Franchisor Health Check
While monitoring the health of franchisees, it’s important not to overlook the health of the overall franchise system. Following are some preventative remedies.
- Ensure financial statements are produced as quickly as possible every month and compare with profit and loss forecasts and projected balance sheets to determine whether you are meeting objectives.
- Accelerate your own monitoring; track key financial ratios for the franchise system on a monthly basis to assess profitability and liquidity: net profitability, average number of days for payables and for receivables, debt/equity, current assets/current liabilities and inventory turnover.
- Review gross profit margins and check for profit “leaks” in the system, especially related to labour and fixed assets. Review gross margins by product line as well to determine whether costing or pricing may need adjustments.
- Know your cash position every day. Prepare cash flow projections for the coming year, including conservative plus worst-case scenarios and compare these forecasts every month with cash flow statements.
- Ensure back up financing is in place; reserves should be available and accessible. Also, in this credit climate, don’t assume that you will be able to renew existing financing arrangements when they come due. Line up alternative lenders – leasing companies, factors, asset-based lenders or government entities such as the Business Development Bank of Canada, whose funding and mandate was expanded in the 2009 federal budget.
- Reduce or eliminate expenses that create little value; instead, direct capital to projects, products, and markets that enhance profitability.
- Conserve capital; be very cautious with expansion – fast growth can quickly deplete the capital cushion of a franchise system.
- Conduct weekly management team meetings to develop and monitor contingency plans for the franchise system and for franchisees.
- Review marketing effectiveness to ensure there is a direct correlation to increased sales; identify a target return on investment for every campaign and change what does not deliver.
- Ensure the continuity and affordability of your supply chain; conduct regular evaluations of each supplier’s ability to deliver, pricing and quality.
- Review the franchise concept to determine whether it may require retooling or whether its appeal and value is holding and can carry the franchise system through an extended downturn.
