Did you know that your franchise holds lost treasure?
If the volume of your franchise sales has been rising quickly, or you have been purchasing new franchise units, your business may hold a particularly rich treasure trove.
As franchises grow, owners have to take advantage of more opportunities, handle more challenges, make more decisions, deal with more details. Smaller details are more often overlooked and shortcuts become more common. That’s when profits may begin slipping away. Late invoice submissions. Supplier pricing errors. Missed vendor discounts. Incorrect payments. Slow customer collections. These are all hiding places for lost profits.
Such transaction errors, collectively and cumulatively, can add up to substantial losses. Typically, business owners who hunt for these hidden profits can uncover anywhere from 2% to 10% of revenue.
Ready to look for lost treasure? Follow our five-step Treasure Hunt for Lost Profits -- and discover hidden riches…
Step 1. Take charge
The first rule of this treasure hunt is “don’t delegate; do it yourself.” The owner or other key company officers or directors must be responsible for initiating and participating in this type of treasure hunt. While it may be tempting to delegate some or all of these steps, the end result will be directly related to the personal commitment of the stakeholders.
So, the first step is: take charge.
Step 2: Draw a map
Caches of lost profits are typically buried within two process areas of a franchise operation:
1. between initial sale and accounts receivable, and
2. between supply procurement and accounts payable.
The best way to search for those treasures is to draw maps; diagram a flow chart of the process you employ to order and pay for supplies and another for acquiring and collecting sales. Be sure to include the points where transactions are passed from one individual to another or from one system to another. These are points where lost revenue is often discovered.
You might for example, take a few key items and trace them from start to finish: purchase order, sales invoice, shipping, receipt, collection. Identify who handles each step, how long each step takes, and how accurate is each piece of information generated along the way.
It’s important to keep in mind that while you may have automated systems for many of these steps, such systems generally reduce the risk of errors, but they certainly don’t eliminate them.
Step 3: Dig for gold
Now it’s time to dig for treasure at key locations within your flow charts; following are some areas where lost profits are often discovered.
Sale to accounts receivable
Compare initial sales to accounts receivable and measure what’s going in and what’s coming out. Look for discrepancies in the figures and for lengthy timelines. Then study what’s happening at each step in your flow chart. Here, for example, are some areas where profits frequently go missing:
- incomplete credit checking of new customers
- poor monitoring of customer credit limits
- slow invoicing
- time lag between shipping products and receiving payment
- poor monitoring of overdue accounts
- chronically late paying customers
- customer account statements with persistent outstanding balances
- slow bank deposits
Procurement to accounts payable
Profits lost between procurement and accounts payable are a result of diverse, and often random, causes: human error, complex discounts and allowances, fluctuating prices, poor documentation, large quantity of vendors, and so on. But there are some common locations for profit losses.
- imbalance between supplier discounts and interest costs
- missed/incorrect discounts, allowances, rebates, extended terms
- vendor pricing errors
- overstocked/slow moving inventories
- duplicate payments as a result of incorrect invoice numbers or processing
- documents other than invoices
- unreconciled monthly bank statements
- incorrect GST calculations
Because the causes of lost profits in the procurement to accounts payable process are often random, it’s advantageous to conduct regular reviews. What you discover may be different from one week to the next – but it will always be a worthwhile search. Franchise owners in the food sector should be particularly vigilant, because with a high volume of low cost transactions, there are many opportunities for profits to escape. One of our clients reviews an order summary each week following a shipment of supplies -- and every week he identifies errors. These errors – sometimes just a misplaced decimal -- would mean significant lost profits if he did not take the time to conduct this ad hoc review.
Step 4: Dig for information
While you are hunting for profits, it’s important to keep in mind your goal: a healthy bottom line. This means you need to look up every once in awhile and make sure you’re on the right path.
At least once a month, review your cash flow statement so you have a clear picture of all of your expense- and revenue-generating activities. Compare this with the budgeted results of your cash flow forecast for that month. Combined with the proceeds of your treasure hunt, you should be able to pinpoint both trends and isolated problems. Then you can deal with these before even more profits disappear – and are lost forever.
Step 5: Continue the quest
Lost profits are never a one-time occurrence. Just as your internal operations and the surrounding marketplace evolve, so too do opportunities for lost profits. That’s why you should make treasure hunts a part of your regular business routine. After all – isn’t finding hidden treasure a dream for every franchise owner?
Rick Chittley-Young, CGA, is a principal of BDO Dunwoody LLP (www.bdo.ca). BDO is one of Canada’s leading accounting and advisory firms, which helps entrepreneurs, family businesses, franchisors and franchisees succeed. If you have questions about this article or would like to receive BDO’s “Tax Factor” newsletter, contact Rick in the Oakville office at (905) 844-3206 or rchittley@bdo.ca.
