Picture this: You have just popped the cork on the champagne to celebrate selling your first two franchises. Congratulations! Now, the real work begins. Your next crucial step? Set your franchisees up on the right financial footing – right now.
Why Focus on Financials from Day 1?
Imagine two scenarios: In one, your first two franchisees develop strong business acumen and have constructive dialogue with their business coach that keeps them on track with their financial goals. They thrive financially and become brand ambassadors. In the other, they focus energy on the wrong things, run out of cash and ultimately fail. The difference between these outcomes can make or break your franchise’s future.
Here’s the truth: Franchisees don’t fail because they can’t change the oil, scoop the poop, clean the windows, or whatever your core products and services require. They fail because they are undercapitalized and lack financial management skills. A new franchisor cannot afford early failures. Initial franchisee success will set the tone for your long-term viability.
Overcoming the Financial Management Hurdle
You might think, “We’re already stretched thin tending to sales, marketing, compliance, and operations training. How can we focus on financial management?” It’s a valid concern. Many founding teams resist supporting management functions. They might perceive it creates liability or may even find financial acumen outside their comfort zone. And they typically don’t have the budget to hire a full-time CFO or financial consultant.
Here is the good news: You don’t have to go alone. By choosing to outsource resources earlier, you can leverage industry experts to build a solid financial foundation for your franchise.
Seven Financial Non-Negotiables for Franchise Success
To set your franchise system up for financial success, focus on these key elements:
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Standard Chart of Accounts
Provide your chart of accounts in a system setup file for your recommended (or required) accounting software. The financial data you’ll need to measure customer acquisition costs, margins, staff costs and more will come from these accounts. Choose them wisely with your process for financial analysis and KPI benchmarking in mind. Identify fixed and variable costs so you can easily track the timeline to breakeven. When franchisees use a consistent format for accounting and reporting from day one, you can easily automate your benchmarking – now or later – so you can demonstrate what’s possible.
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Reliable Accounting System
Choose an accounting system that balances ease of use with the complexity of your business model and partner with outsourced bookkeeping professionals that understand franchising. Find firms that do more than record keeping and tax filing. Franchisees need consistent, accurate financial reports on a regular cadence so they can gain actionable insights that support good decision-making. This doesn’t happen when they do the books themselves or enlist an underqualified family member to do it.
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Business Planning and Goal-Setting Model
Help franchisees set goals for essential Key Performance Indicators (KPIs). You’ll also need a spreadsheet template a yearly budget that includes monthly sales, expenses and profits. Beyond the P&L forecast, you’ll need a model that accounts for the difference between profit and cash so you can predict cash shortages, burn rates, and the cash reserves needed to support a healthy franchise launch. Provide training and coaching that ensures the budgets and goals are used each month to monitor whether the franchise is on the right financial track.
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KPI Dashboard
What must your franchisees get right to be successful? Identify the success drivers and how to measure them. Those measurements represent KPIs that should be automatically captured through digital operating systems with a dashboard that is easy to read and always up to date. Applications for customer relationship management, point of sale, job scheduling and costing and even accounting can be integrated into a hub that contains reports and KPI dashboards. Foster a culture of transparency and collaboration so everyone sees what’s possible.
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Financial Training
There is a lot to learn about your business model, but don’t sacrifice financial acumen from your initial training curriculum. Franchisees don’t typically come to the table knowing how to use financial statements and KPIs to stay focused on their success drivers.
Not everybody needs to understand debits and credits, but a command of breakeven analysis and what we call “Breakeven PLUS” is essential for all business owners and coaches. It starts with understanding the cost structure and how it changes as the business grows. Some people call this the financial model, or unit economics. Train people to calculate the sales needed to breakeven – that’s milepost #1 on the pathway to profits. Then progress to subsequent mileposts with Breakeven PLUS to calculate the sales needed to reinvest in assets, pay back debts and pay a reasonable return on investment to the owner.
Again, you don’t have to go it alone. Use financial training experts, on-demand curriculum and hybrid learning cohorts to make training turnkey and scalable.
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Scalable Financial Coaching
Your protocol should include a standard financial analysis process and trained, confident business consultants who ask powerful questions that lead to critical financial conversations. Use peer groups to make coaching scalable and to create a culture of collaboration and transparency, and build strong relationships throughout the entire franchise system.
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Realistic Predictions for Required Cash Reserves
How much cash reserves will franchisees burn before turning cash positive? Of course, the answer depends on their costs and how quickly they grow. Having a predictive model and transparency to real results ensures you know the stated cash reserve requirement is adequate. Even profitable businesses fail if they don’t have enough cash.
Don’t be tempted to underestimate necessary cash reserves to make it easier for candidates to qualify for funding. Businesses need capital to survive. Without sufficient cash reserves to win their race to profit, franchisees will fail.
The Payoff: Walking the Walk
Don’t just say you care about profitability. Implement these financial non-negotiables.
You can’t just talk the talk, you’ve got to walk the walk. When you do, these benefits can be yours:
- Accurate and timely data reflecting your success drivers and results.
- A unified financial language across your organization.
- Transparency to franchisee goals and progress for success drivers.
- Scalable coaching that transcends operational and financial aspects of the business.
- Happier, financially healthier franchisees.
Franchisees deserve more than just lip service about profitability support. They need their franchisor to provide the financial insights, systems and coaching that are yours when the seven financial non-negotiables are in place.
Your Next Steps
Keep financial success at the forefront of your support strategy. Prioritize financial acumen from day one. You will set up your initial franchises for success and lay the foundation for a robust, scalable franchise system.
Join our IFA Preconference CFE Special Session, Monday, November 18, 2024
Emerging Franchisor Conference, Austin, TX
Want to dive deeper into financial strategies for emerging franchise brands? Bring your team to join us on Monday, November 18, for a half-day CFE Special Session: Financial Accelerator: Turbocharge Franchisee Sales and Profits. Earn 3 CFE IFA LIVE Learning Credits. Register here.