In the first two articles in this 3-part series, we established the financial blueprints for these possible pathways to growth:
- Growing your core business (organic growth—same services, same territory)
- Expanding your range (more products and services, same territory)
- Expanding your territory (extend your geographic region)
In this final article, we focus on building a financial blueprint for expansion.
So what is a financial blueprint? Simply put, it is a companion to your growth strategy that details the measurable goals for activities that, if achieved, will yield the results you seek. Your financial blueprint for growth demonstrates how the math pencils out for your strategy. To set actionable goals and measurable milestones for each strategy, you must do the math.
Make a cash flow plan
A franchise investor opening their second unit has an important advantage they didn’t possess when opening their first: real financial information. Unfortunately, they also have a distinct disadvantage if they think working harder makes their investment scalable. Leadership skills are essential. We’ll leave that topic for a future article. For now we’ll focus on the financial blueprint.
With the knowledge gained from operating the initial unit, predicting monthly recurring expenses should be simple, especially once the location is selected and the rental expense is known. For many businesses, rent and staffing make up 80% or more of total expenditures. For others, equipment costs also are important. All of these are reasonably predictable once you have some experience with the franchise system.
It is normal for a business to need a capital injection to support growth, especially when adding a new location. To obtain adequate funding, investors must predict how much money they’ll need, when they’ll need it, how much will be borrowed, and how it will be paid back. Unfortunately, multi-unit investors commonly plan for long-term financing for franchise fees, buildout, and equipment, but fail to plan for adequate cash flow.
A new location starts its life in a race to profit. That is, it must reach breakeven-plus (i.e., become profitable) before the cash runs out. The cash flow needed to support the race to profit is typically the most difficult financial factor to predict. What’s the solution? You guessed it. Do the math.
All franchise investors should have a cash flow plan that details monthly sales, expenses, profits, and cash flow for the first 2 years of operation. Most franchisors offer a P&L budgeting tool, but very few provide a tool for predicting cash flow.
A P&L budget is essential in predicting the cash reserves needed to win the race to profit. Many profitable businesses have failed because they didn’t have enough cash to pay their bills. For the business to be “cash positive” it must earn enough profit to pay for growing inventory and accounts receivable, making long-term debt payments, adding equipment, and paying owner distributions. A robust forecasting template makes it easy to account for these things and shows the cumulative cash shortages so investors can plan for adequate cash reserves or borrowing.
Successful expansion requires a financing plan for long-term assets, pre-opening costs, for the cash flow needed to support operations until monthly cash receipts exceed monthly cash disbursements. Without a cash-flow plan, multi-unit investors can find themselves back at the bank asking for an increase in their credit line when pressure from the new (underperforming) location makes it impossible to stay current with bills for the existing (mature and profitable) location.
How can franchisors help?
Franchisors avoid helping with financial forecasts before a unit or territory is open because this can be construed as promising a specific financial return (i.e., an earnings claim). Thus, many franchisees move forward without a solid financial plan. How can franchisors help? Through financial education and benchmarking.
- Financial education. Provide knowledge, financial skills, and tools. This includes a solid understanding of the many uses of breakeven analysis, and basic budgeting and cash flow planning skills. Check out our website for a quick-start, scalable solution to get franchisees on the right financial track, right now. Many franchisors require this training be completed before the new location is opened.
- Financial benchmarking. Collect, analyze, and share information that demonstrates what “good” (and achievable) performance looks like at various stages of maturity. For startups, customer metrics such as average ticket price and purchase frequency are extremely helpful. Benchmark these sales metrics, along with productivity, profitability, and cash-flow ratios so franchisees can construct reliable plans and obtain the financing they need to succeed.
If you don’t have a tool to help owners create monthly budgets, make it priority to develop a good one in 2022. If franchisees typically have inventory, accounts receivable or debt, your tool should forecast both profits and cash flow.
Do the math!
The blueprint to profitable growth through multi-unit expansion includes a solid understanding of the expected cost structure (variable cost percentage and monthly fixed costs). Breakeven analysis is an essential skill set for all business leaders, but profit planning is not enough. To build long-term wealth and business value by adding territories, multi-unit franchisees must budget for monthly sales, costs, profits, and cash flow for at least 2 years. Download a sample cash flow planner from our blog called “How Does Cash Flow?”
Barbara Nuss is the president and founder of Profit Soup, a financial education organization specializing in providing services to franchisors and franchisees to enable them to trust their numbers, focus on priorities, make better decisions, and earn more profit. She can be reached at firstname.lastname@example.org or 206-282-3888.