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Finance matters

why finance matters in franchising

Carl Reader explains why it’s important for franchisees to keep on top of their finances

For most prospective franchisees, the administration involved in running a business is a new task in which they have little experience. Government red tape, legislation and franchisor requirements seem to dictate what is required. However, it is important to ensure that you  are on top of the finances of your franchises for your own success, as well as your  external obligations.

Many business failures are due to cash flow difficulties, and it is vital that you have a plan in place to make sure that you minimise this being a problem for your franchise. Without this, it is similar to driving without headlights – you will not have a clear view of the hazards ahead.

A vital step is to implement a bookkeeping procedure from the start of trade. Many business owners tend to leave the administration until the end of the year. By the time they collate their records for the taxman, it is too late to address any issues that might have been discovered during regular monthly bookkeeping. Fortunately, diligent franchisors regularly review their franchisees’ financial performance - although I would suggest that being on top of this administration would help you, as a franchisee, address any problems even sooner.

Using a computerised bookkeeping package will help simplify this process, and reduce the time required to maintain your records. If your franchisor does not have a recommended system, then speak to your accountant about the packages available. There are a number  of online and offline packages, and each package has different advantages that suit different businesses.

A benefit of using a computerised system when compared to manual bookkeeping is the ease of reporting. Often, financial difficulties become evident when certain KPIs (key performance indicators) are below target. The main reports that a business owner uses to monitor the performance of their business are:
• Proft and Loss Account – this is a report  which summarises the profitability of a business over a set period.
• Balance Sheet – this is a snapshot of the   net worth of a business at a certain point   in time.
• Budgets vs Actuals (Variance Report) – this is a comparison of actual performance against budgeted performance.

There will be KPIs from these reports, and also other operational KPIs, that will act as an early indicator of difficulties. Before setting the KPIs, you should ensure that you understand the contents of these reports, and that your bookkeeping system is set up appropriately to produce them. If you do not understand the documentation, you should consult an accountant who can help you understand the salient points in each.

Once you understand the reports, you should then identify what are the financialKPIs for your business, so that you know what figures to focus on. Other metrics that you should monitor include the break-even figure for your business (the level of activity to ensure that you cover all costs), and benchmarked overheads.

The level of benchmarking available is unique to franchising, in that you can see exactly how other similar businesses are performing, and review your performance against them. Your franchisor, or specialist accountant, should have this data from your network, and this information is extremely valuable when reviewing your own performance.

Carl Reader
Carl Reader is a partner at Dennis & Turnball Chartered Accountants & Strategic Advisors, based in Swindon.
For more information call: 01793 741 600

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