Consultant Kate Groom is making a business out of profit; with a CV that includes franchising in Australia as general manager of Signwave, experience at Kwik Kopy and her own business, Starfish Consulting, she has gained an appreciation of the need for financial know-how and knowledge sharing to ensure franchisees are engaged in profitable businesses.

“The way we know a business works is that it makes profit. Of course, starting a business is also a way to achieve other personal and lifestyle goals, but it has to make money. Not that anyone really doubts this; still, many business owners don’t focus on understanding and improving their profit.”

Understanding profit

Groom believes there are three big factors contributing to this. First, not every business owner has accurate and up to date accounts. If you aren’t measuring it you’re not going to be able to manage it. Second, accounts can be seen as a scorecard rather than a tool to help with business improvement.

“It’s all too easy, especially if results are not all we expect (which happens in the real world), to focus on explaining why things didn’t work out rather than looking for the opportunities to improve. That approach can make it quite uninspiring to actually look at the information.”

Finally, suggests Groom, it’s easy to talk about the non-financial parts of business – how satisfying it is, operational aspects, people issues and marketing – and harder to talk about financial results. And she says, this is especially true in a franchise, where operations and compliance can often be the focus of support.

“But no matter how strong your brand compliance and ability to drive revenue, the model must make a profit if it is to survive long term. The benefits of a franchisor knowing the operating results – the revenue, cost and profit profile – of every franchisee are significant. Owners with a competitive spirit are motivated by knowing what the best achieve and special attention can be given to help those who are underperforming. From a franchisee satisfaction point of view there’s a huge win when profit is a primary focus.”

At a strategic level, when a franchisor knows the results of every franchise they have information to help with planning. For example, if the franchisor wants to introduce new equipment, products or services it’s essential to know whether franchisees have the financial resources to implement the program.

“And in the long term, franchises must be profitable if the network is to expand. Isn’t provable profit one of the best ways to attract quality franchisees?”

Tracking the profit

So if more profit is good for everyone, why doesn’t every network have a specific program to track and improve the profit of every franchisee? Franchise networks should be very well placed to turn the conversation to ways to achieve profitable sales growth.

“Franchise agreements commonly have a clause requiring franchisees to provide their accounts at least once a year and franchisees are clearly in business to make money,” reiterates Groom. “While there are indeed challenges with getting and standardising accounts, I suspect a big hurdle can be fear of uncovering underperformance and the subsequent need to address it. Business health checks can be as confronting as personal ones – and just as important.

“After all, if we have something wrong we can often fix it if we know soon enough and get to work on the changes to improve our lifestyle or our business.”

Groom believes franchisors should consider a process to track and improve profit. “Set it up just like a health check: let’s take a look and together work to get stronger.”

But she admits for some franchises the difficulty is there’s no one responsible for driving the process through. And success in performance improvement programs takes long term commitment to create the processes and establish buy-in from the network.

“If we look at networks with really strong commitment to tracking performance (eg Pack and Send, Kwik Kopy), the CEO is a key driver and has either got internal or external resources in place to ensure focus on the program,” she explains.

Collect the results!

Franchisees are in business to make money, and franchise systems are stronger when all franchisees are profitable (after the start up phase) and when profit and sales grow consistently over time.

“Quite simply, franchisors need a process to collect results and provide structured information to the franchisees so they can use it to help them improve their business. And to lift performance we need to look at the results of every franchise, not just the top performers.”

So what should prospective franchisees look for? A robust performance improvement program integrated into the system, or for those businesses without this, signs that implementation is planned, perhaps by the collection of some simple information from those franchisees who want to participate.

“In the end, franchisors need to be brave enough to confront the reality of a range of performance in their network and committed to addressing it,” Groom advises. “Achieving a result in this takes time and collaboration but the results in terms of satisfaction and ability to build a strong and sustainable network are potentially huge.”