Do you know the early warning signs of a franchisee in financial trouble? This is an issue more important than ever in today’s challenging and ever-changing business environment.

A franchisee that is delaying or has stopped paying royalties will keep any franchisor awake at night. But what can you do about it and, better still, how do you stop it reaching this situation in the first place?

The secret is in understanding the numbers, not just the top and bottom lines but everything in between. The ability to quickly analyse and interpret franchisees’ financial data and to red flag any potential problems, both existing and emerging, is crucial to taking decisive action before it is too late.

Financial trouble

Simply measuring sales and chasing revenue targets is no longer good enough from franchisors and franchise management professionals seeking to secure dependable, growing royalty streams from financial sustainable franchisees.

There is now a real need to look a little deeper into balance sheets to identify and rectify what may be impacting on a franchisee’s long-term profitability, and their subsequent royalty payments. A quick glance over a profit and loss statement won’t suffice. There is a lot more to it than that.

The early warning signs are always there. It comes down to having the financial understanding and skills to know where to look. It really is all about the numbers, not only on a page at a certain point in time, but also being able to identify the lead indicators of where they are heading.

So what are you looking for? Late payments are always a sure sign of stress on the most crucial cog in the machine of business sustainability – cash flow. Late payments or delayed reporting in areas such as marketing levies, supplier bills,  ATO and Super payments, rent and credits cards are all emerging symptoms of a franchisee in trouble.

Issues such as these could drag on for months before they really announce themselves and cause much bigger and potentially irreversible problems. If cash flow is the source and saviour of all business ills, then this is the area where you need people with incisive financial management skills and capabilities to be closely examining franchisees’ operations.

Core cash impacts are the determining factors that will influence franchisee cash flow and include sales, margins, operating expenses, external debt obligations and swing factors or variables. Having upskilled professionals in the field who can focus in on these key areas by quickly and accurately analysing and cross-referencing the relevant financial data will make all the difference.

How to fix it

However, identifying issues is only half of the puzzle of profitability. Once you see them, what to do about them? Field visits to franchisees can often be approached with dread by all parties, so keeping friendly and productive lines of communication open is an essential starting point.

Communicating painful messages arising from thorough financial analysis requires tact and must be built on a level of engagement with franchisees that moves beyond just compliance to a more holistic partnership approach to optimising returns for all.

A profitable franchisee is a happy and financially sustainable franchisee; a network of profitable franchisees,creates happy franchisors with dependable royalty streams and less-stressed franchise management professionals. There are win-win-win outcomes to be achieved, and sleepless nights to be banished, on all sides if the communication is aligned with the shared goals of all stakeholders.

To this end, meaningful, practical and continual engagement with franchisees on their financial data and trends is now recognised as the main game in maximising the performance, profitability and sustainability of franchisees and, in turn, the royalties received by franchisors.

A communication strategy that has been shown to reap results over and over is the marrying of a franchisee’s personal financial and lifestyle goals with any financial action plans that need to be implemented to improve the cash flow and profitability of their business.

This requires field support to develop deeper levels of personal engagement and interaction with franchisees on an ongoing basis, so they get to know and understand not just the numbers driving a franchisee’s business, but also the motivations and aspirations of those invested in it.

From this foundation, the identification of emerging financial issues and rapid development and implementation of remedial plans will be met with much greater acceptance and buy-in and, ultimately, a better chance of ensuring long-term profitability and sustainability for franchisees and franchisors alike.

• The Asia-Pacific Centre for Franchising Excellence is hosting its Franchise Financial Sustainability Masterclass in Brisbane, starting March 18-19. This intensive training program is based on extensive research and first-hand experience of driving franchisee profitability. Click here for more information.