Franchisee profitability is undoubtedly one of the hottest topics in franchising today.
In an environment of ever increasing competition across all markets in which franchise businesses operate, there is great value in recognising the many small things that franchisees can do that can add up to a big difference in their financial performance.
David Campbell of Avatar Consulting is a renowned franchise profitability expert who hosts regular financial workshops at Griffith University’s Asia Pacific Centre for Franchising Excellence.
Known as ‘the metrics master’ for his more than 30 years of hands-on experience in working with franchisees to boost their bottom-line performance, David uses many practical tools to demonstrate the little actions that can deliver big gains in profitability.
At his regular Franchise Financial Essentials Workshops, this includes highlighting the ‘power of ones’ via the following three questions:
- Could you increase sales by one per cent?
- Could you improve your margin by one per cent?
- Could you reduce operating expenses or increase efficiency by one per cent?
David says he has never had a franchisee say no to any of these questions, but they are shocked when he explains that these three little ‘ones’ combined can increase a franchisee’s profitability by an impressive 26%.
This is just one highly-effective example of the way that David engages with franchisees to improve their understanding of the key financial figures underpinning their business. With this invaluable knowledge on board, franchisees are empowered to move forward on a successful path of ongoing profitability and growth.
According to David, boosting franchisee profitability can also be as simple as improving their understanding of the key profit indicators of their franchise business using the four forces method, comprising of: Thrust (Sales); Lift (Cost of Goods Sold + Margin); Weight (Operating Expenses); and Drag (Labour Efficiency).
“You need thrust in business to get off the ground. Thrust is what we’re able to generate through sales,” David says. “Lift in business comes from our margin. Too often people make sales but with low margin and it doesn’t work. The gross margin needs to be right.”
“The weight in business is the costs (operating expenses) and drag is the labour efficiency or lack of productivity (inefficiency). When cost and inefficiencies are greater than the impact of sales and margin the business will make a loss.”
“If cost and inefficiency equal sales and margin you’re breaking even and if sales and margin are greater than the impact of costs and inefficiencies then you’ll make a profit. The more sales and margin gets above cost and inefficiency the profit growth is exponential.”
Unfortunately, too many franchisees are consumed with confusion around basic issues of financial management and the number one equation that they usually don’t know is their breakeven point.
David says the breakeven formula is one of the most powerful financial management tools for any franchisee. Not only will the breakeven formula calculate the sales required to cover a certain level of fixed costs it can be used to calculate a specific range of targets in order to release the sought profit required.
How to easily calculate, understand and set your breakeven is a key topic covered in the Franchise Financial Essentials Workshop, where participants receive practical explanations on the crucial figures that will drive their bottom-line profitability. Central to this is the ability to understand a Profit and Loss Statement, Balance Sheet and Cash Flow Analysis.
Participants will walk away with a deeper understanding of the essentials of financial management for their franchise and the practical tools to immediately apply to their own business. The workshops are very hands-on and tailored to attendees, both single and multi-site franchisees.
Many franchisees enter the franchise sector for lifestyle reasons and to be in control of their own business destiny. But ultimately, it is a clear understanding of financial management fundamentals that will have the biggest influence on reaching these goals
Through its unique financial workshops, FranchiseED aims to demystify the complexity of working with numbers for franchisees in order to put them in control of their finances and future business success.
As part of its commitment to promoting best practice standards throughout the franchise sector, FranchiseED is at the forefront of providing franchise-specific financial education to help create more successful and sustainable franchisees and franchise systems. The Centre offers a wide range of franchise courses, both online and face-to-face, professional development events, online seminars, research reports and more. It is completely independent and impartial, there are no vested interests or selling of franchise systems. The focus is solely on education and professional development in franchising, including the foundation stones of knowledge for new entrants to the industry.