Financial models are the track to run on to measure each operating component of your franchise company. It has taken years to develop customized franchisor financial reports. These are the most important executive tools to start your franchise company, and yet they do not exist in the open market. They would have no reason to since large consulting firms are removed from these highly-intricate franchisor financial reports. There is an unwarranted assumption that you will understand how to set up this financial management system.
Franchise companies are required by law to perform annual accounting audits using General Accrual Accounting Principles (GAAP). This is a different financial language from cash-based accounting (basic revenue deposits minus expenses) which you are more familiar with. We have completed twenty (20) consecutive annual audits and learned from each of these how to improve our internal financial management systems which dramatically reduces the cost of an annual audit.
Setting up these reports properly from the beginning will assist you in evaluating and analyzing each department’s profitability. These ready made reports promise better advanced see and prevent decision-making in all aspects of your company. We are dedicated to offering you a methodical, hands-on understanding of our proprietary financial reports systems and teach the key learning points before you start. Basic, off-the-shelf bookkeeping software is inadequate to manage a franchisor business. Furthermore, each process and system within each department must on a line item basis increase revenue, minimize expenses and generate profit for both the franchisor and franchisee.
- Cash-Based Budget
- Accrual-Based Budget
- Balance Sheet Set-Up
- Royalty Collection/ Bad Debt
- Inventory Purchasing
- Distribution Center/Order Fulfillment
- Audit Preparation
- Fixed Vs. Variable Overhead
- Departmental Profit/Loss
Most founders I have met are not well versed or experienced on how to run a franchise company on a cash and accrual basis at the same time. There is a mental tendency to resist one method or the other and gravitate to your comfort level. When this conflict occurs, your ability to manage profitability becomes your company’s biggest weakness. It only takes one or two years of inexperienced financial management performance to tarnish the results of profit reported in your Franchise Disclosure Document, and this bring new franchise sales to a screeching halt.
Our goal for you as a new franchise company is to ensure that your revenue exceeds your expenses at the lowest breakeven expense point. We will offer you cash-based templates to regularly double check your profit and loss on a weekly basis. These reports are simplified versions of the higher level reports mentioned above which allow you to adjust your real costs at the click of a button. To maximize your profit, we will set profit goals of 30% owner’s discretionary income. This means that each dollar of revenue you generate will have a strong gross margin and controlled fixed costs to deliver 30 cents of each dollar in salary and profit. To accomplish these high financial standards, we will train you on added efficiencies with regard to what percentage of your corporate expenses are fixed versus variable costs.
Founders of new franchise companies are learning new things so quickly that they only think in the generic terms of “WHEN I GET THE 10, 20, 30 LOCATIONS, I WILL BE PROFITABLE”. This is a death cross to be avoided at all costs. We will certify you to manage your business from the start with the experience to set up your franchise business to be profitable at any level of revenue so that earnings expand as your franchise system grows. In any unforeseen cyclical economic decline of revenue, your business model will contract while maintaining your gross margin and net operating income percentages. Fortunately, after decades of trial and error, our business model contracted and expanded within economic cycles.
Research and Development
Research and development equity investments generally occur in the new product development of Information Technology, Marketing and Sales offerings to your franchisees. There are continuous demands to invest in creative and innovative products and services to grow system wide revenue. These monthly investment demands build valuable brand equity, however, the bigger question is WHO is responsible for these costs: franchisor, franchisee, or both?
- Information Technology – Strategic decision making in advance on this issue will have a lasting positive or negative impact on the franchisor and franchisee profitability. There are three (3) options, each with advantages and disadvantages, to leverage these investments, while maintaining a progressive IT development schedule.
- Marketing and Sales – Local, regional, and national advertising exposure to build your brand are mutual goals of a franchisor/franchisee relationship. New point of purchase (POP) product development and public relations programs are a continuous appetite of franchisees. National websites, locator and content management systems require continuous updates. WHO is responsible for these costs: franchisor, franchisee, or both?
There are multiple strategies to be discussed before you sell your first franchise. Our rear-view mirror of experience in these areas will save you hundreds of thousands of dollars over a ten (10) year period. This will result in increasing your corporate profitability and ensure that the overall needs of your franchisees are achieved. Lost corporate revenue is centered in poor decision making in how to deliver cost-effective creative marketing and sales products/services on a regular basis to franchisees. The strategies selected will prevent you from being on the receiving end of a complaining franchisee who will withhold royalty and ad fund payments until a fair outcome is achieved.
(Decisions made in these areas in the early stage of your franchise system development are difficult to reverse without having franchisee ill will and lost revenue.)
Founders and CEO’s of new franchise companies will make or break their future dream based on the quality of their decision making! The creative nature for some entrepreneurs is so highly spirited that it can result in the overconfidence of “I can do it myself”. Handymen prefer not to work with other people on a job and to do everything by themselves. The franchise industry is a “mentoring” industry much like completing a medical internship for two years with a world-class brain surgeon. Your tuition is not to simply invest in the manuals, templates, and documents, but to work side-by-side your teaching physician, who will perform 200 cases per year. You want to learn from somebody who has started their own franchise company and can prove this to you with their battle scars. Our goal is to offer the real experience, training techniques, and reporting concepts behind the tools so that your consulting return on investment can be measured by every dollar you invest with our company.
- 33% of your investment will include a qualitative understanding of what practices and techniques we have unsuccessfully and successfully used in the past. This will help you overcome the “why” factor and dramatically cut your learning curve by 80%.
- 33% of your investment will be repetitive role playing, training, and utilization of franchising practices until you are confident and able to execute each technique.
- 33% of your investment will be on the accountability of utilizing our proven reporting systems, which we encourage you to put in place from the beginning.
I have utilized large franchise consulting firms, former specialized executives of franchise companies, franchise attorneys, and a former ex-founder/CEO of a franchise business. My paradigm shift to break old stubborn habits and locate the efficiency to strengthen our franchise company was delivered by a dear friend, Bernie Browning, who has since passed away. Bernie was a decorated naval officer, educated in the field of engineering, who upon his retirement had an entrepreneurial spirit to build from the ground up General Business Services into 1,000 locations. Unfortunately, after 20 years of building his enterprise, he sold his business to the Dwyer Group and slowly watched it wither away. His experience and knowledge transcended a wisdom beyond even his years. He was to me what John Wooden was to UCLA basketball. He singlehandedly diagnosed every leadership flaw and management system and process in our company and improved the efficiency by up to 50%.
The CEO is also the CFO
WHAT ROLE DOES MANAGING WORKING CAPITAL PLAY IN MAKING A FRANCHISOR PROFITABLE?
The recent downturn has suggested that it helps to have a lot of it – but that’s only a small part of the story. A CEO’s financial management skills (how you allocate your resources) play a key role in your growth, stability and profit as a franchisor. This financial management education, “unique to franchising”, will become your greatest asset and ensure your longevity as a franchisor. CEO’s who acquire these high-level financial skills will report stronger balance sheets and net-operating income year over year. During this early stage of development, your corporate overhead does not yet justify the cost of hiring the caliber of a Chief Financial Officer. Typically, the faster your franchise system grows, the more important these skills become. The speed of your daily operating decisions combined with inadequate financial management skills is a disaster plan waiting to happen.
As you develop these Chief Financial Officer skills, you are buffering your franchise company from all economic downturns and the financial stress from sinking into the red. Your ability to navigate your company through “expanding or contracting” economic environments will make the difference between becoming an up-and-coming miracle growth company who is in business for less than 10 years, or a solid franchisor who delivers decades of year-over-year financial stability.
Perceptions of how well your new and existing franchisees believe you manage company resources will play a key role in shaping the quality and stability of your franchise system. Franchisees who feel their CEO is spending money on aggressive growth plans and lavish seminars and events are strong indicators of a potentially risky future and a short-lived franchise company. Contrary to popular belief “smart franchisees” will choose to purchase a franchise more on how their personal values align with those of their franchisor, rather than purchasing a franchise just on a brand name.
There is plenty of passion and aspiration when you start your franchise company. This can lead to irrational spending and poor investment choices. This combined with novice financial management skills while operating a specialized franchise business model can create a struggle and tension to figuring out the right balance of growth, stability and profit.
FGP will provide a hands-on financial management training to run your new franchise company as if you were publically traded. We will provide you highly customized financial reports that will drive your strategic and operational plans. These high-level CFO skillsets learned in the first year of your franchise company will allow you to grow at any pace you desire and maximize efficiency and profit on your journey to achieve your dreams and goals. A healthy launch of your franchise company is everything!