At the risk of sounding repetitive, the old adage that those who fail to plan, plan to fail is very true of franchisees. While you probably value being your own boss, you still need to pay the bills and make a profit – and that means understanding the financial drivers and performance of your business.
Work out your living costs
Unless you know what is the minimum level of income you are going to need to cover your essential living costs, then you can’t start to set a benchmark for your business. Review all your expenses, rent, mortgage, insurances, groceries, utility bills, health care, children’s schooling costs and so on. This is the baseline return that your business must generate as a starting point.
Match the debt with the asset
Ensure that the term of your loan for the franchise is the same as the length of the franchise agreement you enter into. You don’t want to find yourself still servicing a debt for a business you have sold or left. Take the same approach if you lease your business premises.
Personal versus business costs
Think carefully before you decide to put personal expenses through the business. It might have some tax benefits for you such as increasing tax deductions or reducing tax on profits. However reducing taxable profits will also reduce the ultimate sale price of your business. Businesses are bought and sold on their ability to generate profit, and so a business that shows little or no profit will be worth much less to a potential buyer than the price you as the seller would like. Talk to your accountant / business advisor before taking a step that jeopardizes your sale value.
Pay yourself an appropriate wage
Overpaying or underpaying yourself for what the job of running the business would be on the open market will distort your profit figure. This has serious implications for the perceived value of the business. Discuss it with your accountant before you take this step.
The magic of margins
Franchise fees are often calculated as a percentage of turnover, meaning franchisors often focus on the top line sales. But the variation in profit margins added can result in bottom line profits being wildly different between one operation and another. Identify the products and services that offer better margins and focus on those.
Control expenses carefully
Often the secret success factor between high and low-performing franchisees comes down to how effectively they manage expenses as a percentage of their turnover. Sometimes even the fixed costs (such as rent or labor) in one geographic location versus another can mean the franchise will be less profitable since the expenses are higher.
Master the art of selling
Your ultimate aim should be to predict likely sales increases from a given marketing activity. This takes a serious commitment to constant benchmarking so that you learn and understand exactly what works effectively with your target market.
It all comes back to getting the margins right, keeping costs under control and increasing sales. Even small changes in each of these three areas will result in exponential growth in profitability.
Speak to your accountant business advisor so that you can set up the right systems to benchmark, monitor and manage your business. The commitment and discipline will boost your bottom line.