We've all heard the doom and gloom economic forecast for the immediate future. Some of the key reasons for businesses failing are undercapitalisation, poor stock management, poor credit control, poor control of costs and cashflow issues or inadequate profit margins.
All of these are examples of either profitability management or liquidity management. It's critical for us to reinforce with franchisees that the numbers don't lie and a simple understanding of them can make planning significantly easier and, ultimately, their businesses more profitable.
Franchisees need to understand their financial performance as this is an outcome of their overall business plan. So here's an overview of finance 101 for non financial franchisees whether you're involved in running a retail or service based business.
Step 1. Financial objectives
The two primary areas of financial management focus upon profitability and liquidity. The financial management process produces information for decision-making purposes. Businesses face decisions of a financial nature in the three areas of investment, financing and distribution.
This means that the processes of financial management are directed at the management of the businesses, operating activities to see that it maximises profitability by ensuring that every dollar invested by the owner is put to its most efficient use to get the best return. It is also essential that, as a minimum, the business is always able to meet its obligations as and when they fall due.
Step 2. Key reports
There are two main financial reports that help franchisees adhere to the objectives of financial management (profitability and liquidity) and to assist with decisions about investment, financing and distribution. These reports are profit and loss statement and the balance sheet.
Step 3. Budgeting
Budgeting can be defined as the translation, into money terms, of a business s plans for the future. Budgets are the formal statement of a franchisee's goals and objectives for a specific period of time and are normally done for the year ahead and reviewed every month.
Budgets are the formal statement of a franchisee's goals and objectives for a specific period of time
Budgets cover revenue plans, expense plans, asset requirements, financing needs, and staffing. Forecasting is more dynamic and should be done at least monthly.
Step 4. Analysis
Financial analysis has two elements, the actual analysis and its interpretation, and its main purpose is to assess and report on the profitability and liquidity of your business. Financial analysis enables franchisees and store managers to concentrate on the critical factors in the financial stability and success of the store. Financial statements contain a wealth of detail about the business and frequent monitoring of results (say, monthly) can ensure problems are identified and handled in advance.
Five ways to fail
The main reasons for business failure are
- Undercapitalisation
- Poor stock management
- Poor credit control
- Poor control of costs
- Cashflow issues or simply inadequate profit margins
This is an edited extract from Finance for the non-finance business owners, part of the Franchise Careers Education Series 2009, a practical one day workshop in conjunction with Andrew Harvey from Optimum Assurance Group.
By Dean Salomone - Managing Director of franchise consultants, Franchise Careers
This article appears courtesy of Franchising Magazine