Those pondering a future in franchising face many important decisions. Beyond nuts-and-bolts basics such as raising capital, identifying a brand that fits, and completing the paperwork, are other â€“ just as important â€“ factors to consider. One such topic is what's known as unit economics.
Anyone who has ever cracked open a business school textbook understands that the bottom line of the monthly financial statement of any company should reflect profitability â€“ if the company is to survive. When the numbers are in the black the business is generating more than it's spending. It's simplistic but effective. But there can and should be a more sophisticated approach to operating a franchise in a fiscally responsible way.
Some entrepreneurs get involved in businesses without employing a proper system to help them keep a watchful eye on what they're earning and what they're spending. Managing day-to-day operations can be so time-consuming that it leaves little room for financial analysis. Or perhaps key individuals lack a basic understanding of how to read and interpret financial statements. Poor financial management skills can prove costly.
Successful multi-unit franchisees realize the importance of keeping their eyes focused firmly on the bottom line, and they put in the time to understand and continually analyze their financial statements. In other words, they keep a keen watchful eye on their unit economics. If you're considering franchising, this is another important step you should take. As you evaluate franchise brands, consider that many franchisors are now encouraging their franchisees to evaluate their unit economics as a part of their daily operations. Some are offering their franchisees just these kinds of tools to manage their expenses and revenue in a manner that benefits not only the franchisees but ultimately the franchise brand. As they say, "You can't manage what you don't measure."
As a rule, look for franchisors that provide their franchisees with some kind of financial training and resources (computers, software, standard chart of accounts, etc.). The net result benefits all parties. What's more, when franchisors don't take the lead in helping their franchisees better understand costs and revenue, they're only asking for trouble from franchisees who most likely will be under-performers, which in turn will lead to poor validation and slower system growth for the franchisor.
The concept of unit economics has been growing, in part, because of the emergence of sophisticated data collecting and analyzing technology tools. Computer programs can now track unit and system revenue, expenses, and beyond, and compare the variables in all sorts of ways. And it's no longer just a monthly financial report, but rather, up-to-the-minute stats that can be analyzed by franchisees daily. Smartphones even allow on-the-go franchisees to review their numbers wherever they may be. Tracking financials and managing unit economics are all part of a growing sophistication within franchising.
One unit economics trick that many franchisees rely on is what's generally referred to as a scorecard. A scorecard provides a quick one-page overview of the most critical financial data about the unit. It's a way to boil down the most essential cost and revenue numbers into a report that helps franchiseesâ€”and their team membersâ€”manage at a glance.
There's one more advantage to utilizing a unit economics management strategy. In good economic times or bad, unit economics reporting is not just a concept for better management of your franchise locations and improved profitabilityâ€”it's something your friends at the bank want to see, too, if you have any hope of borrowing money as you grow into the future. Strong unit profitability numbers will reduce a franchisee's risk as measured by lending institutions.
If you're seriously looking at a future in franchising, you'll most certainly want to gain an understanding of and rely on unit economics to get the most out of your business journey.
19.3: Budgeting Skills for Franchisees
20.2: Financial Guideline