Cashflow Blog

Franchising is possibly the most successful business model ever invented. The survival rate of franchises is far higher than that of stand-alone businesses. Is it possible that there is a lesson to be learned from the way in which franchises operate that could be applied to small independent businesses to improve their profitability and likelihood of survival? The answer is an emphatic YES. The fundamental principle of good management that franchisers have put to such good use is available to any business owner – it’s SYSTEMATISATION.

Think like a franchiser

The key to systematising your business is to think about it as if you were turning it into a franchise. Entrepreneurs who set out to turn their business into a franchisable operation know that the core thing they need to get right is to develop foolproof operating procedures. The franchisor isn’t going to be there to watch how each one of their agents prepares and cooks the pizza or washes and grooms the family pet. Central to franchising is the repeatable production of a high quality product or service experience for the customer without the oversight of the franchise manager. The only way a franchisor can guarantee that happens is to train their agents to go through every process in a systematic manner. If it’s preparing a sandwich, then everything from the way to cut the bread to how and when the condiments are added is dictated and taught from a system developed by the franchiser The success of individual franchise outlets is the best advertisement for the soundness of this approach.

Systematise the right things

First things first

Systematising may seem like a daunting job but not every process needs to be done at once. The key processes for your business are those that touch on product quality and customer service standards. Get those right first. Back office routines that don’t directly touch on these such as handling payroll, bookkeeping and marketing can be considered later.

Some processes can be systematised simply by buying a training package, for instance, telephone technique. Others can be systematised by creating templates, standardised forms and checklists so all team members go about a task in a consistent way. And some processes, such as payroll, may be better off being outsourced to ensure they are done in a systematic manner.

Write it down

Franchises are successful for a very simple reason – each one has identified a set of customer winning practices and developed operational methods for consistently replicating them. Any business prepared to exert the necessary discipline can benefit from systematisation in exactly the same way as franchisers do. The payoff won’t only be in terms of profit. Systematising a business allows it to run without requiring your constant intervention or always answering employees’ questions about how things work. It can improve your peace of mind as well as your bank balance.

Use realistic projections

Don’t underestimate costs

Petrol, travel, raw materials, rent – all costs increase over time. A projection of costs at current year value will result in budget blowouts.  It’s wiser to make a best estimate and then increase it a little. If the actuals do end up coming in under projection you will have provided a little bit of ‘fat’ in the budget to cover the odd unanticipated contingency. You might even add a ‘miscellaneous’ line item to the budget to handle those unknowns.

Question every expense

Preparing a budget provides the perfect opportunity to consider what value for money you are getting from the costs you are incurring. Is it time to change the petrol powered work vehicle to a hybrid? Look at raw material substitutes? Move to a VoIP phone service? Also look for any expense items that could be eliminated. A penny saved is a penny earned!

Factor in cash flow

Incorrectly projecting cash flow will turn the best budget into a fiasco. In virtually every transaction there is a lag time between the finalisation of the deal and actual cash collection. This time lag has to be built in when preparing a budget – you may expect to sell goods to a certain value in Month X but that doesn’t mean the value of those sales will be in your bank account in Month X. This doesn’t present a problem if the budget allows for it. When it’s not factored in you can run into serious cash flow problems through spending money you don’t yet have.

Allow for your tax liability

Don’t forget your likely obligations to the taxation department. Sales income will ultimately be depleted by sales tax, various other state and federal taxes and employee withholdings. Fail to account for these and you run the risk of budgeting for future projects that you aren’t going to be able to afford.

Keep the figures current

It’s easy to let the budget become just another document gathering dust on the shelf. Plugging in the new figures each month, considering how actuals are tracking against projections and what that means in terms of what you need to do takes a lot of self discipline. But if you don’t do it, you’ve not only wasted the time and effort you put into creating the budget, you open the path to fiscal irresponsibility and wasted opportunities as off-the-cuff purchase decisions send expenses out of control while unexpected income sits in a bank account when it could be put to use to improve operations.