Business Advice Financial Collection

Side by Side Financials
The Why, What and How To Guide for Franchisors

Collecting financials in the franchise industry is by no means a common practice. In fact it's rarely done at all, and is almost never done right. There are many reasons why franchisors don't collect financials, let's take a look at some of those.

1. We get their sales and that tells us all we need to know - I have a client that was doing about one million dollars a year in sales when I first started working with them and was netting about $150,000. By the fifth year their sales had grown to a little over three million dollars and their net dropped to a loss of $380,000. Did the sales tell the whole story?
2. We are on a fixed royalty so it doesn't matter - It does if they are closing as fast as you can sell them. How many new franchisees come into your network each year and how many do you lose? It does matter if you truly want your franchise to grow. Otherwise I have one question for you. "Do you leave the drain open every time you fill up your bathtub?"
3. We have tried, but they just won't send them to us - How much of a priority is it? I can guarantee that when you ask for their royalty checks you make sure you get them.

Consider these facts; store closings are expensive and harmful to every one from the franchisor down to every remaining franchisee. The franchisor has to spend a ton of money on advertising to get a new owner in the closed or closing location. The outgoing owner will certainly not be sending you, the franchisor, any prospects to become new franchise owners. People in the community that see the closed location will most likely think that there was a problem with the business or your business brand; they are not likely to assume it was a bad owner. These same people travel, move to new cities, and talk to their friends and family, all the while carrying the perception that there is a problem with your brand name.

Let's face it; the financial statements for any business, is the scorecard:

• It is how the business owner should be measuring the results of his/her business.
• It is what the investment world looks at to determine a businesses worth.
• It is what the banks use to determine the businesses viability (and ability to repay)
• It is what any potential buyer of a business should want to see.
• And it's the best way for a franchisor to determine that he is doing his job in supporting their franchisee network.

I believe that all franchisees should have financials and know how to read them, and if they don't shame on them. Now, if they should happen to fail, how would it affect you?

• Lost royalty fees
• Loss in customer loyalty (if you're not there they go to a competitor)
• Damage to brand name "We had one of those in town but they just couldn't make it"

The list goes on, so even though it's not your business, their business directly affects your income and ability to grow and protect your brand name across the entire franchise network.

Below are the three main financial statements that you should be collecting from each and every one of your franchisees.

• Balance Sheet
• Profit and Loss
• Statement of Cash Flow

Balance Sheet
What can be learned from the balance sheet:

• Is the business cash strong or weak - do they have any? If so how long can they survive on it?
• Are the income producing assets tangible or intangible?
• Is the business under capitalized?
• Is the business burdened with too much short-term debt?
• Is the owner(s) draining the business of its working capital?

The unfortunate thing about many failing small businesses is that they are usually being run by an owner or owners that deem themselves entitled to perks just because they now own a business. Company provided vehicles, cell phones, meals, trips and so on.

Combination of Balance Sheet and an Income Statement
For this let's assume that you have a year-end balance sheet and the income statement, which covers the year ending on the date of the balance sheet.
Here is what you can learn...

• How long can the business survive without sales on just its cash reserves?
• How many days on average does it take to collect Accounts Receivable (A/R)?
• How many times does inventory turn over?

Income Statement
A properly prepared income statement can tell you a lot about a business:

• Is there enough gross to pay the bills - is the business losing money?
• Is the business owner killing the business - is the owner taking excessive wages, too many perks or fringes, or just plain mismanaging?
• Is the business owner investing in growing the business - any marketing expenses. 5% of gross would probably indicate that a valid attempt is being made
• How to plan for the future - gather income statements for each month for the last few years and figure out the trends, where are the good and bad months or quarters. Once you know what the trends are you can develop a plan for the future and how to accentuate the positive and eliminate the negative.

Statement of Cash Flow
The purpose of the Statement of Cash Flow is to explain to the reader of the financial statements the change in cash balances for a given period of time.

The Statement of Cash Flow starts with Net Income and then will add back any non-cash deductions such as depreciation and or amortization. Next it will take you through changes to balance sheet to show the reader the amount of cash the business produced or lost from operations, how much cash was produced or used from investment activities and finally how much cash was produced or lost from financing activities.

The biggest things the reader needs to know before looking at this statement is that buying assets and or increasing asset balances uses cash, selling assets or decreasing asset balances produces cash. Also, borrowing money or increasing liability balances produces cash and paying back borrowed money or decreasing liability balances uses cash.

In closing now that you know all about what can be found in the financial statements of your franchisees we still need to address how to use them, but you got to get them first. Below are the steps in running a successful collection program for financials:

1. Have them host their QuickBooks file on a server farm where they can be extracted without the franchisee having to send them to you.
2. Have them all running the same software version (very helpful)
3. Have the books prepared in a consistent manner (standardized chart of accounts)

Once you have them, in a format to be compared you can use them to determine best practices all across your network:

• Ranking based on net income, not sales
• Who is getting the greatest return on marketing dollars
• Who has the best customer to employee ratio
• Along with a multitude of others

Then it's a simple as finding the best franchisee in each area of operation, learn what they are doing, and teach the others. Allowing you to take a proactive approach in assisting those who may be struggling, rather than fielding their calls telling you they have to shut their doors.

If you are a franchisor and would like more information on how to run such a program or to learn more about how to unlock the hidden secrets within your franchisees financial statements you can contact My Back Office at (517) 788-8690 or online at www.mybackoffice.org.