3 key franchise financials you need to know
Are you ready to buy a franchise? If so, once you're signed up and operating the business you will probably be so focused on getting traffic through the door to worry about financial figures. A word of caution... that’s a dangerous pattern to fall into.
If you are unfamiliar with number-crunching, it's probably something you put to one side. After all, understanding franchise financial information isn’t something you can suddenly become an expert in. Financial advisors and accountants spend years developing tools and strategies to help franchisees operate a profitable business.
So while no-one expects you to become a franchise finance specialist overnight, there are a few things that all new business owners should keep a close eye on.
Here are three of the most important franchise financial figures to put on your radar.
When you are buying or operating a franchise business, the single most important metric to help you manage your finances is cashflow.
Cashflow is literally the flow of cash into and out of your business. It’s the pulse of your operation and provides excellent insight into how you are travelling.
Maria Robinson, CEO of financial mentor service, Sequel CFO said cashflow is an essential tool to be used at all stages of your franchise journey.
“It should be used when conducting your due diligence to decide whether a business opportunity is right for you, and it should be used while operating your business,” Robinson said.
There are three parts to a cashflow, these are; revenue, which relates to all money coming in, expenses, as in set-up costs and operating costs, and closing cash position.
2. Target sales
The is more than just a goal for your business to achieve. Your target should be calculated based on the cost of operating your business and the sales required to meet these costs.
Use the information calculated in your cashflow projections to determine operating expenses.
Further to this, it is important to determine the type of sales target that you need to achieve. For instance, franchisees can set specific goals relating to each individual product, giving information relating to the number of products you need to sell and the markup on each unit.
3. Wage costs
More often than not, the cost of employing staff will be your biggest expense.
Work out your wage costs by calculating the cost of staffing the business at the level of sales you are aiming to achieve. In order to do this, you must have a sales target to work towards, so this may be another factor to consider.
Having a firm grip on projected wage costs means asking the question, “how many staff are need to efficiently run this business and at what rates?”/
The industry in which your franchise operates in is also a highly influential factor in your wage costs. Be sure to follow the appropriate award, or rates stipulated in the business agreement to avoid any legal complications down the track.
It’s crucial that you understand the landscape in which your business operates and your responsibilities as an employer. For example, are you required to pay penalty rates for employees who work late? If so, how much?
Remember, it’s not uncommon for different states and industries to have different rates of pay.
Operating a franchise can be hard work, particularly in the early days. While there are some metrics and financial figures that you should be across, never be afraid to seek financial help.
While it may seem like an unnecessary cost at first, franchise financial advice should be viewed as an investment.
If you are committed to running a profitable, compliant and sustainable operation, seek advice from a franchise accountant and stay on top of your financial figures.