Blueprint for Growth: Add a Location, Win the Race to Profit
Part three of a three-part series…
In our first two Blueprint for Growth articles, we established the financial blueprints for these possible pathways to growth:
- Growing your core business (organic growth – same services, same territory)
- Expanding your range (more products and services, same territory)
This article explores best practices in creating a financial blueprint for:
- Expanding your territory (extend your geographic region)
What is a financial blueprint? It is a companion to your growth strategy. It details the measurable goals for activities that lead to breakeven and beyond, yielding the business prosperity you seek. Your financial blueprint for growth shows how the math pencils out. To set actionable goals and measurable milestones, you MUST do the math.
Expand Your Territory
A business owner opening their second unit has an important advantage they didn’t possess with their first: real financial information. But they also have a distinct disadvantage. They think working harder makes their investment scalable. Leadership skills are essential. We’ll leave that topic for a later article. For now we’ll focus on the financial blueprint.
The knowledge gained from the first unit makes predicting monthly recurring expenses simple, especially once the location is selected and the rent expense is known. For many businesses, rent and people make up 80% of total expenses or more. For others, equipment costs are also important. All of these are reasonably predictable based on learnings from the first location.
It is normal for a business to need a capital injection to support the expansion. To obtain adequate funding, investors must predict how much money they’ll need and when they’ll need it. They need a plan that details how much they will borrow and how they will pay it back. Multi-unit investors commonly plan for long-term financing for franchise fees, build out and equipment, but fail to plan for adequate cash flow. This can be a deadly mistake.
Enter Your Race to Profit
The new location starts its life in a race to profit. That is, it must reach its Breakeven PLUS (become profitable) before the cash runs out. The cash flow needed to support the race to profit is typically the most difficult financial factor to predict. What’s the solution? You guessed it. Do the math.
A P&L budget is essential to predicting the cash reserves needed to win the race to profit. Many profitable businesses have failed because they didn’t have enough cash to pay their bills. Achieving breakeven will not make the business to be “cash positive”. You must earn profit. How much? Enough to pay for growing inventory and accounts receivable, to make long-term debt payments, add equipment, and pay owner distributions. A robust forecasting template makes it easy to account for these things. It shows cumulative cash shortages so investors can plan for adequate cash reserves or borrowing.
Build Budgets for Profit AND Cash Flow
All business investors should have a cash flow plan that details monthly sales, expenses, profits, and cash flow for the first two years of operation. It’s easy to find templates for P&L budgeting. If you’re in a franchise, your support team can probably provide a good one. The P&L budget includes sales, expenses and profit, which may be very different from cash flow. Because tools for predicting cash flow are more complicated, they are also rare.
Successful expansion requires a financing plan for long-term assets and pre-opening costs AND for the cash flow needed to support operations before reaching the breakeven point. Without a cash flow plan, multi-unit investors can find themselves back at the bank asking for an increase in their credit line. Pressure from the new (underperforming) location makes it impossible to stay current with bills for the existing (mature and profitable) location. Talk about stress.
How Can Franchisors and Advisors Help?
A CPA or business consultant can help develop a budget with a cash flow plan. You can also download the Profit Soup cash flow planner here.
Franchisors avoid helping with financial forecasts before the territory is open because this can be construed as promising a specific financial return (earnings claim). That’s against SEC rules. Consequently, many franchisees move forward without a solid financial plan. How can franchisors help? Financial education and benchmarking.
Financial Education: Provide knowledge, financial skills, and tools. This includes a solid understanding of the many uses of breakeven analysis, and basic budgeting and cash flow planning skills. Check out ProfitSoupOnline.com for a quick start, scalable solution to get new business people on the right financial track, right now (ICFE Education Credits available). Many franchisors require this training be completed BEFORE the new location is opened.
Financial Benchmarking: Collect, analyze, and share information that demonstrates what “good” (and achievable) performance looks like at various stages of maturity. For startups, customer metrics like average ticket price and purchase frequency are extremely helpful. Benchmark these sales metrics, along with productivity, profitability, and cash flow ratios so franchisees can construct reliable plans and obtain the financing they need to succeed. If you’re not in a franchise, seek out other sources of benchmarks. Start with your CPA and industry associations.
Business Planning Tools: Franchisors and consultants that do not have a tool to help owners create monthly budgets for profit AND cash flow should prioritize developing a good one in 2022. For business models that typically have inventory, accounts receivable or debt, the cash flow forecast is extremely important.
Do the Math
The blueprint to profitable growth through multi-unit expansion includes a solid understanding of the expected cost structure (variable cost percentage and monthly fixed costs). Breakeven analysis is an essential skillset for all business leaders. But profit planning is not enough. To build long-term wealth and business value by adding territories, you must budget for monthly sales, costs, profits and cash flow for at least two years.
Need a Tool to Help?
Download our Cash Flow Planner – a macro-enabled workbook that helps predict your cash windfalls and shortfalls.