Boosting Unit Profitability

By: Steve LeFever and Rod Bristol
Published: September 24th, 2015

We're often asked, "I've been in this system four years. When should I start making a profit?" This is a disturbing question at best--as if profits were somehow time-sensitive: just wait long enough and, Presto!, profits. If only it were that easy. Here are some thoughts on improving your bottom line.

• A disaster waiting to happen. Unit profitability and performance are, at their core, a function of three key drivers: 1) financially trained franchisees, 2) an effective performance model, and 3) accurate financials. Whether owing to cost or priorities, many franchise networks are lacking in one or more of these areas. It is critically important that franchisees have the financial skills and knowledge to drive up both profitability and cash flow in their operations. How is this accomplished?
• Reach out and teach someone. Traditionally, if there are two people involved in a business, one knows how to make it and one knows how to sell it. The financial/management side of the business is typically left to the accountant, the banker, their spouse, or to no one. People just hope it works. Sadly, most discover that hope is not a strategy. Most franchisees receive excellent training for initial startup, operations, and sales/marketing. Financial training is often overlooked completely or delivered by the corporate accountant who reinforces the expectation that finance is "dull and boring." Franchisees need to learn to use the numbers to tell the story of the business, and know how to use their financial intelligence to develop a performance report card. It will clearly identify strengths and weaknesses--and point the way to developing a "spot on" action plan.
• What gets measured, gets managed: the three-legged stool. The performance model that has proven most effective in driving up unit profitability is a three-legged stool: 1) education, to provide the foundation, 2) benchmarking, to provide the yardstick, and 3) accountability, to provide the discipline. Built around the key term "measure," this process consistently drives performance improvement.
• Education beats shooting from the hip. There are many paths to a better life. Education happens to be the most reliable. At a minimum, franchisees need to understand the four linchpins of finance: 1) how a company makes a profit (i.e., break-even analysis), 2) how to develop and use a financial performance scorecard, 3) understanding the crucial role of the balance sheet in managing cash flow, and 4) managing the credit line and bankability.

An effective financial curriculum, such as our Profit Mastery, provides franchisees both the framework and the tools to make insightful decisions in a recovering economy, rather than simply "shooting from the hip."

• Benchmarking: you can't measure without a yardstick. Talk is cheap. Everyone has a story about how they're doing. Producing a financial benchmarking study cuts through the rhetoric, provides a performance report card for the network, profiles the top performers, and provides a reliable framework to measure best practices. A well-developed financial benchmarking process is an indication of both a maturing network and a professional approach to performance.

Financial benchmarking presents an unexcelled opportunity for networks to do what everyone talks about: work together. In the relatively few systems that produce timely, meaningful benchmarks, franchisees consistently experience measurable increases in performance--and regularly report these benchmarks as among the most valuable resources provided by the franchisor.

• The power of peer groups. Imagine a group of 8 to 12 franchisees meeting quarterly, twice in person and twice online, to share complete financial performance results that have been packaged side-by-side in a scorecard format. The group is led by a trained facilitator. Each group member prepares a concise situation analysis to present to their surrogate board of directors, the other group members. This is the basis for a performance group. One member likened the initial meetings as "getting naked in front of strangers," but added that it's "the most beneficial business-related activity I've ever undertaken." The bottom line: in networks that use peer performance groups, group members consistently outperform non-group members.
• Accurate financials: GIGO. For many franchisees, completing their financial statements is a major chore that leads to a sigh of relief: "My work here is done." The fact is, nothing could be further from the truth: the owner's job has just begun. Their job is to take these statements and, based on the story the numbers tell, evaluate their performance and chart a course for the future.

Sadly, this management perspective is often sidetracked by faulty financial information. Without accurate and timely financials, you become a member of the Christopher Columbus School of Management. When Columbus left he didn't know where he was going, when he arrived he didn't know where he was, and when he returned he didn't know where he'd been.

The good news? It's never too late to focus on the unit profitability and cash flow that foster performance and growth. As a franchisee, you have invested your capital, time, hopes, and dreams in your company. Every month you send a piece of your bottom line--yes, your bottom line--to your franchisor, which becomes their top line. It is in everyone's best interest to drive your bottom line up by finding the tools and resources proven to be effective in doing so.

Steve LeFever is the founder and chair of Business Resource Services (BRS), a Seattle-based consulting firm that provides financial management education, network benchmarking, performance group facilitation, and bookkeeping services for closely held businesses under its Profit Mastery brand. Rod Bristol is senior vice president at Profit Mastery. Learn more at www.profitmastery.net, 800-488-3520 x14 or write to lefever@brs-seattle.com.

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