As readers may well know from my past articles, I was a banker for nearly 40 years of my working life. So, it may come as a bit of a surprise that generally I am not usually in to the details or numbers, unless they are important to me.
Having said that though Maths and English were my two strongest subjects, so whilst neither were enjoyed it appeared I had some sort of knack with them and passing the exams. I do think that my teachers in that subject had a great deal to do with it.
Of course, when running a business certain numbers and detail are extremely important and not knowing or understanding them could be your downfall. In this long career with banking obviously numbers were important and they will always be.
I was at the recent bfa Conference in Telford and Theo took to the stage to talk about data – essentially the numbers. Of course, it’s not the data in itself that is important but what it means.
So, what are the important numbers for your franchise?
When you are examining franchising for the first time what numbers should you be looking for?
Firstly, it is important it is to generate turnover/income/revenue from sales. With any franchise you will have costs to set up before you begin, such as the various fees and set up costs, perhaps for premises and equipment. A good franchise will be able to provide some indicative numbers for sales, though do be aware this could be an average so higher and lower figures are possible. When looking at those numbers you need to understand from the franchisor how they are derived. With a franchise in its infancy, it will be more challenging to know how accurate they are because the business may have very few or no franchisees and their figures might be based on when the business began many years before when times could have been more favourable or more challenging. Once you have the sales figure how is that calculated. For example, x products at £y price plus other aspects of that. The more products the more difficult this can become, unless there are many franchisees trading and who you can talk to about it.
You also then need to look at the costs to the business. These will either be fixed, so they won’t change like the monthly rent, rates, phone and other utilities or variable, such as labour/wages, travel, the cost to produce a product, etc.
From these two elements you can calculate both gross and net profit. Gross is the sales less the cost to produce them and net is gross profit less all other expenses. A profit after costs is clearly what the business should have, as it will normally be this figure that banks will use to calculate how much you can borrow. Typically, a multiplier and in some instances, they will be happy to use the sustained profit, which is the regular figure the business produces in year 2 and beyond, which makes an allowance for setting up and the sales increase during year 1. Very few start-ups will be afforded this retained figure as there is no proof it will happen – but it should be in a franchise where there is evidence from trading franchisees.
However, the most important number to know is your cashflow. Obviously, sales are needed and costs will happen but how does the cash flow through the business. If a business to consumer (B2C) franchise, such as a restaurant, sales will normally happen at the time of the transaction (or should do) and therefore profit and cashflow should be fairly similar. The challenge arises when you operate a business to business (B2B) when you may have to wait from a customer for payment e.g., they have 30, 60 or even 90 days to pay. In this scenario you will have sales and hopefully a profit but the cash does not arrive for up to 3 months. During this period, you need to calculate what costs you have and may well need your extra cash to cover it. Alternatively, banks may provide an overdraft. This is, or should be, a temporary solution with the timing of costs and income/sales. Over time the profits generated should mean less reliance on an overdraft. Of course, if the business continues to grow it may still be required but not indefinitely.
With B2B businesses it is of paramount importance to keep an eye on your customers paying on time or better still before they need to. These customers are called debtors. I recommend setting up a system to remind those customers when they need to pay. For example, at the end of each month send a statement of outstanding debt, send a reminder about their payment due a week before and another the day before. As soon as a payment is overdue phone and email seeking the payment.
This is just some of the numbers you need to think about as a franchisee and I will be picking up on this theme next month, including if any questions are raised.
