Multi-Unit Franchisee Magazine Issue IV, 2016 | Page 68
Finance BY ROD BRISTOL
Increase Your Profitability
Benchmarking is a critical yardstick in improving performance
U
nit-level economics (ULE)
is the latest fancy phrase for
the fundamental concept of
franchisee profitability. The oldschool franchise concept of caring only
about a monthly sales report and a royalty check and, if the franchisee was not
profitable, reselling the territory in 18
months, is dead. It was killed primarily by
new private equity firms that won’t touch
a franchise network if they can’t demonstrate that the franchisees at the unit level
are actually making money.
There are three necessary components to driving up ULE in any franchise
network. First, you have to improve the
financial acumen of the franchisees by
educating them, helping them understand
that their profit-and-loss statement and
balance sheet actually provide “management intelligence,” not just financial data.
The second component is benchmarking,
which I elaborate on below. The final
component is the “performance group”
model, which holds individual franchisees accountable to each other to drive
up their own profitability and cash flow.
It’s not enough to know how well your
business is doing now. Hopefully, you are
meeting the minimum acceptable standards
for financial reporting today: an income
statement and balance sheet delivered to
you on the 15th day following the close
of business of the previous month, every
month. Also hopefully, you actually take
a look at the information that’s presented
to you and know if you’re making money,
losing money, have positive or negative
cash flow, and have a clear understanding of your risk level as you operate your
company. However, this is not enough!
How well could you do?
This is where a benchmark study becomes
very valuable to individual franchisees
and to the network as a whole. A benchmark study is a financial “snapshot” of a
franchise network that allows individual
franchisees to compare their operations
with others of similar size and type. A
benchmark study report helps franchisees
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answer important questions.
• How much more money could I
make if I managed my cost of goods as
efficiently as my peers do?
• How does my operating profit compare with others of my same size and
longevity in the network?
• What specific action plans can I put
in place to get my numbers in line with
the profit leaders?
• How do my cash flow and liquidity levels compare with those of others?
• How much more cash would I have
if I managed my receivables as well as
my peers do?
• Am I making the most efficient use
of my assets and equipment?
Benchmark studies contain performance ratios that focus on the financial
relationships in a business, rather than
just on absolute numbers, such as annual
sales. In almost every benchmark study we
produce, the annual sales leaders a re not
necessarily the most profitable businesses.
In our benchmark study model, we
provide two reports back to the network.
The first is the Group Report, which lays
out the entire network’s profitability,
measuring the typical operator against
the top 25 percent. This gives the entire
network a clear picture of where the opportunities are in a number of different
financial management areas.
The second report is what we call the
confidential Company Consulting Report.
This report lays out the specific financial
information of an individual operator
against the typical operator and top 25
percent—and provides specific direction
as to where the owner needs to focus their
management attention to drive up their
financial performance to match the top
25 percent.
Case in point!
We recently completed the first benchmark study for a small emerging franchise
network. This is a “man in a van” concept
with a fairly simple business model, using
rolling stock as their primary asset. The
report presented a “typical” participant
measured against the “high profit” operators, and the results were stunning.
Using round numbers:
• The high-profit leaders were not the
highest sales operators.
• The high-profit leaders, however,
had a 6% differential in gross margin
over the typical operator.
• The high-profit leaders had an almost
3% differential in operating expenses over
the typical franchisee.
• Finally, and most important, the typical operator had an owner’s discretionary
profit of 12%, compared with 22% for
the high-profit operators.
What made the difference?
Paying attention to labor costs, monitoring
employee hours, double-checking quotes
to make sure jobs are priced properly and
employees are not offering unauthorized
discounts, making sure that your jobs are
scheduled properly for maximum efficiency
of labor and expenses—all these, and more,
add up to the difference between a typical operator and a high-profit franchisee.
The benchmark study clearly provides
the direction and focus that enables a
franchisee to go from being just average
to highly profitable. And, let’s be honest,
who do you think is happier: the franchisee making $60,000 a year, or the one
making $150,000 a year (owning the same
kind of business)?
Benchmarking is one of the tools that
enables franchise networks to achieve
those results. Contact me to see a sample
of both studies.
Rod Bristol is executive vice
president at Profit Mastery.
For over 30 years, franchisors
and franchisees have improved
their financial performance
and unit profitability by following the Profit Mastery process: financial
training, benchmarking, and accountability/
bankability modeling. Learn more at www.
profitmastery.net, 800-488-3520 x13 or
email [email protected].
MULTI-UNIT FRANCHISEE IS S UE IV, 2016
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