One of the greatest advantages to joining a franchise system as a franchisee is that you are given proven templates by which to operate your business. For many of us just starting out in small business, the safety net of a franchise can be irresistible. No doubt, the success rate of franchisee businesses compared to independent operators speaks for itself - over 80% survive their first 18 months of operation. More so, another advantage over the independent operator is that a good franchise system can bring to table the collective mind and skills of a number of professions critical to success. These have been honed over many years and proven to work. In other words, a well structured franchise system is a blueprint for a franchisees success.
Sometimes a franchise systems' greatest strength can also be one of its greatest weaknesses when applied to different levels within the chain.
Franchise chain financial controllers need to monitor a large network encapsulating anywhere up to several hundred retail stores. Their requirements are to delicately pull the financial chains of a broad spectrum of stores onto one financial model, for the purpose of finalising a financial year budget for the consumption and aims of Head Office. Their perspective is on a macro level, and integrates the broad decisions of the corporate executive. For ease of understanding, the financial models they work with are devoid of the intricate analysis or customised breakdown required by a franchisee to ensure their success and continued sales growth. It is near on impossible for most financial departments to integrate the desires of the executive into each individual store budget. It is not their job to drill down to the store level and be able to financially gauge impact.
As well, head office staff such as area managers, business development officers, store managers, etc -- go out into the field with broad financial models which meet the requirements of a group of stores, but not any one in particular. They simply provide a broad range of percentages by which a franchisee should group operational expenses. Head office staff often lack the time to build on the generic financial template and provide each franchisee with a detailed budget for their store - a personalised account so to speak.
So it is the job of the franchisee to develop the financial skills and create a budget model which will ensure that not only are the desires of head office are met, but at the same time is able to integrate the cost of these desires and the individual stores desires, and can also measure the impact they may have on store sales.
The reality is that the franchisee should learn to compose a detailed budget which can control costs and at the same time grow sales. If they then learn to couple a detailed budget with a three way cash-flow model - which ties in the Profit & Loss, Balance Sheet and Cash-flow Statement - then each individual franchisee business would be unassailable. From experience, the few who have done so have gone on to lead highly successful businesses, knowing exactly what lies ahead on the road to financial freedom. By learning these things, a franchisee clears the mist from the crystal ball, and gains clarity of purpose.
The first step in gaining clarity of purpose in your business is to develop a financial budget for your business which is simple, but not simplistic. As I indicated earlier, simplistic financial models used for the fast consumption of head office are actually at cross-purposes with the ultimate aim of the individual franchisee - that is to grow sales, often because they do not readily identify the components of an individual business which do that.
The greatest growth in sales I have witnessed experienced by franchisees has come down to first tutoring them in a novel way of looking at the standard budget template, and then making a few adjustments to the budget which constructs relevance to their business.
When I consult, my aim is to put the franchisee's operational expenses in perspective. I do this by allowing franchisees to understand the difference between real 'costs' and costs which are 'investments'. (This is a novel perspective on an old theme of budget drafting). A great number of franchisees have used the following ideas to successfully grow sales.
Let's look at a simple food and beverage retail store budget. Please note that I have purposely left out numerous expenses which would find themselves listed under 'Overheads', whilst I have included only a few pertinent categories.
As I said, this is a simplistic model.
Despite my opinion that such a budget is too crude to guide a business, nonetheless, I have seen many franchisees use such a simplistic budget template. Whilst it is generally accepted model by a number of franchises, it does not hone in on the full scope of factors within a business which do stimulate sales growth and increase profitability.
My belief it that a budget model such as the one above is flawed primarily because it treats ALL overheads (expenses) as a cost to a business, and coaches franchisees to think that increased profitability is gained through cutting costs.
Put yourself in the mind of the franchisee for a minute.
Every expense to the above business is listed a cost (overhead) on the above budget. When increased profitability is called for, quite naturally the business-owners mind focuses on the list of 'expenses' attached to the business. The easiest thing to do is to reduce expenses, and move dollars down to the bottom line. In fact such behaviour does not require any special talent, effort or increased analytical skills. Typically, the greatest cost savings are made in the first year.
But what will happen to this business every subsequent year?
For instance, forcing suppliers to provide cost savings of 10% across the board would add $38,000 more profit at the end of one financial year. Whilst this is an achievement it is rather short lived. The impact of such behaviour is most vividly felt in the second and subsequent years where the same amount of 'squeezing' brings diminished returns and noticeably reduced quality of service and/or product to customers, thereby adversely affecting sales. I have seen too many small businesses (and large) fall into this pattern and have the life choked out of them.
Curiously, many 'how to' business books focus heavily on this side of the ledger, proclaiming such methods as the way out of poor profitability, and many business owners follow this advice with monotonous regularity. Reading between the lines I believe all business books advocate controlling all expenses pertaining to a business, which is wise, but they do not advocate that a business owner aim for cyclical reductions to all business related expenses.
Slashing overheads is a time consuming task. And as I said earlier, doing so can serve to weaken the unique selling proposition of a business by cheapening quality of services or products. What's more, all customers have a threshold of how much dilution in service or product they will tolerate within a business. An annual drive to 'cut back' eventually sees a business reach that threshold. Unbeknownst to the owners, pushing beyond this threshold causes an 'avalanche' effect. Generally, there is a noticeable speeding up of customer desertion rates and an ever more rapid slide in turnover. I can liken this to seeing you are speeding toward a wall, and speeding up as you get closer. It is a scary experience which leaves most franchisees feeling absolutely helpless. For businesses going through this the end may be measured in months and for others in years - but what is certain is that all businesses on this drive do perish. Sadly, the many who then attempt to sell out before they 'hit the wall' also discover a double whammy - that is, as sales slide, so too does the capital value of a business.
The temptation is always there to slash overheads when sales don't seem to be growing apace. However, there is an alternative approach which builds structural health into a business and solidly grows sales. It requires developing a new perspective in thinking, a modicum of patience, and the belief that this alternative is also a time tested method (albeit by fewer proponents).
Back to our model.
In order to avoid the 'slash overheads' scenario from unfolding, a franchisee must be able to develop foresight and predict the consequences that continued carte blanch cut backs to overheads would have on sales. A simple maxim of mine for franchisees to remember is that "everything you do, think or plan will have an effect on sales - either positively or negatively". The role of the franchisee is to determine the ultimate effect which ANY action they undertake will have on sales. The ultimate aim should be to engineer cost savings whilst at the same time growing sales. With patience and careful study these supposed contrary goals can become mutually inclusive. Therefore we must be able to focus on engineering positive impact habits in our store which create sales growth. For as the old saying goes; "We cannot save our way to success. We sell our way to success". And we must keep this top of mind at all times.
As an example, what is it worth to spend days and weeks sourcing alternative food suppliers, sampling their goods, negotiating reduced prices if the 'cost' of doing this exceeds the direct saving? For example, I can conceivably spend a whole day on the phone, along with 2-3 days of follow up meetings with suppliers to save $400 a week on food supplies. However, if I valued my time at $50 per hour, what kind of saving would this be?
As a shrewd franchisee I should realise that this 'achievement' came at a further cost. By spending my valuable time searching for discounts, I have simultaneously taken my focus off growing sales, and cast my energy toward savings. If I add to this the likelihood that I must now be buying a cheaper quality food supply, then I should understand that the sales growth opportunity of my business will diminish substantially. This is simple to understand. As I indicated earlier, which customer wants to experience a continually reducing quality of product over the course of time due to a franchisees attempt at annual forced cost savings? Sooner or later customers desert for a better option.
Be assured that I am not advocating we ignore cost savings. What I do advocate is that any cost savings must be balanced with a true cost/benefit analysis. As a franchisee, we need to get away from the generic budget template which locks labour, cost of goods, rent etc at a particular percentage to turnover which must be adhered to. Instead we must become hell-bent on throwing our energies behind growing our sales, and focusing on what it will take to do so
Now back to my earlier example. If instead I spent one day thinking about ways to grow sales and 2-3 days on executing a promotional programme in-store, I could conceivably grow sales by 10% per month over the next few months. Using the above spreadsheet, if I implemented such a campaign in January, by April I would have generated $17,000 more in sales! Regardless of how you view this approach, it is more compelling than striving for cost savings at the expense of every other possibility.
Again, how do we achieve this?
As a franchisee we need to recognise that every item on our Overheads column IS NOT a cost to our business. Some expenses to our business are simply 'investments' which create our unique selling proposition, and allow us to leverage sales. We need to identify which are which. Secondly, we need to re-arrange our budget to reflect this differentiation, and slip in percentages which protect our Gross Profit margin.
So what defines a cost?
A cost to a business is anything which must be paid for, but does not directly affect sales. Rent falls into this category. It must be paid, but does nothing to improve (or decline) sales. A painting which you might purchase to put on the wall of your shop can be considered a cost. It does not affect sales directly. I am sure you get the picture (pardon the pun) and you can now go on to identify other 'costs' to your business.
On the other hand, some 'costs' should be considered valuable 'investments'. These are defined as any costs to a business which directly grows sales. In other words the more 'investment' into these areas the greater the return in sales.
They are not difficult to identify.
Typically, if we were to cut back on these 'costs' the result would be that top line sales are immediately affected in a downward direction. In general, staff is seen as a 'cost' to a business. But without enough staff, service and quality of your business suffers, and sales growth will be capped at a low plane. Worse still, sales may even begin to diminish due to repeated dissatisfaction experienced by customers. With careful consideration though, I will point out how staff can be considered an 'investment' once we add another important 'investment' line to our budget.
Whilst I can go on to site a number of other examples pertaining to individual stores, in a nutshell, if franchisees delineated between 'costs' and 'investments', focused their energy on budgeting measured increases in the 'investments', and simply controlled the 'costs' to their business, then the top line to their budget (Sales) would grow substantially. Sensibly, all items below listed as Overheads would diminish rapidly as a percentage of total sales.
And this provides a clue to how we can continually monitor the results of our actions, and not allow Gross Profits to ever erode. The answer is to include percentages to turnover in our new budget model. Speaking from experience, growing our sales is a far better and more profitable way of 'controlling' overheads.
Let us look a budget I would implement in my store. It is the same broad template as the one shown earlier, but I have re-engineered it to create a focus on the things which grow sales.
Again, I have left out a number of other line items, but note that the yellow highlight identifies the 'investments' of this business. The hope with this type of budget is to grow the awareness amongst small business owners that a commitment to quality in every part of their business is the ticket to greater sales.
In order to improve on quality of product, quality of service, and overall quality of business, a franchisee should look for ways of investing money (and time) into these yellow highlighted line items, which I consider 'investments'. By structuring this budget just so, any dollar increase in 'investments' should be accompanied by an increase in prices charged to customers. Customers are generally happy to pay whatever it takes to experience better quality of product and services, so long as the 'promise' generated by the higher price is backed with a quantifiably better product or service from any other like business in the local market. Ample testimonials and personal experience shows this to be true. So I say again, customers will pay whatever it takes to experience a real point of difference in the market place.
And if delivering on such a promise dilutes gross profit percentages, then prices have to be adjusted to protect our percentages. That is why I like to see percentages input into any budget. Admittedly, the first time a franchisee is asked to protect his/her margins, it takes a great leap of faith and belief on their part that they have done all they can to make their service and products second to none. When it comes to service or products, quality must be the only pursuit of the franchisee. But quality comes at a price, inevitably driving up cost of goods, which then must be reflected in a retail price adjustment.
That is another welcome focus of this model.
Chasing quality creates a real point of difference in the market place, which in turn grows sales. This creates an 'above average' operation, which will attract customers who appreciate an 'above average' experience. Generally they are happy to pay more so long as the experience is very different to other operations. Higher prices are simply the result of higher quality.
On the other hand, holding prices steady and diluting quality to protect existing GP is the approach of average operations, which attracts customers who are happy with an 'average' experience. The only problem with this approach is that the majority of other businesses are vying for the same category of customer, and lower average spend, so this kind of business must fight it out with all the rest. There is no discernible point of difference offered to customers at this level!
As I stated earlier, the above budget model encourages us to throw most of our focus on quality which in turn improves the top line, or sales, growth. In the long term, this is the only way to survive and profit as a going concern.
Now, let's turn our attention back to staff.
Turning staff from a 'cost' to an 'investment' is directly connected to the line item titled Training. It is a line item which rarely ever appears on a franchisees budget, but greatly determines the quality of the product range and service within a business. Training is a necessary expense to a successful business, and must be viewed as an 'investment'. Without training, staff will never be able to maximise the dollar spend of your existing customer base, let alone put a business in a position to grow its customer base. Ill-trained staff are very poor staff. And so long as they are poorly trained, they will always remain a cost to any business. Poorly trained staff also reflect badly on a business, the values of the business owner, and create a negative opinion of the business in the minds of customers. Poorly trained staff never can, and never will, grow sales. But staff can easily be forged into an 'investment' for a business. This 'investment' in training simply turns staff expenses into an 'investment'.
Another important reason why the training of staff benefits a business is that it creates a concerted programme for the growth of sales through the detailed focus on the needs of each franchise store, and what is required from all those involved - including the owner. In turn, this focus breeds self-sufficiency, which then breeds confidence, which develops customer service standards, which generates sales growth. As a point of reference, having dealt with over 650 franchised stores I remember only a handful who committed to an ongoing training programme for staff. Needless to say, the stores which had a structured training programme for staff experienced escalated sales growth. A structured training programme only emerged once these franchisees realised it was their responsibility (and financial burden) to incur this 'investment' rather than head office.
Training is the key to quality improvement at all levels within a business and enhances the 'quality experience' of the customer. Training enhances the perception consumers have of a business' product quality, again, serving to grow sales.
So, in case you have not yet grasped the degree of importance I place on the integration of training 'investment' in your budget model, let me use this example.
I liken small business to a team sport. We all know that in order to simply be allowed to play on a team, we must commit to a weekly schedule of training. We also know that any amount of training will not guarantee your team sweeping the field and winning competition trophy. Nonetheless, it is taken for granted by all that to reach a high level of excellence an intensive training schedule must be part and parcel of a successful team. And without labouring the point further, so must it be in a successful business - whatever its size!
Sales, efficiencies, quality of product & service, and profits can only be maximised through regular and effective training. It is a money wheel, the more a franchisee focuses on in-house training, the more returns on their investment.
In conclusion, each franchisee must create a budget which is customised to the local market their store finds itself in. It must be structured in such a way as to throw focus on growing sales. Franchisees should not, nor cannot, afford to rely on Head Office budget templates for their success. Doing so is a sure recipe for average results at best. Carefully crafting a custom budget for their business will create extraordinary results for a franchisee. It must identity what constitutes real costs and 'costs' which are actually investments. It must be able to create the belief that pursuing quality is the road to higher sales and profitability, and that the only vehicle to deliver that belief to the market place is training. A customised budget will allow a franchisee to straighten out the road ahead and self create substantial sales growth. Then they become masters of their own sales destiny.
For more information and copies of the actual spreadsheets, please contact George Sabados via Facebook url.
George Sabados is the worlds leading motivational speaker to major Coffee & Food retail and franchise chains around the world - having worked with over 700 franchised and 300 independent businesses since 1998
He motivates, inspires, and most importantly, instructs coffee & food focused businesses to generate explosive sales growth and profitability in the shortest time possible - his 3 levels of mastery guarantee massive change in 12 weeks!
George Sabados is a retailer first and foremost, and provides simple steps (based on experience of what works) to clients which immediately focuses a business - making it a stand out to customers, from competitors, resulting in instant local market leadership.
George Sabados' specialty is working with large franchise groups in the Food & Beverage sector - with a sterling track record of massive sales improvement with several chains.
George Sabados has been a leading figure in the global espresso movement from successful international barista, successful retailer, international roaster, international cupper, writer, public speaker and most importantly, coffee entrepreneur.
George Sabados is without peer in experience and outside the box thinking within the international coffee industry.
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