Service based operations do not use the traditional retail based format for the profit and loss statement which utilizes a ‘Cost of Goods Sold’ section, instead the service industry uses a ‘Cost of Services Rendered’ segment. The presentation format is very similar though.
Cost of Services Provided
Cost of services provided (rendered) is used by labor based organizations. Cost of services provided include labor wages, benefits, taxes, worker’s compensation insurance. It often will include transportation costs for remote site services.
One of the most fascinating business models is the hair salon industry. Many salons are poorly managed and rarely generate adequate profits. To make matters worse, the stylists are like professional sports players. One week they are playing for this team, and next week they are on a new team. In effect, they switch salons. It often happens because of personality conflicts, but the most common reason is that the grass is greener over at the other salon. That is; there is more compensation over at the other salon. How can this exist? How can one salon offer greater compensation than your salon? After all, they face the same economic barriers you deal with on a day to day basis. Given this, what is a fair compensation package? How do you create a model that not only entices better stylists but ensures adequate profit for your salon? This article is written to describe the current industry model, and then I’ll explain what is wrong with the model and finally how to change the model to create a fair compensation package for the stylist and still generate adequate profits for your salon.
Each industry is different in determining costs of goods sold or cost of services rendered. Retail uses two distinct methods to calculate costs of goods sold. The first is called ‘Specific Identification’ whereby each item sold is specifically identified to its recorded cost. The second method is referred to as ‘Inventory Adjustment’ format. In this method, a beginning and ending balance is recorded along with the purchases throughout the year.