Franchisees with no prior financial management experience are often intimidated by financial documents, or caught unprepared for the financial management skills needed to ensure their new business remains profitable.
One of the biggest problems across the franchise sector is that the management accounts from service providers often arrive too late for franchisees to be able to do something proactive about their situation.
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1. Common financial issues that can be easily rectified
- Starting up with insufficient working capital to carry you over the first six months of your business.
- Failing to have bank overdraft facilities in place for quiet or lean periods.
- Not opening a separate account for: VAT payment money that will be due to SARS at a designated time, or savings for store revamps that are always due when least expected.
- Not paying: PAYE, UIF, Workmen Compensation (if applicable), royalties and marketing contribution royalties to franchisors, rent and utilities, and suppliers timeously. Paying suppliers late can cause delivery delays and stock shortages of certain products or lines.
- Failing to submit annual company tax returns timeously.
- Not agreeing on terms from suppliers and paying for everything in cash. Remember cash is not always king, rather cash flow is almost always king!
- Using bookkeepers or accountants who supply the monthly management accounts too late and don’t provide financial recommendations.
2. Dire financial issues that should be avoided at all costs
- Turnover is continually well below the margin of safety required and the business cannot break even.
- The gross profit % margin is continuously far below industry benchmarks. This could indicate theft, stock losses, stock wastages, poor and expensive buying, and overstocking.
- Not controlling the total expenses or overhead expenses in the business (i.e. rent, salaries, owner’s drawings etc.)
- Living well above your means and not sticking to the originally projected owner’s drawing amount.
- Continually not having adequate cash flow to pay suppliers, the landlord, franchisor and staff, often results in the business closing its doors.
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3. Financial basics all new franchisees should understand
- A good understanding of how to read and interpret a basic income statement, cash flow statement and balance sheet.
- How to calculate and manage important financial formulae. See table below.
Calculating and managing important financial formulae
- Mark-up %: Gross Profit
Cost of Sales
- Gross Profit%: Gross Profit
- Break-even Turnover: Total Expenses Gross Profit %
- Break-even number of units:
Fixed Costs (Total Expenses or Overhead Costs)
Selling Price for one unit – Variable Cost (Cost of Sales) for one unit
- Net profit %: Net profit before tax
- Maximum discount % that you can give customers: Net Profit before tax
- Total or true cost per item / unit:
Fixed Costs (Total Expenses or Overhead Costs) + Variable Costs (Cost of Sales)
Number of units sold
- Margin of safety % (By how much % can your turnover drop and you can still break-even):
Total Sales – Breakeven Turnover
(NB: Note that when calculating a %, you must always multiply (x) the answer by 100 divided by 1 to get a percentage (%) answer.)
Ultimately, it is important to know what to manage financially in your business and to focus on your strengths.
Remember, you only have to know how to drive the car properly which is managing the key financial formulae stated above; you do not have to be able to do your books and be the mechanic as well.
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Rather hire an expert bookkeeper or an accountant so that you can free up your time and focus on sales, marketing, customer service and all the other things that are important, make you happy, and drive your passion in your franchise.
Remember: Sales is the lifeblood of your business and financial management the heart rate monitor!