Franchisors: You Gotta Know Your Numbers

Last week I attended the inaugural meeting of the Philadelphia Franchise Association.  It was a lunch meeting with about 30 minutes of networking at the beginning, a great Italian lunch (Maggiano’s), and a panel discussion afterwards.  The topic of this meeting was near and dear to my heart; “How your franchisees can make more money & you get better numbers.”

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Love Park in Philadelphia

Thanks to Tom Spadea of Spadea, Lanard & Lignana for organizing the event, and selecting such a great topic for discussion.

Marty Ferrill, CEO of Soft Pretzel Franchise System in Philadelphia, started off the discussion and emphasized how important it was to “know the numbers.”

The three panelists talked about how important working capital is to the success of new franchisees.  They all stressed how critical it is to get monthly Income Statements from the field.  I asked a question about Balance Sheets (after all – you need a balance sheet to monitor working capital).  The consensus seemed to be that you need to walk before you run – and the income statement was a good place to start.

One of the panelists, David Gould,  recalled how he used to be a field consultant, and the first thing he would do during a visit is look at the Zee’s Accounts Receivable.  Anything over 30 days, he would call and say “I’m from the corporate office, and I noticed you have a past due amount.  Can I stop by and pick up a check today?”  He said he collected thousands of dollars for his Zees, and was pretty popular among them as a result.

Another panelist, Dana Kline,  noted the importance of context.  So you’re collecting all these numbers.  Is a value good or bad?  The Zees need guidance on what defines good performance, and what is not so good.  I couldn’t agree more.

Someone from the audience asked about compliance:  “how do you get the Zee’s to report their numbers?”  Dana Kline said that you just have to make it part of the “system.”  Tell them, “This is just how we do things.”  Others chimed in that the franchisor  should make monthly reporting a part of the franchise agreement.  All agreed that feeding back useful information to the Zees was essential to achieving a high rate of compliance.

I talked to a couple of CPA’s in the audience who re-iterated how important Cash, Working Capital, and other Balance Sheet Data is to understanding the financial health of the Zees.  Plus KPI’s that involve data outside the accounting system.  One accountant mentioned to me that getting the data helps illuminate book-keeping problems.  Many Zees scrimp on book-keeping and often leave it to untrained family members.

Joe Caruso (head of the Capital Area Franchise Association) talked about the need to know about debt service and whether a Zee can cover it.  He cautioned that some of the debt may be outside the company books.  He cited the example of a franchisee that takes out a home equity loan to help purchase a franchise, and sees his mortgage payments double from $2,000 to $4,000.

One of the panelists reminded the audience that  success of the Franchisor depends on the success of the individual Franchisees.

There’s a great video summarizing the event with snippets from each of the 3 panelists, and interviews with members from the audience to get their reactions at the end.  I’m the one 2:25 into the video who doesn’t know how to tie a tie.

http://www.franchise-info.ca/PFA/2013/09/inaugural-meeting—panel-discussion—video.html

My takeaway:  It is critical for the Franchisor to actively monitor and analyze the financial performance of all Zees in the network.  It’s not easy, but it has to be done.  It’s a good thing there are tools like SurvivalWare that ease the burden of collecting financial information in a common format so that it can be properly analyzed.  The cash flow projections are icing on the cake.

Understanding Franchise Unit Economics – why is it so hard?

Most people look askance when I tell them that franchisors represent a key market niche for SurvivalWare.  Surely they have everyone on a centralized accounting system and it is just a matter of spitting out the right reports.  But remember that each franchise location is a separate business, with a separate owner, its own accounting system, and its own set of books.  Even if you do publish a common chart of accounts (and most franchisors do!), they morph over time in real world usage.

Why is it so difficult for you, the franchisor, to get a handle on franchisee profitability and cash flow?

…Because trying to get financials from franchisees has been like beating your head against a wall full of sharp razor blades (ouch)! 

…Because you quickly found that once you did get some financials faxed to you that it was a painfully slow and incredibly labor-intensive process (not to mention error-prone) to manually enter the numbers into a spreadsheet so you could see the data and try to understand it. 

…Because you realized you needed a “common format” for the financial information BUT every franchisee has a different chart of accounts, many use a different accounting system, the reports are all in different formats (some are highly summarized and some are very detailed), and someone on your staff has to make sense of that in order to enter the data in your “common format”. 

…Because you had a nagging fear in the back of your mind that the data “translation” process was not consistent or accurate. (The fact that you brought in a temp to do the work didn’t help your sense of concern, right?) 

…Because  you quickly realized there was no way you could gather monthly financials from franchisees because this process was way too time consuming and costly to even consider doing on any kind of regular basis.

I’d love to hear back how franchisors have tackled the problem – whether using SurvivalWare or some other tool. 

Here’s what the CFO of AlphaGraphics has to say about how they solved the problem.

Learn more about Franchise Analytics and SurvivalWare’s Cash Flow Software  by clicking on the links.

Shining the Light on Franchisee Profitability and Cash Flow

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I just got off the phone with Philip Campbell (my business partner and author of the book, “Never Run Out of Cash”).  Philip just got back from appearing on a panel at the International Franchise Association (IFA)  annual conference.  He said there was standing room only for the session – maybe 80 to 100 people.

 

Here’s how they promoted the session to attendees:

§         Learn how to improve franchisee profits and cash flow §         Focusing on KPIs (Key Performance Indicators)  You can’t manage what you don’t measure §         Learn how to make franchisees WANT to share their P&Ls with you.  §         Learn how to create healthy internal competition amongst franchisees, for record breaking performance. §         Learn how to accelerate the growth of your system with the right people  §         Learn how to make all of the above work to the advantage of your franchise sales process 

Philip has made available his slides and a sample Profitability Model written in Crystal XCelsius to illustrate some of his points at this URL:

 

http://www.franchise-analytics.com/ifa/

 

Philip preaches that just giving visibility to the key measures is a step in the right direction.  If you start watching a particular measure, you will make sure it improves.  I’m going to test that theory by posting my weight at the top of each blog entry starting today.  If it doesn’t start going down over the coming weeks and months, then we know that Philip’s theory is all wrong.