This post continues my discussion with franchisors and franchisees (and others running multi-location businesses).
The fact is…
- Ultimately, success in business comes from profitability and cash flow
- In a multi-location business, the profitability and cash flow that creates success starts at the location level
- Franchisees in a specific system are all running very similar businesses
- It's weird to be in a system of hundreds of franchisees running very similar businesses and not have frequent, comparative, action oriented financial data so you know exactly where you stand on the critical drivers of financial success
So let's say you are a franchisor and you have decided to end the weirdness. J
You want to implement a plan to create rankings, comparisons, and benchmarks that franchisees can get excited about. You want to provide information to help them drive both profits and cash flow higher at the location level.
Here's how you get started.
1. Demonstrate Value in Advance
It's incredibly important that you show franchisees examples of the reports and comparisons they will receive before you ever ask them to submit data. I can't overemphasize how important this step is.
They need to see very clear examples of the rankings, the benchmarks, the key performance measures, and the improvement opportunity calculations so they can answer the all-important question "What's in it for me?"
In fact, this is a beautiful opportunity to score big with franchisees if you do it right. It all starts in how you introduce the project. In one case, a franchisor put together a great presentation. They were hoping to get positive feedback from a select group of franchisees so they could get rolling. What happened instead surprised them.
Not only was the feedback overwhelmingly positive, franchisees were standing up saying it should be required that every franchisee provide their financial data.
So the franchisor was able to turn the tables and say "No, it will not be required of every franchisee. Instead, only those who provide financial data will get access to the reports." They were able to get incredible buy-in from franchisees as a result.
2. Key Performance Measures
You want to put the focus on the key performance measures that define success in your system. Oftentimes, franchisees are overwhelmed by the financial side of the business. They struggle to distinguish between the important and the trivial.
You become the hero when you help franchisees laser in on the key performance indicators/drivers. You're helping them zero in on the target so it becomes easier and easier for them to grow and improve their business.
Your measures could include…
- Average ticket
- Customer retention rate
- Inventory turnover
- Cost of goods sold %
- Personnel cost as a % of sales
- Marketing cost as a % of sales
- G&A cost as a % of sales
- Return on assets
- Return on equity
- And more…
Every franchisor has a different set of key performance measures. Make sure you think through and determine the measures that are critical to success in your system.
3. Financial and Non-Financial Data
To accomplish the objective we just discussed in step 2, you have to include both financial and non-financial data in your comparison and benchmarking results.
The financial data will include the franchisee's financial statements. The non-financial data will vary depending on your business.
For a retailer, data from the POS system is critical for calculating average ticket, average items sold per customer, customer frequency of purchase, customer retention, etc.
One franchisor had almost 90% of franchisees on a POS system where they had central access to the data. They were able to extract that data from the system so we could easily import it into our ranking and benchmarking software.
This really cranked up the value of the reports for the franchisee and the franchisor. Why? Because now the franchisee's had visibility into the key drivers of sales and they could easily see where they stood on those measures against everyone else in the system.
They were amazed at the levels others had achieved in average ticket and items per ticket. And they could see how even a small improvement in each of those measures would produce an exciting increase in their sales and profitability.
4. Common Format
Now you have franchisees excited about the information they will receive, you've determined the key performance measures, and you have identified the financial and non-financial data required.
Here's the challenge. It will all break down if you don't have a repeatable process for getting the data into a common format for analysis and reporting. This is one of the big reasons franchisors struggle with gathering and providing meaningful financial information to franchisees.
Franchisees all have a little different (sometimes dramatically different) chart of accounts. Their chart of accounts may start out as the "common format" but it quickly morphs into something very different over time.
And while many franchisees today use QuickBooks, there are still a variety of accounting systems being used throughout the system.
You need software that maintains an internal "map" that automatically maps the franchisee's chart of accounts to your common chart of accounts. That allows for importing and makes it possible to create rankings, comparisons, and benchmarks in a common format.
This also makes it possible to calculate and present the key performance measures consistently for everyone.
5. Electronic Format
The old way of getting financial statements by email (or fax in some cases) and trying to force selected information into spreadsheets is a dead end process (even if you outsource it). Its labor intensive, prone to serious error and inconsistency, difficult to update and maintain, and takes forever to complete.
You have to have a process that is repeatable and can be automated. And that means you have to be able to gather the data electronically. The good news is that almost every accounting system today can export financial statements almost as easily as it will print those same financial statements. (QuickBooks makes it amazingly simple.)
Caution: Getting the data electronically is not the same as asking the franchisee for a copy of their actual accounting system files.
I have seen what happens when a franchisor, for example, asks franchisees to send their QuickBooks file to them. (In effect, the franchisor is asking for access to transaction level data, detailed payroll data, and other transactions that many franchisees will resist providing.)
The good news is you don't need that level of detail to provide the rankings, comparison, and benchmarks. All you need is the basic financial statements exported from the franchisee's accounting system so you can import the data into your system using your common chart of accounts.
It then becomes much easier to update your benchmark and comparison data every month, quarter, or year.
The most powerful tool I have found for accomplishing this objective is SurvivalWare.
Steps 6 – 10
In a future post I'll walk you through steps 6 through 10 so you can implement a plan to create rankings, comparisons, and benchmarks that franchisees can get excited about.
There's just too much riding on financial success at the location-level to continue flying blind.
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