Franchise business plans are worthless without monitoring

Franchise business plans are worthless without monitoring

Everybody knows that business plans are essential to prepare for the future success of a business.

Bankers know this. Accountants know this. Governments know this. Franchisors know this. The person in the street knows this.

And yet many people who start in business for themselves as franchisees or independent operators, who also know this, choose not to prepare a business plan.

So why acknowledge that a business plan is necessary, and then fail to produce one?

The reason is surprisingly simple – nobody checks them.

Without a business plan, a bank is unlikely to lend the funds to start up a new venture. However, if a borrower has more than enough real estate or other security to back the loan, a bank may not look too closely at the details of the plan, let alone hold the borrower accountable to its performance (until of course it’s time to call in the loan).

Accountants are trusted advisers who are primarily called upon to reconcile what we spend with our tax obligations to the government. This is a necessary but rearward-looking service. It concentrates on what we have done, not what we will do.

By definition, a business plan is the stated objectives of an organisation. It is what it will do. Accountants are great for looking backwards, but only the potential business owner themselves can have the best insight into what their future will look like.

Governments love business plans. The website www.business.gov.au has terrific resources available online free to potential business start-ups to help them plan their new ventures. Governments love business plans because the more planning that goes into a new venture, the less likely it is to fail (with all the social and economic problems that flow from business failure that governments are expected to somehow fix).

Franchisors love business plans because franchisees increasingly need to complete them as part of the recruitment process.

Often though, these plans are based on little or no meaningful information because the franchisor doesn’t want to make any representations to induce the franchisee into buying the franchise for fear of being sued later.

So potential franchisees put together business plans that might have unrealistic sales projections, inaccurate cost assumptions, and which generally will be limited in their value to either franchisee or franchisor.

Finally, the potential small business intender themselves knows the importance of the business plan, but puts one together only to meet a requirement of the bank, the franchisor or both, and then never looks at it again.

And why do they never look at it again? Because most of it was irrelevant to start with.

A typical business plan by a franchisee regurgitates a lot of general information about the franchise itself, especially the operational aspects of the business which are detailed at length in the franchisor’s operations manual.

Likewise the market information, products and services, etc, will also be outlined in the franchisors operations manuals and materials.

So a franchisee’s business plan should really concentrate on that which will be different for their business in their location, and this comes down to competition, the different quantities of products or services they are going to sell as a result of how well they are promoted, and at a cost and on terms that will allow the franchisee to be profitable.

This leads to the relationship that exists between the following core business plan elements:

  1. The marketing plan;
  2. The sales mix forecast;
  3. The cashflow forecast;
  4. The profit & loss statement.

The marketing plan

The marketing plan is the schedule of promotions that is designed to stimulate sales.

Under this definition, simply being open for business may stimulate sales, however this is usually considered an operational necessity and not a marketing innovation (however some business owners fail to make this distinction and expect customers to flock to them simply by opening their doors).

At its simplest, a marketing plan outlines what activity will be undertaken when, targetting who, and at what cost, to stimulate sales.

For an independent business owner, this may only be considered after a detailed assessment of the market, the competition, and the choice of governing strategy to deal with competitive challenges.

In a franchise, the choice of governing strategy has already been determined by the franchisor, and after taking local competitor and market factors into account, the franchisee should be able to concentrate on deploying the franchisor’s pre-approved marketing tactics in their plan.

An extract from a marketing plan for a retail outlet might include the following:

 

Opening

March

April

May

June

Community Newspaper Ads

Activity

Full page per issue

Half page per issue (Version 1)

Half page per issue (Version 2)

Half page per issue (Version 3)

Half page per issue (Version 4)

Quantity

4

4

4

4

4

Cost per unit

$1,000

$600

$600

$600

$600

Total cost:

$4,000

$2,400

$2,400

$2,400

$2,400

Table 1: An extract from a sample marketing plan

The marketing plan needs to be as detailed as possible, allowing for multiple simultaneous marketing activities (rather than the solo sample shown here).

Many franchisees fail to make the connection between a marketing plan and sales. Some expect that the franchisor’s brand alone is enough to attract customers but fail to understand that by applying their own efforts to augment the power of the franchisor’s brand, their sales could increase exponentially.

Where franchisees rely only on the franchisor’s brand to attract customers, this is known as “free-riding”. Franchisees who free-ride generally fail to capitalise on the potential of their franchise, resulting in poor financial outcomes and lower overall satisfaction with their investment than franchisees who actively engage with the brand to conduct their own marketing activities.

The sales mix forecast

The sales mix forecast is the predicted volumes of products or services to be sold in any given period, and their contribution to revenue and costs.

 

Opening

March

April

May

June

Item: Kitchen Organiser

Number Sold

10

8

24

16

10

Selling Price

$48

$48

$40

$48

$48

Total Sales

$480

$384

$960

$768

$480

Cost of Goods Sold per item

$20

$20

$20

$20

$20

Total Cost of Goods Sold

$200

$160

$480

$320

$200

Table 2: An extract from a sample retail sales mix forecast

The sample extract from a retail sales mix forecast shown in Table 2 above shows the predicted sales of kitchen organisers from the opening of the store until the end of June.

Sales start well during the opening promotions, then taper off before more than doubling in April during the Mother’s Day promotions, and easing back during May and June.

This item would be linked to the sample marketing plan extract from Table 1, showing the clear relationship between inclusion of the item in the Mother’s Day promotions, and the higher sales in April and May.

Notice also that the item has had a special price applied in April to attract customers to the store in anticipation that they will buy other items during the same visit.

A similar forecast would be created for each other product or service offered by the business. Where there are a large number of products or services, these may be grouped into categories for ease of reference (eg. kitchenware, bathroomware, etc) in the sales mix forecast and for linkage to the marketing plan.

The cash flow forecast

Businesses that are profitable can still go to the wall without sufficient cash flow. This is one of the most important lessons for any business owner, and sometimes learned the hard way.

A cash flow forecast helps a business identify its future cash surpluses and shortfalls so that it can ensure it is capable of paying its bills on time and meeting its future required cash outlays (such as staff wages, for example).

In the sample cash flow forecast below, the retail business operates on a cash-flow positive basis. In other words, at the end of each month, its bank balance increases. However, the rate of the increase slows dramatically at the end of May, when the business starts paying rent at the end of the rent-free period (negotiated with the landlord as an incentive for the business to occupy that particular location).

 

February

March

April

May

June

Total

Income

 

 

 

 

 

 

Sales revenue

$42,500

$46,000

$54,000

$46,000

$44,000

$232,500

Capital

$10,000

 

 

 

 

$10,000

Sundry

 

 

 

 

 

 

Total Income:

$52,500

$46,000

$54,000

$46,000

$44,000

$242,500

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Cost of Goods Sold

$16,000

$18,000

$22,000

$18,000

$17,000

$91,000

Accounting services

 

 

 

 

$1,000

$1,000

Advertising

$10,000

$6,000

$8,000

$6,000

$7,000

$37,000

Bank fees

 

 

 

 

 

 

Electricity

 

$800

 

$800

 

$1,600

Equipment lease

$2,000

$2,000

$2,000

$2,000

$2,000

$10,000

Outgoings

 

 

 

$200

$200

$400

Rent

 

 

 

$5,000

$5,000

$10,000

Staff – Wages

$10,320

$9,200

$11,280

$9,320

$9,280

$49,400

Staff – Superannuation

$1,032

$920

$1,128

$932

$928

$4,940

Telephone

 

$250

 

$275

 

$525

Total Expenses

$39,352

$37,170

$44,408

$45,527

$42,408

$205,865

Cash surplus/(deficit)

$13,148

$8,830

$9,592

$3,473

$1,592

$36,635

 

 

 

 

 

 

 

Bank balance:

 

 

 

 

 

 

Start of month

0

$13,148

$21,978

$31,570

$35,043

 

End of month

$13,148

$21,978

$31,570

$35,043

$36,635

 

Table 3: A sample cash flow forecast for a retail business.

As a general rule, businesses which deal with consumers will have stronger cash flows than businesses whose customers are other businesses. This is because consumers will generally pay at the point of purchase of the product or service, whereas business customers often prefer payment terms from seven to 30 days, or longer. Deferred payment for goods sold, or services performed, can strain a business’ cash flow while it continues to pay its ongoing obligations for rent, staff wages and other costs in the meantime.

Additionally, seasonal variations in demand impact a business’ cash flow for better and for worse, and may require planning by the business owner to deal with most effectively.

The profit & loss statement

Finally there is the profit and loss statement. Unlike the the cash flow forecast which predicts the business’ bank balance at any given point in time, the profit and loss statement identifies the anticipated profit or loss of the enterprise at the end of a specific period.

For many Australian business owners, the annual P&L after the end of the financial year is less a measure of success, and more of an inconvenience to comply with tax reporting obligations.

But the P&L is important nonetheless. It provides a snapshot of business performance, and shows clearly whether or not the owner is making money, or digging a nasty hole for themselves.

 

XYZ Retail Pty Ltd

Projected Profit & Loss Statement for the period Feb-June, 201X

 

Total

Income

 

Sales revenue

$232,500

Less Cost of Goods sold

$91,000

Gross Profit:

$141,500

 

 

Expenses:

 

Accounting services

$1,000

Advertising

$37,000

Bank fees

 

Electricity

$1,600

Equipment lease

$10,000

Outgoings

$400

Rent

$10,000

Staff – Wages

$49,400

Staff – Superannuation

$4,940

Telephone

$525

Total Expenses

$114,865

Net Profit / (Loss):

$26,635

Table 4: A sample profit & loss statement for a retail business.

While the snapshot in this example shows only five months of trading, it provides a positive indicator to future performance and the likelihood of success for this venture.

It also demonstrates the ability to identify relationships between key items. For example, rent over the period can be calculated as a percentage of sales. Likewise, staff costs can also be calculated as a percentage of sales, and other expenses too.

This creates performance benchmarks that allow the business owner and their advisors to identify deviating performance when ratios move outside expected tolerances (for example when a business becomes overstaffed, forcing its wages costs outside the acceptable benchmark range.

And this is why business plans are so important

Because if we don’t measure the performance of a business against a plan, we may as well not bother to create a plan at all. And without a plan, how can a business expect to be successful?

Monitoring the business’ performance against the business plan is the same as regularly checking a map or GPS when undertaking a long road journey.

Although primary responsibility for this monitoring belongs to the business owner, franchisors should also be monitoring their franchisees’ performance against their plans, and using the benefit of the collective knowledge of the network advise and guide a franchisee back on track if they begin to stray from their plan.

This guidance may even extend to suggesting modifications to the plan even before the business starts, to ensure that it is realistic in its expectations for sales, costs, and cash flow.

A good business plan that is constantly reviewed against the performance of the business is essential to the success of any franchisee. A plan that is not realistic and not monitored against the business’ performance may only serve to provide a false sense of security right up to the point where the business becomes insolvent.

Which would you prefer?

Jason Gehrke is the director of the Franchise Advisory Centreand has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

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