Increase Your Profitability
Benchmarking is a critical yardstick
Unit-level economics (ULE) is the latest fancy phrase for the fundamental concept of franchisee profitability. The old-school franchise concept of caring only about a monthly sales report and a royalty check and, if the franchisee was not profitable, reselling the territory in 18 months is dead. It was killed primarily by new private equity firms that won't touch a franchise network if they can't demonstrate that the franchisees at the unit level are actually making money.
There are three necessary components to driving up ULE in any franchise network. First, you have to improve the financial acumen of the franchisees by educating them, helping them understand that their profit-and-loss statement and balance sheet actually provide "management intelligence," not just financial data. The second component is benchmarking, which I elaborate on below. The final component is the "performance group" model, which holds individual franchisees accountable to each other to drive up their own profitability and cash flow.
It's not enough to know how well your business is doing now. Hopefully, you are meeting the minimum acceptable standards for financial reporting today: an income statement and balance sheet delivered to you on the 15th day following the close of business of the previous month, every month. Also hopefully, you actually take a look at the information that's presented to you and know if you're making money, losing money, have positive or negative cash flow, and have a clear understanding of your risk level as you operate your company. However, this is not enough!
How well could you do?
This is where a benchmark study becomes very valuable to individual franchisees and to the network as a whole. A benchmark study is a financial "snapshot" of a franchise network that allows individual franchisees to compare their operations with others of similar size and type. A benchmark study report helps franchisees answer important questions.
- How much more money could I make if I managed my cost of goods as efficiently as my peers do?
- How does my operating profit compare with others of my same size and longevity in the network?
- What specific action plans can I put in place to get my numbers in line with the profit leaders?
- How do my cash flow and liquidity levels compare with those of others?
- How much more cash would I have if I managed my receivables as well as my peers do?
- Am I making the most efficient use of my assets and equipment?
Benchmark studies contain performance ratios that focus on the financial relationships in a business, rather than just on absolute numbers, such as annual sales. In almost every benchmark study we produce, the annual sales leaders are not necessarily the most profitable businesses. In our benchmark study model, we provide two reports back to the network. The first is the Group Report, which lays out the entire network's profitability, measuring the typical operator against the top 25 percent. This gives the entire network a clear picture of where the opportunities are in a number of different financial management areas.
The second report is what we call the confidential Company Consulting Report. This report lays out the specific financial information of an individual operator against the typical operator and top 25 percent--and provides specific direction as to where the owner needs to focus their management attention to drive up their financial performance to match the top 25 percent.
Case in point!
We recently completed the first benchmark study for a small emerging franchise network. This is a "man in a van" concept with a fairly simple business model, using rolling stock as their primary asset. The report presented a "typical" participant measured against the "high profit" operators, and the results were stunning. Using round numbers:
- The high-profit leaders were not the highest sales operators.
- The high-profit leaders, however, had a 6% differential in gross margin over the typical operator.
- The high-profit leaders had an almost 3% differential in operating expenses over the typical franchisee.
- Finally, and most important, the typical operator had an owner's discretionary profit of 12%, compared with 22% for the high-profit operators.
What made the difference?
Paying attention to labor costs, monitoring employee hours, double-checking quotes to make sure jobs are priced properly and employees are not offering unauthorized discounts, making sure that your jobs are scheduled properly for maximum efficiency of labor and expenses--all these, and more, add up to the difference between a typical operator and a high-profit franchisee.
The benchmark study clearly provides the direction and focus that enables a franchisee to go from being just average to highly profitable. And, let's be honest, who do you think is happier: the franchisee making $60,000 a year, or the one making $150,000 a year (owning the same kind of business)?
Benchmarking is one of the tools that enables franchise networks to achieve those results. Contact me to see a sample of both studies.
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