Performance Management Case Study Analysis

descriptions of each were sent to Martha. Following a further three weeks of back and forth communications, Jeff, Martha and Jessica decided to rent a suite of rooms in a building on Beaufort Avenue that had once served as the Nova Scotia governor's residence. Over the next three months, Jeff and Jessica oversaw significant leasehold improvements, supervised the installation of $20,000 worth of hair salon equipment (i.e., salon chairs, backwash units, and hair styling stations), hired a hair stylist to work with Jessica, and outfitted the salon with the luxurious trappings Rossana's had become synonymous with (i.e., chandeliers, plush sofas and chairs, and full-length mirrors). Jeff remained on hand for the salon's 1 June opening. When he left the following day to return to Montreal, he did so with strong confidence in the Halifax salon's prospects for success. During its first three months of operation, the Halifax salon's client numbers averaged nine per weekday and 12 per Saturday. The financial statements relating to the Halifax salon's first three months of operation are shown in Exhibit 2. The results were disappointing. Although the reported loss was small, Jessica's self-designed compensation plan meant she was entitled to $450 in salary (i.e., her 50% sharing of the $900 profit before interest and taxes). Jeff and Martha felt uneasy about this outcome and suggested that the salon be closed. Jessica pleaded that she be given one more month to see if she could turn the situation around. With trepidation, Jeff and Martha agreed. Jessica noted that other than the cost of the hair treatment supplies used during haircuts of about $3/client, and the cost of pastries, cappuccinos and lattes served to clients of about $4/client, and the cost of the stylist she hired at $22/hour (plus the associated payroll taxes of 7.37%), nearly all the remaining costs were fixed. Based on the high fixed cost structure, she decided the answer to her problem was getting more clients. Observing that Halifax was not as affluent as either Saint- Sauveur or Montreal, and thus the reason she could hire a highly experienced stylist for 12% less ($22/hour versus $25/hour) than Rossana's does in Saint-Sauveur or Montreal, she figured the best way to attract more clients was to lower the price of a haircut closer to eastern Canada's median price of $25. While more clients would require more stylists, the salon was presently operating at 40% of its capacity. It had always been anticipated that there would be a gradual build up from the two stylist stations currently being operated to the five stations Jessica and Jeff had installed. Using information supplied by the Allied Beauty Association (Canada's sole beauty professional organisation), Jessica estimated the three impacts of dropping the price of a haircut to $45, $35, and $29, with the assumption that these new prices would produce average daily client numbers of 14, 32 and 45 respectively. To compensate for the lower prices, Jessica planned to decrease the time of a client's haircut modestly for the $45 option, slightly more for the $35 option, and significantly for the $29 option. The anticipated changes would require no new personnel for the $45 option and two additional stylists for both the $35 and $29 options. Jessica further planned to fill any required stylist positions with junior stylists at $20/hour rather than the current $22/hour. Exhibit 3 presents pro forma income statements for each option, which shows that the highest profit before tax is associated with the $29/haircut option. A 50:50 profit sharing of the $96,520 pre-tax income would mean she would earn about $48,260, which would bring her close to the $50,700 she used to make in the Saint Sauveur salon.Rossana's Hair Salon Rossana's Hair Salon comprises three hair salons operating in eastern Canada. Its owners, Martha and Jeff Kuhn, started the rst salon in Saint-Sauveur, Canada in 2010. Saint-Sauveur is located 70 kilometres northwest of Montreal amongst Montreal's most popular ski resorts. Rossana's quickly amassed a reputation for offering cutting-edge hair design in a private, relaxing, and elegant setting, one that features sparkling crystal chandeliers, plush sofas and chairs, and elegant full-length mirrors. The pampered environment Rossana's offers, which includes offering clients pastries, cappuccinos and lattes when they arrive, underpins their charging a relatively high price. While the median price for a haircut in eastern Canada is about $25, Rossana's charges $55. Part of the premium price derives from Rossana's employment of highly experienced stylists. To attract these stylists, Rossana's pays $25fhour, which is about 25% higher than a Montreal stylist's hourly rate. Another difference between Rossana's and other hair salons is that a Rossana's stylist typically sees 5-6 clients per day, whereas a stylist elsewhere averages 10- 12 clients. One additional characteristic that sets Rossana's apart from its competitors is the high emphasis it places on cross-selling, which involves stylists convincing clients to buy additional hair products, such as curl creams, spray foams, and scalp exfoliators. Within months of its opening, the salon became exceedingly popular. Over the course of the next six months, Martha and Jeff installed three additional stylist stations and hired three new stylists. These additions, which brought the salon to full capacity, proved to be only a temporary x. Even with everyone putting in six 6.5 hour shifts per week (i.e., 39 hours per week), they could not keep up with demand. Noting that many of their clients travelled from Montreal to Saint-Sauveur exclusively to have their haircut, Martha and Jeff believed opening a salon in Montreal could work well. Fortunately for Martha and Jeff, a former tailor shop that was located in what is called Old Montreal became available for rent. After further enhancing the shop's elegance with elaborate and ornate furnishings and hiring a replacement for himself at the Saint-Sauveur salon, J e' and two newly hired stylists began working at the Montreal salon. This salon too quickly became popular and two further stylists were hired, which brought the salon to lll capacity. After several years of strong nancial success (see Exhibit 1's most recent income statements), Martha and J eff were presented in early 2019 with an interesting business proposition. Jessica, one of the rst employees they hired, was moving to Halifax, Canada. She proposed that Martha and Jeff establish a Rossana's salon there and make her its manager. To sweeten the deal, Jessica offered to base her entire salary on the salon's protability. She proposed that they make her a prot centre and allow her to share 50:50 in prot before interest and taxes up to a maximum of 125% of her current salary of $50,700. In other words, her minimum salary could be zero, while her maximum salary could be $63,375. The reason for choosing prot before interest and taxes was because she felt all the items comprising it were controllable by her, or at least under her influence. After speaking with their own accountant and performing some independent research on the Halifax hair salon market, including learning that the average salary for a hair salon manager in Halifax is between $50,000 and $70,000 per year, Martha and Jeff agreed to J essica's proposal. Jessica spent her rst month in Halifax searching for a suitable property. She identied three possible sites, and Jeff ew to Halifax to help make the nal selection. Photos and detailed l In a rather fortuitous twist of circumstances, Jessica was then approached by the workers' union representing Dalhousie University, Saint Mary's University, and Mount Saint Vincent University. As an added benet to its members, the union was making exclusive deals with a select set of Halifax-based businesses. In return for promoting Rossana's among its members, the union was asking that Jessica oer discounted haircuts to its members that matched the Halifax average price of $25. Representing over 5,000 employees, Jessica estimated that, of the likely group of employees such an offer would appeal to, the incremental impact on her business would be 72 extra clients per week. Since the salon was already outtted with ve stylist stations, there was capacity available to accommodate this increase in clients. A quick marginal cost calculation indicated a highly protable outcome (see Exhibit 4). Sharing 50:50 in this additional expected prot meant Jessica would earn an annual salary close to $58,885 ($48,260 from the $29 pricing option plus another $10,625 'om the workers' union offer}. With great excitement, Jessica wrote the email which is reproduced in Exhibit 5. After sending the email, she reected on the experience that had been gained over the past few months and the positive platform she felt was now in place for going forward. Exhibit 1: Income statements for Saint-Sauveur and Montreal for the year ended 31 December 2018 Saint- % of % of Revenue: Sauveur total sales Montreal total sales Sales - haircuts $496,980 84.6% $498,960 84.6% Sales - hair products {net of cost] 90,360 15.4% 90,720 15.4% Total revenue 587,340 100.0% 589,680 100.0% Cost of sales: Salaries 263,250 44.8% 263,250 44.6% Pavroll taxes 19,395 3.3% 19,396 3.3% Hair treatment supplies 27,108 4.5% 27,216 4.5% Depreciation on equipment 8,333 1.4% 8,500 1.4% Gross Profit 269,253 45.8% 271,313 45.0% Expenses: Rent 56,700 9.7% 56,400 9.6% Power and lighting 7,32o 1.2% 7,764 1.3% Insurance 18,000 3.1% 18,000 3.1% Salon license 1,000 0.2% 1,000 0.2% Amortisation leasehold improvements 10,000 1.7% 10,500 1.8% Depreciation furniture and xtu res 20,000 3.4% 20,500 3.5% Maintenance 15,072 2.6% 14,553 2.5% Marketing and advertising 20,400 3.5% 20,400 3.5% Cleaning supplies 7,560 1.3% 8,136 1.4% Pastries, ca ppuccinos & lattes for clients 36,144 6.2% 36,288 6.2% Other (water, phone, rubbish removal} 3,612 0.6% 3.816 0.6% 50 b-Total Expenses macs 33.3% 1 T" 3'2 33.5% Net income before interest and taxes 73,445 12.5% 73,946 12.5% Interest _1Q..-.'3_0_Q 1.8% 11,250 1.9% Net income before taxes 62,945 10.7% 62,696 106% Federal and provincial taxes 9.442 1.6% 9.404 1.6% Net income m _9_%-1 M E Exhibit 2: Financial statements for Rossana's Halifax salon Income Statement for the three months ended 31 August 2019 % of Industry Revenue: total sales Avg. % Sales - haircuts $49,665 93.2% 96.3% Sales - hair products (net of cost) 3,612 6.8% 3.7% Total revenue 53,277 100.0% 100.0% Cost of sales: Salaries 11,583 21.7% 51.2% Payroll taxes 853 1.6% 3.8% Hair treatment supplies 2,916 5.5% 11.2% Depreciation on equipment 2,167 4.1% 1.9% Gross Profit 35,758 67.1% 31.9% Expenses: Rent 12,900 24.2% 8.3% Power and lighting 1,320 2.5% 1.7% Insurance 3,600 6.8% 2.7% Salon license 250 0.5% 0.2% Amortisation leasehold improvements 2,250 4.2% 1.2% Depreciation furniture and fixtures 3,750 7.0% 1.6% Maintenance 165 0.3% 2.3% Marketing and advertising 4,500 8.4% 2.6% Cleaning supplies 1,719 3.2% 1.7% Pastries, cappuccinos & lattes for clients 3,564 6.7% Other (water, phone, rubbish removal) 340 1.6% 0.9% Sub-Total Expenses 34,858 65.4% 23.2% Net income before interest and taxes 900 1.7% 8.7% Interest 2,813 5.3% 2.1% Net loss before taxes (1,913) -3.6% 6.7% Federal and provincial taxes 0.0% 1.0% Net income $(1,913) -3.6% 5.7% Statement of financial position as at 31 August 2019 Current Assets Current Liabilities Cash $350 Accounts payable $1,300 Inventory (hair products) 1,100 Wages payable 528 Prepaids 150 Rent payable 378 Total Current Assets 1,600 Total Current Liabilities 2,206 Non-Current Assets Noncurrent Liabilities Salon equipment (net of deprec.) 18,902 Notes payable 150,000 Furniture and fixtures (net of deprec.) 146,250 Total Liabilities 152,206 Leasehold improvement 87,750 Owners' Equity Total Non-Current Assets 252,902 Kuhn, Capital 102,296 Total Assets $254,502 Total Liabilities and Owner's Equity $254,502Exhibit 3: Pro Forma Annual Income Statements using haircut prices of $45, $35 and $29 $45 $35 $29 Revenue: Sales - haircuts $204,120 $362,880 $413,424 Sales - hair products (net of cost) 18,144 41,472 57,024 Total revenue 222,264 404,352 470,448 Cost of sales: Salaries 46,332 130,572 130,572 Payroll taxes 3,414 9,621 9,621 Hair treatment supplies 13,608 31,104 42,768 Depreciation on equipment 8,667 8,667 8,667 Gross Profit 150,243 224,388 278,820 Expenses: Rent 51,600 51,600 51,600 Power and lighting 5,280 5,300 5,320 Insurance 14,400 14,400 14,400 Salon license 1,000 1,000 1,000 Amortisation leasehold improvements 9,000 9,000 9,000 Depreciation furniture and fixtures 15,000 15,000 15,000 Maintenance 560 560 660 Marketing and advertising 18,000 18,000 18,000 Cleaning supplies 6,876 6,876 6,876 Pastries, cappuccinos & lattes for clients 18,144 41,472 57,024 Other (water, phone, rubbish removal) 3,360 3,390 3,420 Sub-Total Expenses 143,320 166,698 182,300 Net income before interest and taxes 6,923 57,690 96,520 Interest 11,250 11,250 11,250 Net income before taxes (4,327) 46,440 85,270 Federal and provincial taxes 6,966 12,791 Net income ($4,327) $39,474 $72,480 Exhibit 4: Contribution margin analysis for union offer (assumes 50 weeks due to statutory holdays) Sales (72 clients * 50 weeks * $25) $90,000 Variable costs Hair stylist 40,560 Payroll taxes (@ 7.37%) 2,989 Hair products (72 clients * 50 weeks * $3) 10,800 Pastries, cappuccinos and lattes (72 clients * 50 weeks * $4) 14,400 68,749 Contribution margin $21,251Exhibit 5: Email from Jessica to Martha and Jeff From: Jessica Edwards Sent: Tuesday, 10 September 2019 2:41 AM To: Jeff Kuhn Subject: Halifax salon's road to protability Hi Martha and Jeff, I believe I have found the key to our success in Halifax. The price we now use for haircuts, which is the same as our Saint-Sauveur and Montreal salons, is just too high for Halifax. I ran three reduced- price scenarios and found that if we reduce the price of a haircut to $29, have faster work flows, and hire two more stylists to manage the added business we will get, we can make a more than $96,000 annual net prot before interest and taxes prior to calculating any profit sharing I would be entitled to [please see Exhibit 3]. On top of this, I have been approached by a workers' union that represents the three main universities in Halifax. They have agreed to promote our salon if we give their members a preferential price of $25. I have calculated the financial implications of this proposal, which would require our hiring an additional stylist, and find that we would make a contribution margin ofa bit over $21,000 (please see Exhibit 4}. In other words, our annual net profit before interest and taxes would be approximately $117,000 before any prot sharing. And this prot is conservative, for it does not include the cross-selling sales we can expect. I have some ideas about the type of stylists we should hire and how I will motivate them. First off, there are plenty of young hair stylists in Halifax that are looking to gain experience. I can save costs by hiring them at the average Halifax stylist rate of $20fhour. Being young, they will not come with any preconceived work ideas and will be amenable to the fast growth, fast work culture I want. We will, after all, be looking at moving from our current average of 5.5 clients per stylist per day to an average of 11-12 clients per day. I will also be looking to measure the stylists' performance, and perhaps at some point incentivise them on it, based on such objective measures as the number of clients they see per day and the variable costs used per client. I read an article about the importance of cost-effectively using hair product, which you can find at https:ffwww.hairfinder.comfhairquestionsfshampoocost.htm. In sum, with the changes I am proposing, I am sure we will now succeed. Kind regards, Jessica