How to Win the Race to Profit
This article is the third of a series sharing some key learning from our upcoming ICFE session, “Profitable Growth through Multi-Unit Expansion“. Click here to get the prior article.
In my last blog I described the importance of having profit plans for both short and long-term, and how understanding your cost structure and the many uses of Breakeven PLUS can support a Profit Growth Mindset.
Today’s article features Chapter 3, Race to Profit. With this chapter, learners practice using Breakeven Plus to forecast the amount of cash required to keep a location operational until it is profitable. We call it a race to profit because you MUST cross the profitability threshold before you run out of cash.
How many months will it take to turn a profit?
Multi-unit investors know this is one of the most important questions they must answer.
Why? Because this timeline determines how much cash a new business or location will burn.
Losses are expected during the startup phase because it takes time to build the volume required to break even. The quicker you reach breakeven, the less money you will lose. To fund these losses some multi-unit investors believe they can rely on a credit line to make up for anticipated cash shortages. Unfortunately, this thinking can lead to a trap. Even if the location turns profitable in six months, it may be 18 months or more before it has “earned back” enough profit to replenish the cash consumed by the startup losses. A short-term credit line requires that a loan rest (be paid in full for at least 30 to 60 days) at some point during that year. Don’t set yourself up to fail. Plan for cash AND profit.
Have the Right Plans
To avoid running out of cash, we recommend arming yourself with these four things:
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A sales plan
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A profit plan
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A cash flow plan
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A financing plan
Building the Sales Plan
A sales goal is not a sales plan. Determining the sales needed to reach your Breakeven Plus is a great way to establish the sales goal. Your sales plan describes what you’ll need to do to drive the sales. There are three basic ways to increase sales:
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Gaining customers
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Prompting customers to buy more frequently
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Prompting customers to spend more each time they buy
An actionable sales plan identifies activities for the sales, marketing and customer service teams that attract customers, increase purchase frequency and lift the average ticket. To make the plan measurable, select some quantifiable measures, Key Performance Indicators (KPIs,) that measure the activities that drive success. KPIs are great tools because they communicate expectations objectively, allowing you to measure progress towards the goals and change course if you’re falling short.
Chapter 3 covers these steps in more detail by describing how to:
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Select leading Key Performance Indicators to measure the three ways to increase sales
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Plan the activities required to reach monthly sales goals that will yield the target profit
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Establish a cadence for monitoring KPIs and providing feedback to keep your team on track
Plus, Chapter 3 covers the steps for developing your monthly profit and cash flow plans along with tips for structuring debt and securing the financing you need.
How Can Franchisors Help?
Franchise professionals attending our workshop (see below) will identify strategies to help franchisees develop the four plans essential to winning the race to profit. To identify whether your franchise system is doing all it can to build a winning franchise system, take the Race to Profit Self-Assessment.
If your score is less than 100%, this workshop is for you!
Driving Profitable Growth Through Multi-Unit Expansion | Saturday, February 26, 2022
This pre-IFA conference workshop is hosted by the Institute of Certified Franchise Executives (ICFE). Attendees earn 200 CFE Education Credits. Learn more about the session, including registration details here.