety Bonds: it is important for the employees to sign a contract to fulfill their contractual obligations.
• Replacement Personnel: it is important that replacement personnel of the beauticians are trained in case if that beautician leaves, then the replacement is able to take the place without affecting the business.
• Securitization: this is going to help the salon against its debt, because any cash flow can be securitized.

Evaluation & Implementation

Evaluation of a salon includes continuous improvement which can be defined as the implementation of a large number of small but incremental improvements in all the areas of the salon as an ongoing process. In a successful total quality improvement program all the employees of the salon learn what they are expected to contribute by initiating changes in their own work activities. The basic thing in this process is that to improve things little by little at a time but all the time. This process has the highest probability of success in quality improvement of the company. There is no improvement that is considered small to implement the activities are fine tuned all the time and if the organization starts with little improvements it would lead them to big improvements in time.

Conclusion

Regardless of the nature of a business risk management is a serious issue, too often in the past small businesses paid insufficient attention to insurance matters and failed to acquire skill in analyzing risk problems. Today, such a situation is unthinkable; the small business manager must take an active role in structuring an insurance package for his or her company and in our case, the beauty salon.

1. Cosmetics and toiletries overview. Retrieved October 15, 2009 from http://www.austrade.gov.au/Cosmetics-and-Toiletries-overview/default.aspx
2. Beauty Salon. Retrieved October 15, 2009 from http://en.wikipedia.org/wiki/Beauty_salon
3. Internet Business and Marketing. Retrieved October 15, 2009 http://www.internetbusinessandmarketing.com/index.php?showtopic=65
4. Das2006

Matrix of Risk

• Green Zone: turn on “the green light” to continue invests in this business
• Yellow Zone: the management should take more information to reduce these estimated risks before continuiting.
• Red Zone: The suggested strategy is that management should begin to make plans to exit the industry.3

Example

Matrix of is useful because, it would help the management of the beauty salon with analyzing its risk factor. For example, the risk being losing the beauty salon may be made up the hazard of a fire, the hazard of a natural disaster, and the hazard of being in debt. Each of the risk has a probability and as well as a consequence. In this case scenario the probability of being in debt is very much greater than a natural disaster hitting the salon. However the company being in debt is less than that of a fire destroying the business.

Reference:

1. Cosmetics and toiletries overview. Retrieved October 29, 2009, from http://www.austrade.gov.au/Cosmetics-and-Toiletries-overview/default.aspx
2. Beauty Salon. Retrieved October 15, 2009 from http://en.wikipedia.org/wiki/Beauty_salon
3. Internet Business and Marketing. Retrieved October 15, 2009 http://www.internetbusinessandmarketing.com/index.php?showtopic=65
4. Das, S, 2006, Risk Management. John Wiley & Sons
5. Business Strategy Matrix. Retrieved October 29, 2009, from http://www.brs-inc.com/models/model17.asp
6. Matrix of Risk. Retrieved October 29, 2009, from http://images.google.com.au/imgres?imgurl=http://sal-t.googlecode.com/files/risk_matrix_salt.gif&imgrefurl=http://code.google.com/p/sal-t/downloads/list&usg=__Zs16ZlXOdTGfYv5D9ZrBdcuyho8=&h=439&w=439&sz=12&hl=en&start=24&um=1&tbnid=bmr_EGZv_o4ImM:&tbnh=127&tbnw=127&prev=/images%3Fq%3Drisk%2Bmatrix%26ndsp%3D18%26hl%3Den%26client%3Dfirefox-a%26rls%3Dorg.mozilla:en-US:official%26sa%3DN%26start%3D18%26um%3D1
7. Standards Australia database via the library’s databases page http://www.utas.edu.au/library/info/dbase/index.html